A:

Bitcoin was launched in 2009 as the world's first decentralized, private digital currency. Because it has no physical denominations, Bitcoin only exists inside of an interlinked computer network system. This is not entirely unique, as much of the U.S. dollar supply only exists in digital account balances instead of as actual green pieces of paper.

Bitcoins are generated, or "mined," through a sequence of complex mathematical formulas run through computers. The anonymous creator of Bitcoins set a cap on total Bitcoin volume. Once that number hits 21 million, no more Bitcoins can be generated. These digital coins can then be bought or sold with other currencies and used as an investment or money to buy goods from any sellers who accept them.

Why Does Any Currency Have Value?

Economics teaches society that values are subjective; items have economic value because people desire them for one reason or another. Currencies, or mediums of exchange, serve several different and crucial functions in an economy. For one, they make trade easier; money currencies trade for nearly any good or service.

For example, suppose a person has 5 units of lumber and wishes to purchase a dog. Without currency, his only option is to find a lumber-wanting dog owner. With currency, like U.S. dollars, he can sell the lumber to anyone who wants it and then use the money to purchase a dog.

Currency also provides a universal measurement for accounting purposes. For instance, without currency, it is difficult to compare companies that sell different goods. Currency is used as a store of value, which makes saving, investing and banking easier.

Some currencies, like gold, have value because they are useful as a commodity. Government fiat currencies, like the U.S. dollar, have value because governments grant them legal tender status and only accept taxes through them.

Why Do People Value Bitcoins?

Bitcoins do not have value as a physical commodity like gold and are not widely accepted as legal tender like dollars. Rather, Bitcoin appears to have value for the following reasons:

It is popular. In short, people accept and trade in Bitcoin because other people accept and trade in Bitcoin. It is recognized and accepted as a currency by many.

Bitcoin is decentralized and limited. This is a major factor for many Bitcoin users. Bitcoin is hard for governments to trace and tax. Also, unlike fiat money produced by central banks, there is a cap set on total Bitcoins, limiting how much the currency can devalue through inflation.

Bitcoin acts like an equity investment. The market value of Bitcoins has had wild swings in value and even a market cap.

Bitcoin is a social network. The Bitcoin "community" is active and acts like other online social networks.

RELATED FAQS
  1. How do you buy Bitcoins?

    Many people have heard of this virtual cryptocurrency, but few know all the ways you can purchase Bitcoin. Read Answer >>
  2. What are the advantages of paying with Bitcoin?

    Learn how payments made with Bitcoins offer certain advantages over standard currency, including user anonymity, no taxation ... Read Answer >>
  3. What does a block chain record in a bitcoin exchange transaction?

    Read about the bitcoin blockchain, a public ledger shared among all bitcoin users that records the information of every single ... Read Answer >>
  4. How does a block chain prevent double-spending of Bitcoins?

    Find out how double-spending is prevented in the Bitcoin server and how transactions are posted and verified on the Bitcoin ... Read Answer >>
Related Articles
  1. Tech

    Are There Taxes On Bitcoins?

    Here is a short guide to the tax implications when using or investing in bitcoins in the US.
  2. Tech

    How To Trade Forex With Bitcoin (XOM, EXPE)

    We look at ways to trade forex with bitcoin and the pitfalls in doing so.
  3. Tech

    How Bitcoin Can Change The World

    Bitcoin has the potential to not only create savings for consumer, but also to transform global transactions.
  4. Tech

    Bitcoin May Be The Currency Of The Future

    Forget the dollar or the euro. Bitcoin may be the next big currency to hit the world.
  5. Tech

    Countries Where Bitcoin Is Legal & Illegal (DISH, OTSK)

    Although bitcoin has been in existence for five years, most countries still do not have consistent laws regulating the cryptocurrency. However, a few countries have banned bitcoin altogether.
  6. Tech

    New Bitcoin Price Record: Over $2,000 Per Coin

    The price of Bitcoin has climbed to its highest point of all time, now trading at over $2000 per coin.
  7. Investing

    What's Behind the Single-Family Office Interest in Bitcoin?

    Wealthy individuals and family investing offices are making purchases of Bitcoin at increasing rates. How come?
  8. Tech

    How Rich Would You Be If You Had Purchased $100 of Bitcoin in 2011?

    Your initial $100 of bitcoin is now worth $482,666.67.
  9. Tech

    SEC Denies Winklevoss Bid to Launch Bitcoin ETFs in Surprise Upset

    The Bitcoin world was stunned by the SEC's decision not to approve the Winklevoss Bitcoin ETF.
  10. Tech

    Benefits & Risks of Trading Forex with Bitcoin

    Want to trade forex using bitcoins? Don’t jump on the bandwagon until you compare the risks to the benefits.
RELATED TERMS
  1. Bitcoin Exchange

    A bitcoin exchange is a digital marketplace where traders can ...
  2. Bitcoin Unlimited

    A proposed upgrade to Bitcoin Core that allows larger block sizes.
  3. Trade Hill Exchange

    A Bitcoin exchange launched in June of 2011. Trade Hill Exchange ...
  4. Bitcoin Classic

    A fork from Bitcoin Core that proposed increasing the size of ...
  5. Bitcoin XT

    A fork from Bitcoin Core that proposed increasing the size of ...
  6. Satoshi

    The smallest unit of the bitcoin cryptocurrency. Satoshi is named ...
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  6. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
Trading Center