What is a Bitcoin?

You know all about the dollar. You’ve probably seen a peso. You’ve heard of the Euro. These are some of the most famous currencies in the world, and just about everyone has heard of them or used them at some point in their lives. But have you heard of Bitcoins?

If you spend much time reading news articles online, the name probably sounds familiar. To put it simply, Bitcoins are a fairly new form of currency that are generating quite a lot of buzz in financial, political, and technological circles. After several clients asked me about this new phenomenon, I thought it was high-time for a letter on the subject ... a subject that has major implications for the future of commerce as we know it.

What are Bitcoins, exactly?

Bitcoins are actually a kind of “digital currency” in that, for the most part, they only exist electronically. An easy way to think of them is to imagine an online game where you can pay for items, tools, and other things using the “money” found within the game. Digital currency is similar to that, except you can actually use it to purchase goods and services in real life.

Bitcoins are one example of digital currency. More specifically, Bitcoins which relies on cryptography (the art of writing in code) and peer-to-peer networks (which share files and information across multiple computers without the need for a central server) to work.

Complex? You bet. The future? Very possibly.

To put it simply, a Bitcoin is a piece of electronic money, completely separate and independent from any national currency, which you can use to purchase goods and services from vendors who accept it. They are not issued by any country, are not controlled or regulated by any bank, and have nothing to do with Visa® or MasterCard®. Bitcoins are completely decentralized, and are maintained by some of the very people who use them. They have value because the people who use them see them as valuable ... not because any authority proclaims it.

Why are Bitcoins important, and why are they getting so much press?

The very fact that Bitcoins are not issued, controlled, or regulated by any bank or country is what makes them so intriguing to many people. Fans of Bitcoins see the following advantages over more traditional currency: