What is a Bitcoin and digital currency?
Bitcoin is a currency that is completely decentralized and has no issuing bank—every time new currency is created or a transaction occurs, a loose network of computers all around the world verifies that the action occurred and store it in what is known as the blockchain (think a chronological string of every single Bitcoin transaction, ever). Currently, there are only around 12 million Bitcoin, worth $7.2 billion USD, in existence, and up to 21 million can theoretically exist. This money can be stored in security-coded wallets online or on your secure computer.
Creating your own Bitcoin
You can actually create your own currency and add it to the pool. To do this, “miners” run a program to solve a complex mathematical calculation using the current blockchain as a variable. Since it’s one long string, everybody uses the same number—and whoever gets the right answer first is awarded with a brand new Bitcoin. The new Bitcoin is then added to the end of the blockchain’s algorithm, plus a random value called a “nonce,” and the process begins all over again. The thing is, with every new Bitcoin, the string gets longer and the calculation gets tougher, creating scarcity and also meaning that no one can fake a coin that’s not based on the previous calculations.
Profiting with Bitcoin
According to Mt. Gox, the world’s largest Bitcoin exchange, a single Bitcoin is worth just over $1,200 USD. However, if you’re thinking of creating money out of thin air, think again: since its inception, Bitcoin creation has gotten so hard that the average computer can barely make a dent in the complex mathematical calculations necessary. For example, according to BitcoinX’s profitability calculator, a high-end computer used for modern computer gaming can only generate roughly $0.06 USD worth of the next Bitcoin every day, while consuming about $0.32 USD worth of electricity. A solo mining operation can take well over a year.
In order to turn a profit, miners have created pools, or networks of computers each doing a small part of a Bitcoin calculation. This increases the success rate of getting a new Bitcoin, but it doesn’t necessarily mean you’ll make money on your bedroom computer. Often, pools will split the resulting currency among their users based on how much of the code their processors contributed.
Upgrading your hardware
Miners turn to specialized processors whose sole purpose is to perform Bitcoin calculations without wasting electricity. Bitcoin mining hardware is fairly expensive—expect to drop $2,000 to $20,000 USD—but it runs thousands of times faster than the average desktop PC. According to BitcoinX, with a $2,500 investment on a 50 Gigahash super computer, you can stand to generate over $8,000 a year after the costs of electricity and the initial investment. Fair warning, however: some users have built banks of computers that are thousands of times faster, so there’s a higher chance they’ll still contribute more to the correct conclusion and you’ll get a smaller cut.
Spending Bitcoin and getting cash
Bitcoin started in 2009, and already some major retailers are starting to catch on. Famously, Virgin Galactic’s commercial space flight service recently announced it will accept Bitcoin. However, the average user will use the Bitcoin in their wallets to purchase things online where available, including OKCupid, Reddit and WordPress. However, some local and small businesses have been accepting Bitcoin because it avoids transaction fees with major credit card companies. You can also exchange Bitcoin for other currencies, and vice versa, using services such as Coinbase.