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What The Heck Are Bitcoins? – Bitcoin Basics, Part 1

What The Heck Are Bitcoins? – Bitcoin Basics, Part 1

This week, the total market value of all Bitcoins in circulation passed the one billion dollar mark.

If your first reaction to that news is “What the heck are Bitcoins?” you’re not alone. Despite more than doubling in value over the last few months and being accepted as payment by thousands of American businesses, the vast majority of the world has no idea what a Bitcoin is.

Even though you may not know (or care) about Bitcoins now, our guess is that you’re going to hear a whole lot more about Bitcoins in the coming months and years. Bitcoins are considered by many proponents to be a safe-haven store of value and because of this, any serious prepper should take the time to learn about this subject.

In fact, the value of a Bitcoin skyrocketed during the recent Cyprus banking crisis:

Two weeks ago, one Bitcoin was worth $40, then a record high.

Today, it’s worth $72, largely because of “incremental interest” from euro and Russian ruble holders who are terrified by the situation in Cyprus, said Nicholas Colas, chief market strategist at ConvergEx Group, a financial technology company in Manhattan. – ABC News

So, to help you stay one step ahead of the game, we bring you the first installment in our “Bitcoin Basics” series.

First, Bitcoins are a currency, but unlike traditional currencies, Bitcoins are not issued by any government. In fact, Bitcoins don’t even exist in physical form. Bitcoins are a purely digital currency that is traded between individuals and has no central issuing authority.

The Bitcoin concept was first described in a 2008 paper by an individual (or group of individuals) going by the assumed name of Satoshi Nakamoto. The paper described an encrypted “mining” process where a distributed group of computer servers created a limited, and defined, number of Bitcoins.

(If you want to learn more about Bitcoin history and get into the technical details of how the digital currency is produced, I recommend this November, 2011 Wired story.)

The first actual Bitcoins were created in 2009 and since then, more than 10 million have been digitally “minted”. The program’s creator set a total limit of 21 million Bitcoins that can ever be produced and used some clever to math to gradually reduced the supply of new Bitcoins each year, until the total limit is targeted to be reached in 2140.

The fact that no government or individual controls the Bitcoin universe is what has made them attractive to those seeking financial anonymity. Also, for those concerned about the world’s central banks devaluing their fiat currencies, the planned limits to the pace of Bitcoin creation has attracted many looking for a safe-haven currency.

In the next installments of our Bitcoin Basics series, we’ll look at the process of buying, selling and storing Bitcoins, debate the pros and cons of Bitcoins, as well as discuss how Bitcoins may fit into your prepping strategy.