Bitcoin is the world's first decentralized digital currency and online payment system which allows clients to perform transactions without the need of any third party intermediary like e.g. banks.


Bitcoin which is the name given to one unit of the virtual currency can be portioned further into subunits which are similar to cents or pennies - the smallest of which is referred to as a satoshi (one hundred millionth of a bitcoin). The bitcoin protocol and reference software that works on any computer or smart phone was developed from the person who had been introduced in 2008 by pseudonymous inventor known as Satoshi Nakamoto.


The currency is secured by cryptography so that making it impossible to duplicate. To start using bitcoin a client can sign-up for a free account with any of the bitcoin wallet providers - and Coinbase are the popular ones. Once signed up a unique 34-character address - a combination of letters and numbers - is dedicated to the client. Alternatively for better security you can download an appropriate wallet and store the bitcoins offline - so called a cold storage.


All transactions between the bitcoin clients are verified by network nodes and recorded in open shared account which is referred to as the block chain. A record of each transaction is shown in the log of the client as well. Thereby a transaction only starts if there is spendable balance in the wallet. Bitcoin uses a private key to hinder thieves from stealing the coins from the wallets and to hinder loss or duplication of the coins in the block chain.


The process of confirming the transactions or record-keeping service is called mining. The computers which are involved in such a process are called the network nodes. There is a cap of 21 million bitcoins which would be ever created - through reward for the mining process. The rate of creation divides in half every four years until the cap is reached.


There are four ways of purchasing bitcoins:

  • Mining process.
  • Sell goods or services for bitcoin.
  • Public exchanges (Bitstamp, Bitfinex, Coinbase, etc.)
  • Exchanger services (CoinMama, ALFAcashier, SuperChange, etc.)

Advantages over other online payment systems:

  • No government or central bank has direct control. All other payment systems (Neteller, WebMoney, PayPal, etc.) are directly influenced by the decisions of governments. The shutdown of Liberty Reserve is a well-known example.
  • No obligatory usage fees. Fees are optional and paid by the sending party to accelerate transaction confirmation. All centralized payment systems charge a fixed percentage of the transaction value as a service commission.
  • Totally anonymous. Transactions through any other payment processor can be easily pursued.
  • No identity stealing. Identity verification is mostly a must for other forms of payment systems.
  • Conversion to fiat currencies is possible in a transparent manner through exchanges. In case of other electronic payment systems the service operator sets the conversion rate.
  • Bitcoin does not face the issue of counterfeit or deliberate devaluation.


  • The price is highly volatile. A movement of 10% or more against the US dollar in a single day is not unusual.
  • Limited supply and liquidity.
  • Facilitates illegal activities because of anonymity. The underground website Silk Road which was taken down by FBI is a well-known example.
  • Highly vulnerable to rumors.