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What is Bitcoin and how does it work?

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New Delhi: Bitcoin broke through the USD 10,000 barrier for the first time on Wednesday as it continues a stratospheric rise that has delighted investors but sparked fears of a bubble.

The digital currency –a form of electronic money independent of traditional banking – that was virtually unknown just a few years ago, is now showing some staying power.

Bitcoin has evolved into a software-based payment online system or an alternative currency touted by a fervent group of followers.

But what exactly is Bitcoin? Very few people are aware of what it really is and what its implications are.

What are Bitcoins?

Bitcoins started circulating in 2009 and have become the most prominent of several fledgling digital currencies.

The virtual currency relies on a network of computers that solve complex mathematical problems as part of a process that verifies and permanently records the details of every bitcoin transaction that is made.

Unlike traditional currencies, where a central bank decides how much money to print based on goals like controlling inflation, no central authority governs the supply of bitcoins. Like other commodities and currencies, its value depends on people’s confidence in it.

How does Bitcoin work?

Users can use Bitcoin wallet that allows them to send and receive bitcoins. The Bitcoin network works by sharing a public ledger called the “block chain”. This ledger contains details of every transaction. The authenticity of all the transactions are protected by digital signatures corresponding to the sending addresses. Additionally, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called “mining”.

Where are Bitcoins stored?

Bitcoins are held in virtual wallets with unique keys. Transactions are made by sending bitcoins from one wallet to a unique key associated with another wallet in a cryptographic process that is verified by computers across the bitcoin network.

Bitcoin wallets can be stored offline or online at exchanges like Bitstamp and BTC-E.

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