Tuesday 22 October 2013

How bitcoins work

How bitcoins work

Bitcoin is often referred to as a new kind of currency.

But it may be better to think of its units as being virtual tokens that have value because enough people believe they do and there is a finite number of them.

Each of the 11 million Bitcoins currently in existence is represented by a unique online registration number.

These numbers are created through a process called "mining", which involves a computer solving a difficult mathematical problem.

Each time a problem is solved the computer's owner is rewarded with 25 Bitcoins.

To receive a Bitcoin, a user must also have a Bitcoin address - a randomly generated string of 27 to 34 letters and numbers - which acts as a kind of virtual postbox to and from which the Bitcoins are sent.

Since there is no registry of these addresses, people can use them to protect their anonymity when making a transaction.

These addresses are in turn stored in Bitcoin wallets, which are used to manage savings. They operate like privately run bank accounts - with the proviso that if the data is lost, so are the Bitcoins contained.

How bitcoins work

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