Bitcoin involves technology, currency, math, economics and social dynamics. It’s multifaceted, highly technical and still very much evolving. This explainer is meant to clarify some of the fundamental concepts and provide answers to some basic Bitcoin questions.
But first: A quick backstory
Bitcoin was invented in 2009 by a person (or group) who called himself Satoshi Nakamoto. His stated goal was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.” After cultivating the concept and technology, in 2011, Naka-moto turned over the source code and domains to others in the Bitcoin community, and subsequently vanished.
What is Bitcoin?
Simply put, Bitcoin is a digital currency. No bills to print or coins to mint. It’s de-centralized — there’s no government, institution (like a bank) or other authority that controls it. Owners are anonymous; instead of using names, tax IDs, or social security numbers, Bitcoin connects buyers and sellers through encryption keys. And it isn’t issued from the top down like traditional currency; rather, Bitcoin is “mined” by powerful computers connected to the internet.

What determines the value of a Bitcoin?
Ultimately, the value of a Bitcoin is determined by what people will pay for it. In this way, there’s a similarity to how shares are priced.
The protocol established by Satoshi Nakamoto dictates that only 21 million Bitcoins can ever be mined — about 12 million have been mined so far — so there is a limited supply, like with gold and other precious metals, but no real intrinsic val-ue. This makes Bitcoin different from shares, which usually have some relationship to a company’s actual or potential earnings.
What can I do with Bitcoin?
You can use Bitcoin to buy things from more than 100,000 merchants, though still few major ones. You can sell it. Or you can just hang on to it. Note that there are no inherent transaction fees with Bitcoin, although exchanges typically charge a fee when you buy or sell.
What are the risks?
Legal and regulatory hazards aside, as both an investment and currency, Bitcoin is very risky. When you wake up in the morning, you know pretty precisely how much a dollar can buy. The financial value of a Bitcoin, however, is highly volatile

and may swing widely from day to day and even hour to hour.
Bitcoin transactions cannot be traced back to individuals — they are secured but also obscured through the use of public and private encryption keys. This anonymity can be appealing, especially with companies and marketers increasingly tracking our every purchase, but it also comes with drawbacks. You can never be certain who is selling you Bitcoin or buying them from you. Opportunities for money laundering abound; in October 2017, authorities in the Netherlands arrested 6 men for just this.
Theft is also a risk. Bitcoin is rife with individuals’ stories and even established exchanges are targets. Mt. Gox (an exchange based in Japan) “lost” 750,000 of its customers’ Bitcoins in 2014 and hackers took $60 million from NiceHash in Dec. 2017. There are few avenues for pursuing refunds, challenging a transaction or recovering such losses. Once a transaction hits the blockchain, it’s final.
OK, so what about — wait, there are more risks?
Because Bitcoin is so new and decentralized, there is plenty of murkiness and many unknowns. Even the technical rules for mining are still evolving and up for debate.
The IRS views Bitcoins as property, not currency. There are tax implications and a federal judge recently ruled that an exchange must surrender records to the IRS on transactions of $20,000 or more.

Then there’s the fundamental question of whether you should trust a particular exchange. Even the most established of them all has struggled to keep up with demand, plagued by site outages, scaling issues and customer service complaints. Even if it’s venture-backed, every Bitcoin player today is by definition a startup and comes with all of the associated risks.
Are there other cryptocurrencies?
Yes. More than a thousand, with more sprouting up every day. Aside from Bitcoin, which is the real progenitor of them all, other well-known alternative currencies include Ethereum, Ripple and Litecoin.
So what now?
Who knows! Bitcoin could be a massive bubble waiting to burst or it may be the future of currency as we know it. Ulti-mately it boils down to how much risk you want to take on. However, it is probably safe to say that it would be unwise to bet the farm on it.
Warren Buffet says, “I get into enough trouble with things I think I know some-thing about. Why in the world should I take a long or short position with something I don’t know anything about… But I do think what’s going on will definitely come to a bad ending.”