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How does Bitcoin work?

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Quick Answer

Bitcoin, a digital payment system created in 2009, works by users "mining" bitcoins by solving math puzzles and encryption protocols, and then using the bitcoins as computerized currency. Bitcoins are recorded in a public ledger in a decentralized software-based operating system. Users buy bitcoins through traditional means using cash, bank accounts or credit cards. Bitcoins can then be used to buy or sell products and services online.

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Full Answer

Because there are no middlemen or banks involved in bitcoin transactions, they are subject to lower fees than what most credit card vendors charge. Therefore, some merchants favor bitcoins over credit card payment. The use of bitcoins is growing, especially in the United States, which is considered to be bitcoin-friendly.

A primary issue with bitcoins is the fact that the system is unregulated and users buy and sell products anonymously using digital wallets. Bitcoins are often used when buying drugs online or for other illicit use.

Bitcoins are also used as a means of speculation and are bought and sold as investments, due to the possibility of bitcoins rising in value. There are "bitcoin exhanges" where buyers and sellers use different currencies to transfer bitcoin ownership. Bitcoin was created by an unknown individual using the alias Satoshi Nakamoto.

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