Bitcoin

What is bitcoin?

Bitcoin is a type of digital cryptocurrency. Functionally, it serves the same purpose as U.S. dollars or Japanese yen, except that it’s not tied to a central bank and isn’t regulated by a government body such as a treasury. Bitcoin transactions take place entirely online and offer a degree of anonymity to users, and they are securely recorded in a public ledger called a blockchain. Users purchase bitcoins in an exchange and have the option of “storing” them in a digital cryptocurrency wallet.

Deeper definition

Bitcoin was invented by Satoshi Nakamoto, a pseudonym for an individual or possibly a group of programmers. Nakamoto’s true identity remains unknown. Bitcoin was the first cryptocurrency and it has inspired a host of similar efforts, such as Etherium and Ripple. Most governments and central banks consider bitcoin a legitimate means of exchange, although a few countries have banned it and laws regulating cryptocurrencies are evolving rapidly.

Cryptocurrencies like bitcoin are completely decentralized, offering a form of anonymized transparency thanks to a digital, publicly available ledger of transactions known as a blockchain. Whenever a bitcoin is generated or used in a transaction, it’s validated and recorded on the blockchain. The blockchain doesn’t record any personal information, but it prevents fraud by making it virtually impossible to manipulate an entry, and any transaction can be quickly looked up.

Bitcoins are generated by users running a special computer program, in a process called “mining.” Each new bitcoin that is “mined” requires exponentially more processing power to create. The system has a top limit of 21 million bitcoins, but it is estimated that it will take at least a century to mine every available bitcoin, due to the exponential increase in effort required to mine each new bitcoin.

Like any other currency, bitcoins are bought, sold, and traded in a currency exchange. They can be kept in the exchange or transferred to a wallet, which stores a unique key signifying where the bitcoins exist on the blockchain. Internet businesses like Amazon and Expedia have accepted bitcoin as payment for years, but traditional brick-and-mortar stores have been more cautious in accepting the currency.

In 2013, the price of bitcoin skyrocketed from $15 per bitcoin to about $1,000, netting early adopters a tidy sum and putting the currency on the map. While some newcomers saw an investment opportunity, others saw a bubble and, indeed, the price collapsed in 2015. Since then, it has risen with a more stable frequency, although recent highs have some economists predicting a new bubble.

Because bitcoin transactions are mostly anonymous and unregulated by a central bank, it has gained a reputation for being the currency of choice in illicit trade on the so-called dark web. Online marketplaces like the Silk Road became notorious for selling drugs and weapons, netting their owners millions in the process and drawing the attention of federal authorities.

Have you sold some bitcoin recently? You might want to invest in a new savings account. Bankrate can help you choose a good one.

Bitcoin example

A (very) early adopter of bitcoin named Kristoffer Koch bought about $26 U.S. dollars of bitcoin in 2009, becoming the owner of 5,000 bitcoins. He stored the unique key signifying the bitcoin on an encrypted wallet and forgot about it. Years later, he started noticing that the price had risen considerably, and he spent weeks trying to remember the wallet’s password. When he was finally able to unlock his bitcoin, the 5,000 bitcoin investment was now worth $886,000, and Koch was able to buy himself an apartment in Oslo.

Other Personal Finance Terms

Total debt service

Total debt service is important to mortgage lenders. Bankrate explains the term.

Revolving balance

A revolving balance costs borrowers. Bankrate explains it.

Notice of rescission

Notice of rescission is a term related to contracts. Bankrate explains.

Capitalized cap cost

Capitalized cap cost is what you’ll pay to lease a car. Bankrate explains.

More From Bankrate