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I'm a programmer, and a generally smart person, but I can't understand really what bitcoin is.

  • Is it a new payment merchant like PayPal?

  • Is it a virtual currency like LindenDollars that can't be really used as money? (put money In, but not Out)

  • Is it a new currency system, where people exchange bitcoin addresses instead of real money?

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Great question! I was sure it was asked by now, but remarkably, I couldn't find it ... so maybe it was not. –  ripper234 Mar 23 '12 at 21:25
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The reason that we don't have a question like this is probably because it has been considered "too basic". Seems like people like this question though so I won't touch it unless the community wants to. I'll remove the FAQ "label" in the title though. All questions should have relevance to other users and the most popular ones will get many votes so there is no need to invent additional labelling, let's keep the titles clean. –  D.H. Mar 24 '12 at 10:42
    
Your second and third options are the same. In either case, you can put money in if someone is willing to sell the virtual currency but can't if they're not and can take money out if someone is willing to buy the virtual currency but can't if they're not. –  David Schwartz Feb 14 at 11:55

6 Answers 6

up vote 13 down vote accepted

Is it a new payment merchant like PayPal?

No.

PayPal is a company, Bitcoin isn't.

PayPal deals with existing currencies like US dollars, Bitcoin doesn't.

PayPal holds your balance for you, can freeze your account, and can stop you sending your money to people it doesn't like. With Bitcoin nobody can freeze your account or tell you how to spend your bitcoins.

Is it a virtual currency like LindenDollars that can't be really used as money? (put money In, but not Out)

Whether it is a currency or not isn't clear, but it is virtual. Some say it's more like a commodity than a currency. It acts a lot like gold, in that there is a finite supply of it, it's valued by some people, and it can be used as money anywhere that accepts it. Also it can be bought and sold for US dollars and many other currencies. At the time of writing 1 bitcoin is worth 470 USD, and there are plenty of people willing to buy them from you at just under that price, or sell them to you at just over that price. The price is decided by the market. The price bitcoin trades at is the one people think it is currently worth.

Is it a new currency system, where people exchange bitcoin addresses instead of real money?

It acts a lot like a currency, and can be used to trade with anyone who accepts it. It is very cheap to transfer between any two points in the world, and very fast compared to transferring US dollars or other currencies.

See this introductory video for a slicker introduction.

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It's a distributed digital cryptocurrency. The key word here is distributed, i.e. there is no central authority, instead transactions are handled peer-to-peer with a complex protocol where everyone ensures no one cheats.

New bitcoins are created at a predetermined rate to people who run "miners", which are a vital part of the protocol that checks for transaction genuinity.

You can exchange bitcoins with other hard currencies using public exchanges such as Mt. Gox. You exchange them with other people willing to sell or buy them, just like on a stock exchange.

For more details: http://www.weusecoins.com

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Lol at the serial downvoter (and lol at this stupid policy of keeping the votes secret, too). –  Lohoris May 24 '13 at 22:03
  • Bitcoin is no payment merchant like PayPal, as it is no company but an open source project and a community of users connected in a completely decentralized P2P network. It can act as a payment service similar to PayPal, but you have no intermediary and transactions are irreversible and (for the most part) free of charge. Also, Bitcoins are not on some online account that can be frozen, but only on your harddisk (similar to cash in your wallet).

  • Bitcoin is a virtual currency as it has no physical form (it's just information in the form of cryptographic keys). It can however very well be used as money in the real world and is actively exchanged for various fiat currencies or products and services (obviously in both directions).

  • It is a new currency system where people exchange Bitcoins instead of traditional fiat money. Unlike the latter, it is however not backed by any government or corporation. Therefore it has a floating exchange rate only determined by supply and demand. In this respect Bitcoin is also similar to commodities or for example precious metals.

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There are a couple of books on Kindle that might help you get started. The best way to really understand Bitcoins is to create a wallet and fund it with a few Bitcoins then use them.

To start safe and securely check this book on Kindle out: http://www.amazon.com/dp/B00A1CUQQU

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http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/

provides a very nice picture of the Bitcoin Protocol. It explains how the transaction is done, how the validation is managed, the cons and pros of some rules and much more, but not in detail rather the basic understanding.

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First and foremost, bitcoin is a protocol that facilitates the transfer of tokens (ultimately) between people. The protocol is very elaborate, and defines diverse concepts:

  • Addressees, which act as a store of the tokens
  • Transactions, or different possible ways of transferring tokens between people (actually, addresses)
  • Blocks, which are simply groups of transactions
  • the block chain - a ordered sequence of blocks

The protocol uses diverse cryptographic primitives (such as hash functions and digital signatures), as well as a decentralized network of computers to facilitate and verify the correct transfer of the tokens.


Most people call the tokens that the protocol transfers simply as bitcoins. Because the amount of existing tokens is finite, the tokens are economically scarce, and people are willing to use it as a store of value. Some people believe that this fact turns the tokens into a form of currency.


Some people also consider the term "Bitcoin" to include a large system of entities that use the protocol, including

Ultimately, asking whether these entities are part of bitcoin is as useful as asking if Google is part of the internet.

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