There is virtual money and then Bitcoin. The supergeeky Bitcoin is a mathematically derived currency that promises to change the way you handle money. Bitcoins are not real coins – they are chains of codes locked with military encryption – and people who use them to buy and sell goods and services are difficult to find. Together with anonymous drug dealers, Ashton Kutcher and the Winklevoss twins are said to have jumped on the train. There is something to be said about the use of currencies that are not regulated by the government or the banks, are not delivered with the usual transaction fees, and are impossible to counterfeit. Bitcoin also promises disaster security because you can't destroy numbers in the same way you can destroy gold reserves or paper money.
What is bitcoin?
Bitcoin is a digital currency that was developed in 2009 by a developer hiding under the pseudonym Satoshi Nakamoto (allegedly a Japanese who knows American English perfectly). Bitcoin is decentralized, which means that it is not controlled by a central authority such as a financial institution, a country, a government or an individual. It is peer-to-peer and open source and is distributed from computer to computer via the Internet without intermediaries. Bitcoin is practically incomprehensible compared to the US dollar, which makes it attractive for libertarians who are afraid of government interference and for citizens of the underworld. You can use it to pay for purchases online and offline, from illegal drugs on the Silk Road to legitimate restaurant dishes.
Where can I get bitcoins?
You can buy bitcoins from friends, online giveaways, or with real money from bitcoin exchanges. However, using real money to buy bitcoins prevents the whole purpose of anonymity, as you may need to add your bank account to a third-party website. You can also buy bitcoins using your mobile phone or cash deposits. New bitcoins are created by "mining". Mining is done automatically by computers or servers – it's not real mining where you have to dig underground to find goods, but the concept is similar. You have to make an effort to dig up gold, and you (or your computer) also have to spend time and resources to review and record Bitcoin transactions.
One of the coolest things about Bitcoin is that it doesn't get its value from real-world objects, but from codes. Bitcoins are pulled out of the air by machines (and their operators) to solve complex math problems related to the current number of bitcoins. These bulky and expensive supercomputers are equipped with powerful encryption functions (and supposedly use power like no other). In a typical transaction, buyer A from location X seller B pays some bitcoins online. The miners then try to authenticate and encrypt the transaction by logging Bitcoin codes on a central server. Whoever solves the puzzle first will get the bitcoins. Around 25 new bitcoins are created for each 10-minute block. However, this number can increase or decrease depending on how long the network is running.
Use of bitcoins
Once you've got some bitcoins in your hands, you'll need to save them in an online wallet through a computer program or third-party website. You will become part of the Bitcoin network once you have created your virtual wallet. To send bitcoins to another user or pay for online purchases, retrieve that person's / seller's identification number and transfer bitcoins online. Processing takes a few minutes to an hour as Bitcoin miners across the world review the transaction.
How to make money with bitcoins
If you are still skeptical, a Bitcoin is currently worth around USD 90 (as of April 18, 2013). Hourly fluctuations can make a daytrader dizzy. As volatile as it is, more and more people are starting to milk the phenomenon, although it's worth it – as long as it lasts. How do you get your piece of the virtual gold rush? Some options: sell bitcoin mining computers, sell your bitcoins at crazy prices on eBay, and speculate on bitcoin markets. You can also start mining. Anyone can mine bitcoins, but if you can't afford an efficient setup, an ordinary PC will take a year or more to solve the algorithms. Most people join other miners' pools that combine their computing power for faster code cracking.