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Bitcoin is a kind of crypto currency, a concept first described in 1998 on the cypherpunks mailing list. Launched on the Internet ten years later, it’s becoming extremely popular. As its popularity grows, along with questions about it, I thought I’d take a moment to share my understanding of this phenomenon.

Based on the idea that money is any object or record accepted as payment for goods and services, Bitcoin uses virtual cryptography to control its creation and transactions, rather than relying on a central authority. This means Bitcoins can be transferred without an intermediary financial institution. They have no established backer, bank, or government to support them. In financial sectors, this kind of unregulated investment product is practically unheard of.

The genesis of Bitcoin is bit of a mystery. In 2009, the first specification and proof of concept was published under the pseudonym Satoshi Nakamoto. Late the next year, he left the project without revealing his identity. To this day, the origin and motivation of Bitcoin are still unknown. That, however, hasn’t prevented it from being embraced by the global community. In 2011, a spike in media attention led to a massive buy rally. While the resulting bubble deflated slightly, the value of Bitcoins slowly climbed back to their media-driven heights. Last year, a foundation was created to standardize, protect, and promote Bitcoin. In April, the value of a single Bitcoin reached $260. Today, more and more users are joining the Bitcoin economy.

Almost all other forms of virtual currency, such as Facebook Credits or Amazon Coins, are centralized and controlled. Bitcoin, on the other hand, is an independent form of digital cash. Every user has a digital wallet that can be stored on a computer, memory stick, in a cloud-based service, even on good old-fashioned paper. Each wallet contains a list of Bitcoin addresses, which has public and private cryptographic keys that prove the holder owns their Bitcoins and is allowed to spend them. Because the addresses are pseudonyms and there’s no registry of who owns what address, they’re ideal for untraceable transactions.

Amazon Coins

Bitcoins are generated by a fixed algorithm. While governments can print more money, there will never be more than 21 million Bitcoins because that’s the way the algorithm is structured. Currently, there are around 11 million Bitcoins and they’re beginning to be used for everything from cars to pizza.

Regardless of where this ends, Bitcoin is an important element in the shifting landscape of twenty-first century commerce. For thousands of years, a vital trait of successful civilizations was collective agreement on the value of “money”—shells, coins, gold, silver, iron, etc.—in exchange for goods and services. Regardless of location or culture, this was crucial to enabling transactions and creating new markets and trading opportunities. While there’s no way to know where Bitcoin’s value will ultimately go, it’s worth keeping a close eye on. In the same way, Bitcoin may prove the catalyst for the next phase in the evolution of global commerce.

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