What is it, how is it made and is it a bubble? 17,000 Friday and bitcoin futures set to start trading on Sunday. Here’s a look at what bitcoin explained easy is and why there’s so much excitement around it.
It’s a fairly new type of currency, not controlled by any government or centrally processed by any bank or company. You can use it to buy things, though don’t expect your corner store to necessarily take it, and increasingly it’s used as an investment. You could think of it as a sort of gold for the digital era. Like gold, no one centrally controls production, supply is limited in part by the effort required to produce it, and you can hold on to it as a store of value. But because it’s digital it can be sent anywhere easily, and each bitcoin can be divided up into fractions much easier than trying to cut up a gold bar, making it potentially much easier to use for actual transactions and to act like a currency. The biggest challenge to a digital currency is what’s called double-spending. Without a bank or credit card or other intermediary acting as a trusted third party, confirming that the same number of dollars come out of one person’s account and go into another, it’s hard to make sure people aren’t spending the same digital money in multiple places or multiple times.
Bitcoin solves this with a public digital ledger that records every transaction, and which forms the basis of the blockchain. Specialized computers around the world crunch complex mathematical problems that incorporate information from a transaction, then once solved, other computers verify the math. The solved equation, with the transaction incorporated, is then added to the blockchain as a permanent record. The combination of collective confirmation, and the public record of the transaction, combine to solve the lack of centralized clearing. New bitcoin is produced as the reward for trying to solve the complex equations involved in every transaction.