What is Bitcoin? How do Bitcoins work?

What is Bitcoin?
Bitcoin is a virtual currency that was created in 2009 by an unknown computer whizz using the alias Satoshi Nakamoto.

Individual Bitcoins are created by computer code.

The total value of all Bitcoin in existence is now more than £112billion.

Transactions are made without middlemen, so there are no transaction fees and no need to give your real name.

More businesses are beginning to accept them and in some parts of the world you can even buy pizza with Bitcoins.

You can set up a virtual wallet websites like Blockchain to store, keep track and spend your digital money.

You are also able to purchase Bitcoin through an online exchange or Bitcoin ATM.

To find merchants that accepts Bitcoin in the UK click here.

Bitcoins aren’t printed, like pounds, dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world.

It’s the first example of a growing category of money known as cryptocurrency.

How do Bitcoins work?
The value of Bitcoin, like all currencies, is determined by how much people are willing to exchange it for.

To process Bitcoin transactions, a procedure called ‘mining’ must take place, which involves a computer solving a difficult mathematical problem with a 64-digit solution.

For each problem solved, one block of Bitcoin is processed.

In addition, the miner is rewarded with new Bitcoin.

To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of new Bitcoins are produced each day.

There are currently about 16 million in existence.

The Bitcoin protocol – the rules that make Bitcoin work – say that only 21 million Bitcoins can ever be created by miners.

But these coins can be divided into smaller parts with the smallest divisible amount one hundred millionth of a Bitcoin.

This is called a “Satoshi”, after the founder.

To receive a Bitcoin, a user must have a Bitcoin address – a string of 27-34 letters and numbers – which acts as a kind of virtual post box.

Since there is no register of these addresses, people can use them to protect their anonymity when making a transaction.

These addresses are in turn stored in Bitcoin wallets, which are used to manage savings.

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