Bitcoin: Looks like a pound coin to me (Picture: Reuters)

Bitcoin, we’re all hearing about it but do we know what it is?

Or are we hiding out in our bedrooms hoping it’ll go away and reminiscing over our collections of NatWest piggybanks?

No? Oh, me neither. But just in case you were, here’s a beginners guide to understanding cyber coinage.

1. What is Bitcoin anyway?


Bitcoin is a type of currency that lives entirely on the internet. It takes no physical form but can be used to pay for goods online like traditional money.

Created in 2009 and as the first crypto-currency, it relies heavily on mathematical algorithms to give it value.



2. Is Bitcoin the only crypto-currency?

There’s an expanding network of digital currencies like Bitcoin, such as Litecoin, Dogecoin, Namecoin, Darkcoin and Peercoin, there’s even CoinyeWest…

Kanye wasn’t too pleased about that though.

How could @kanyewest possibly object to this? I do see a resemblance, but it can’t be related. #coinyecoin pic.twitter.com/kKOG0oyLfj — Winston Smith (@singlespeed) January 10, 2014

Fashioned in the name of Yeezus himself, the Coinye is now a dead currency after Kanye West won a lawsuit against its creators.

3. Who runs Bitcoin?

Unlike traditional currency, Bitcoin is not issued or controlled by any bank or government. For this reason it is a decentralised form of currency.

It commonly cuts out the middle man and arguably makes transactions faster, peer-to-peer, more flexible, is transparent because all transactions are published online, has fewer fees, and is more secure.

According to Bitcoin.org ‘Bitcoin is controlled by all Bitcoin users around the world’, meaning that no single user of Bitcoin can inherently change the system without the agreement of all users – anybody can become a Bitcoin user by purchasing them at a Bitcoin exchange.

4. What do Bitcoin miners do?

If you went behind the scenes of Bitcoin functionality you’d find Bitcoin miners. No, really, you would.

In its simplest form these miners use hardware to solve cryptographic puzzles that process the transactions made by Bitcoiners.

They’re rewarded with Bitcoins for their work and they get more Bitcoins the harder the puzzle they solve. The more puzzles solved, the harder the cryptographic hash that creates these puzzles gets.

5. Will I ever have to use crypto-currency?

Without more widespread investment, the demand for Bitcoin will not be big enough to sustain or support widespread use.

Therefore it’s unlikely that you will start using Bitcoin to purchase your grocery shop, but some companies including WordPress and Reddit already accept it.

6. What are the problems?

Security against hackers and the loss of Bitcoins (due to user error).

Another problem is that lack of widespread knowledge and regulation has pushed countries such as Germany to devalue the currency by not recognising it as digital money.

Additionally, it has a bad reputation as it is commonly used to purchase illegal goods online. The currency was widely used to provide anonymity to patrons of the now defunct Silk Road drug marketplace.