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It’s not an actual coin, it’s “cryptocurrency,” an electronic form of payment that is produced (“mined”) by lots of people worldwide. It allows peer-to-peer transactions instantly, worldwide, for free or at very low cost.

Bitcoin was invented after decades of research into cryptography by software developer, Satoshi Nakamoto (believed to be a pseudonym), who designed the algorithm and introduced it in 2009 2009. His true identity remains a mystery.

This currency isn’t backed by a tangible commodity (such as gold or silver); bitcoins are traded online making them a commodity in themselves.

Bitcoin is an open-source product, accessible by anyone who is a user. All you have to is an email address, Internet access, and money to begin with.

Where does it come from?

Bitcoin is mined on a distributed computer network of users running specialized software; the network solves certain mathematical proofs, and looks for a particular data sequence (“block”) that produces a particular pattern once the BTC algorithm is put on it. A match produces a bitcoin. It’s complex and time- and energy-consuming.

Only 21 million bitcoins are ever to be mined (about 11 million are currently in circulation). The math problems the network computers solve get progressively more challenging to help keep the mining operations and supply in check.

This network also validates all of the transactions through cryptography.

How does Bitcoin work?

Internet users transfer digital assets (bits) to each other on a network. There is absolutely no online bank; rather, Bitcoin has been referred to as an Internet-wide distributed ledger. Users buy Bitcoin with cash or by selling something or service for Bitcoin. Bitcoin wallets store and use this digital currency. Users may sell using this virtual ledger by trading their Bitcoin to another person who wants in. Anyone can do this, all over the world.

You can find smartphone apps for conducting mobile Bitcoin transactions and Bitcoin exchanges are populating the web.

How is Bitcoin valued?

Bitcoin isn’t held or controlled by a financial institution; it is completely decentralized. Unlike real-world money it can’t be devalued by governments or banks.

Instead, Bitcoin’s value lies simply in its acceptance between users as a form of payment and because its supply is finite. Its global currency values fluctuate according to supply and demand and market speculation; as more people create wallets and hold and spend bitcoins, and more businesses accept it, Bitcoin’s value will rise. Banks are now trying to value Bitcoin plus some investment websites predict the price of a bitcoin will be several thousand dollars in 2014.

What are its benefits?

There are benefits to consumers and merchants that are looking to utilize this payment option.

1. Fast transactions – Bitcoin is transferred instantly over the Internet.

2. No fees/low fees — Unlike credit cards, Bitcoin can be used free of charge or very low fees. Minus the centralized institution as middle man, you can find no authorizations (and fees) required. This improves income sales.

3. Eliminates fraud risk -Only the Bitcoin owner can send payment to the intended recipient, who’s the only one who can receive it. The network knows the transfer has occurred and transactions are validated; they cannot be challenged or taken back. This is big for online merchants who are often subject to charge card processors’ assessments of whether or not a transaction is fraudulent, or businesses that pay the high price of credit card chargebacks.

4. Data is secure — As we have seen with recent hacks on national retailers’ payment processing systems, the Internet isn’t always a secure place for private data. With Bitcoin, users do not give up private information.

a. They have two keys – a public key that serves because the bitcoin address and a private key with personal data.

b. Transactions are “signed” digitally by combining the public and private keys; a mathematical function is applied and a certificate is generated proving an individual initiated the transaction. Digital signatures are unique to each transaction and cannot be re-used.

c. The merchant/recipient never sees your secret information (name, number, home address) so it is somewhat anonymous nonetheless it is traceable (to the bitcoin address on the general public key).

5. Convenient payment system — Merchants may use Bitcoin entirely as a payment system; they do not have to hold any Bitcoin currency since Bitcoin can be changed into dollars. Consumers or merchants can trade in and out of Bitcoin along with other currencies at any time.

6. International payments – Bitcoin is used around the globe; e-commerce merchants and service providers can simply accept international payments, which start new potential marketplaces for them.

7. Easy to track — The network tracks and permanently logs every transaction in the Bitcoin block chain (the database). In the case of possible wrongdoing, it is easier for police to trace these transactions.

8. Micropayments are possible – Bitcoins could be divided right down to one one-hundred-millionth, so running small payments of a dollar or less becomes a free of charge or near-free transaction. This may be a real boon for convenience stores, coffee shops, and subscription-based websites (videos, publications).

Still a little confused? Here are some examples of transactions:

Bitcoin in the retail environment

At checkout, the payer runs on the smartphone app to scan a QR code with the transaction information had a need to transfer the bitcoin to the retailer. Tapping the “Confirm” button completes the transaction. If an individual doesn’t own any Bitcoin, the network converts dollars in his account in to the digital currency.

The retailer can convert that Bitcoin into dollars if it wants to, there were no or very low processing fees (instead of 2-3 3 percent), no hackers can steal personal consumer information, and there is no threat of fraud. Very slick.

Bitcoins in hospitality

Hotels can accept Bitcoin for room and dining payments on the premises for guests who want to pay by Bitcoin using their mobile wallets, or PC-to-website to pay for a reservation online. A third-party BTC merchant processor can assist in handling the transactions which it clears on the Bitcoin network. These processing clients are installed on tablets at the establishments’ front desk or in the restaurants for users with BTC smartphone apps. (These payment processors are also designed for desktops, in retail POS systems, and built-into foodservice POS systems.) No credit cards or money need to change hands.

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