What Actually IS Bitcoin? Here's A Basic Guide

We can't seem to go a day without hearing about it but we're slightly embarrassed to admit that, just like the cloud, we don't really get Bitcoin.

And we can't be the only ones, right? What actually IS Bitcoin? And how does it work?

Here's a basic guide.

What it is

Bitcoin is a digital currency. That means there are no physical bills or coins and it isn't controlled by the government, banks or other authorities. Buyers and sellers are anonymous and are connected to each other via encryption keys.

How you get it

The simplest way to crack into the Bitcoin market is to set-up an account with a digital currency exchange like Coinbase, Coinmama, CEX or Kraken. Then you'll deposit some of your actual money - through your bank account or Paypal account - and exchange it for Bitcoin.

What you can do with it

Although no major retailers have jumped on the Bitcoin bandwagon just yet, there are more than 100,000 merchants willing to accept it as payment. Or you can keep it and see if it jumps any higher or sell it on.

What is meant by "mining"

Bitcoin is "mined" by people - or groups - who are great at maths and even better at keeping records. Basically, every Bitcoin transaction is noted down and collated with others in a "block". These blocks are then transcribed into a digital ledger by "miners". Collectively, they're known as "blockchains". Following so far?

These blocks are then converted into sequences of code by miners who are basically working as quickly as they can to be the first to do it. Converted sequences are then known as a "hash".

Once generated, a new hash is placed at the end of the blockchain like a bookend and the successful miner pockets 25 Bitcoin for their trouble. 

How the value is determined

The guy who established Bitcoin, Satoshi Nakamoto, dictated that only 21 million Bitcoins can ever be mined, which obviously limits the supply. So far about 12 million have been mined. That, combined with the fact that there's no real governing body, means that Bitcoin's value is basically determined by how much people want to pay for it.

How risky it is

In a word, very. The value fluctuates wildly, not just day-to-day but even by the hour. Then there's the fact that it's anonymous which makes it a playground for money launderers. And as with traditional money, there are theft and trust issues.

Other cryptocurrencies

While Bitcoin is the most popular, there are plenty - more than a thousand, actually - other cryptocurrencies popping up, including Ethereum, Ripple and Litecoin.