a-real-bitcoinIf you’ve been on the internet much during 2014, you’ve probably heard the term Bitcoin floating around. What is Bitcoin? In case you’re wondering, it is a form of online currency that can be used to purchase goods and without any serial number, there’s no real way of tracing it back to a buyer or seller.

Aside from the software developers who work on new versions of the code that underpins Bitcoin, there’s no Central Bitcoin Bank—no virtual Federal Reserve. Bitcoins are backed by no one and nothing and completely unregulated.

When you write your friend a check, money from your account is withdrawn from your bank, and then transferred to their bank, and then they withdraw it as cash. With BitCoin, there are no middlemen (other than the users that comprise the network itself). Money goes straight from you to whomever, through the BitCoin P2P system, with no intermediary agency passing along the chips.

At the most basic level, bitcoins are traded from one person’s digital wallet to another. Think about it as a peer-to-peer network like file-sharing, in which a network of computers interact with one another, but there is no centre of control, and what they share isn’t files but money. Bitcoin exchanges have also been set up where units can be bought or sold on the open market at the going average rate, plus a fee that goes to the owner of the exchange. Increasingly, bitcoin ATMs are being set up where users can trade cash for bitcoins for a fee.

Bitcoins are “mined” similarly to gold, meaning there is a finite supply in the world. However, instead of pick-axes in the ground, bitcoin miners use increasingly sophisticated computers to solve increasingly difficult computer algorithms. Each time a miner solves one of these cryptographic puzzles, they are paid in the currency, adding it to the money supply. The current maximum of mineable bitcoins in the world is 25 every ten minutes.

Like gold, there is a finite number of bitcoins in the world, with a threshold of 21 million bitcoins and the last expected to be “mined” in 2140. There are about 12 million currently in circulation. Just like a traditional currency, the going rate for a bitcoin is based on supply and demand on global exchanges, and is measured against local currencies. The standard unit of representation is called a BTC, similar to a CAD or USD. Bitcoins hold a fictional value just as much as the piece of paper we hold with $100 written on it.

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Today, Microsoft announced they will be accepting Bitcoin payments for games and apps on Windows, Windows Phone, and XBox.