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Understanding A Bitcoin Can Be Complicated

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Buffalo: Understanding A Bitcoin Can Be Complicated
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Never heard of bitcoin? You're hardly alone. Plenty of people, however, are interested. Millions are, in fact, doing tens of millions of dollars worth of transactions every day.

So what exactly is bitcoin?

"Bitcoin is a virtual currency," says Alan Mekler, chairman and CEO of MediaBistro. "You don't actually physically have it. It's essentially on your computer or on a memory stick."

There are a few ways to look at it. For one thing, it's a decentralized payment system, meaning it's traded without going through a bank or middle man. It's also completely borderless, not backed by any government.

To get started, you just need to set up an online wallet and buy a bitcoin or fraction of a bitcoin to put in it. This can be done through an exchange or directly from other users. Those bitcoins can then be used to pay for purchases or to transfer money from peer to peer.

"Bitcoin can and will be used to buy a cup of coffee, or it can and will be used to send hundreds of millions of dollars of value to anybody in the world, any business in the world, instantly and for free," says Austin E. Alexander, deputy director of Bitcoin Center in New York City.

Each transaction is verified in a public log to make sure all of the bitcoins in existence are accounted for, and there will only ever be a finite amount, 21 million, only about half of which are currently in circulation. They're released in blocks to miners who use special equipment to solve complex math problems.

The other side of the coin are the people who see them as an investment, and like any other commodity, their value depends on the day. When bitcoin first came into existence in 2009, they were given the arbitrary value of 11 cents. Last December, they were trading for about $1,000 bucks apiece. Currently, the price is hovering around $430.

"Value is determined by a marketplace and by people, and so the bitcoin people will tell you that the value of bitcoin is inherent in as many people as basically use bitcoins," says Joe Deaux, economics analyst at The Street.

In our next segment, we'll look at some of the regulatory and legal issues springing up in response to this self-regulated industry.

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