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Bitcoin Primer: What You Need to Know About the New Virtual Currency

May 9, 2013 in Bitcoin, Digital Currency, Education, Investing

By Sarah E. Needleman and Spencer E. Ante. May 8, 2013 (http://blogs.wsj.com)

Bitcoin startups are beginning to raise sizable investment capital even as industry leaders warn that hackers are abusing the Internet virtual currency for profit. Supporters of Bitcoin say it offers anonymity and a cheap way to transact business across borders. But critics say Bitcoin faces so many regulatory and technical hurdles it will never mature into a mainstream currency. Here’s what you need to know:

What is Bitcoin?

It’s a virtual form of currency that can be used to make payments over the Internet without transaction fees or involving a financial institution. Each Bitcoin is subdivided into 100 million smaller units called satoshis, defined by eight decimal places.

Where does it come from?
Bitcoin was created in 2009 by a person or group that goes by the name Satoshi Nakamoto. A 2008 paper written by Nakamoto proposed the creation of a “peer-to-peer electronic cash system” that would allow online payments to be sent directly from one party to another without going through a financial institution. Instead of a trusted third party like a bank, Bitcoin creates trust through a cryptographic system.

How is it made?
Like gold, no central bank controls Bitcoin currency so governments can’t print or mint more of it. Using computers and complex software, people can “mine” Bitcoins by solving complex mathematical problems. If they solve the problem, they get Bitcoin. But since the process is so difficult most people just buy Bitcoin from various exchanges popping up.

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