What is a Bitcoin and how does it work? Bitcoin is the digital currency, has been all over the news for years. But because it’s entirely digital and doesn’t necessarily correspond to any existing fiat currency, it’s not easy to understand for the newcomer. Let’s break down the basis of exactly what Bitcoin is, how it works, and its possible future in the global economy.

Editor’s Note: we want to make it very clear right up front that we are not recommending that you invest in Bitcoins. Its value fluctuates quite a bit, and it’s very likely that you may lose money.

How Bitcoin Works

In layman’s terms: Bitcoin is a digital currency. That’s a concept that might be more complex than you realize: it isn’t simply an assigned value of money stored in a digital account, like your bank account or credit line. Bitcoin has no corresponding physical element, like coins or paper bills (despite the popular image of an actual coin, above, to illustrate it). The value and verification of individual Bitcoins are provided by a global peer-to-peer network.

The basics for a new user

As a new user, you can get started with Bitcoin without understanding the technical details. Once you’ve installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should be used only once.

Transactions – private keys

A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, What is a Bitcoin and how does it work?