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What is Bitcoin?

At this point, everyone has heard of Bitcoin, but many of you may still have questions about what Bitcoin really is. The theory of Bitcoin is simple, but a great deal about their existence and production is, well, inscrutable. We are here to help you understand the basics of Bitcoin so that if you decide to adopt its usage, you can do so with all the information and with confidence in your understanding.

Backed by Gold or Silver?

Traditionally, currency has been backed by physical Gold or Silver. Theoretically, you could walk into a bank and turn in your $20 bill for $20 worth of Gold. That has not been the case in the United States for some time, but in the mind of the average American, the Gold in Fort Knox comforts us as to the value of our paper money.

Bitcoin is not based on any physical commodity. It is essentially a public ledger of credits that exist based on math and computing power. Bitcoins come into being through “mining,” or using one’s computing power to solve equations. When your computer does enough work, you are paid in Bitcoin. There is a hard cap on how many Bitcoins will ever be produced—21 million—and that is set to protect Bitcoin from artificial inflation. No one can ever “just print more” to cover debts. It is the public nature of the ledger and the fact that anyone can check the math that keeps Bitcoin aboveboard, not a conventional commodity backing.

Decentralization

Part of the appeal of Bitcoin is that it is a decentralized currency. That means it has no single presiding authority, such as a national government. Each computer that mines Bitcoins and processes transactions is part of a vast network, with all computers working in sync to make Bitcoin function and keep accurate records. The theory behind this system is that it prevents one central authority from toppling the whole economy. The Central European Bank did just that in Cyprus in early 2013 when they essentially took everyone’s money. Decentralization, with some power in the hands of many rather than great power in the hands of a few, also means that if some portion of the network were to go offline, the flow of currency would continue as usual.

Anonymity

Each Bitcoin user has a front-facing Bitcoin Wallet attached to a Bitcoin address. You move Bitcoin credits around rather like sending an e-mail. However, no one knows which wallet is whose. Your name is not front-facing with Bitcoin, and many people use several addresses to maintain even greater anonymity. However, because Bitcoin runs on a public ledger, and because every Bitcoin is scrupulously tracked for its entire existence through the blockchain, so there is no privacy even with total anonymity. That anonymity has rather sullied the concept of Bitcoin, as some users employ Bitcoin purposefully to pay for illicit items or services.

Getting started with Bitcoin is simple, and you can buy Bitcoins with regular U.S. currency if you wish. You can complete further reading on how to get started, what experts advise about holding Bitcoins, and how to spend Bitcoins once you have them in APMEX’s Education articles.

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