This post is from Miranda Marquit at our partner site Quizzle.com.
One of the more interesting currencies gaining ground right now is Bitcoin. This is a digital currency that provides users with a way to pay each other directly, without transaction fees. But, as Gizmodo explains, it’s not quite so straightforward.
Ultimate fiat currency
Fiat means “let it be done,” and Bitcoin is the ultimate fiat currency. Bitcoins are virtual tokens (although you can order “real” coins) that can be used to purchase goods and services. All you have to do is send the requisite number of Bitcoins to the address provided by the merchant. You can also accept payment in Bitcoins by providing the address of your Bitcoin wallet.
Bitcoins are produced through the power of computer. Gizmodo reports that individual computers using a special app provide the computational power to process Bitcoin transactions. New Bitcoins are created in batches and then distributed according to those who offered the highest computing power in what is known as the “mining” process.
You can try to earn Bitcoins through the mining process (you can do it individually, as part of a pool, or by purchasing “mining contracts”), or you can accept them as payment for services rendered or goods sold. It’s also possible to purchase Bitcoins on exchanges.
When you have Bitcoins, you can use them to pay others that accept them, or you can use them as investments. There are a number of exchanges that allow you to exchange Bitcoins for other currencies (so you can turn your virtual tokens into “real” dollars), and Mt. Gox, the biggest Bitcoin exchange, recently opened with Bitcoin trading at $78 against the US dollar. However, Bitcoin has traded as high as $266.
Before you invest in Bitcoin, though, it’s important to understand the risks. Problems with your wallet could erase all your Bitcoins (you are encouraged to back up your wallet), and, like all currencies, the market is volatile, as seen by the wide swings in Bitcoin performance against the dollar.