Bitcoin is a digital currency created in 2009 by a mysterious figure using the alias Satoshi Nakamoto. It can be used to buy or sell items from people and companies that accept bitcoin as payment, but it differs in several key ways from traditional currencies.
Most obviously, bitcoin doesn’t exist as a physical currency. There are no actual coins or notes. It exists only online.
“Real-world” currencies, like the dollar, are managed by a central bank such as the US Federal Reserve or the Bank of England, which manage the money supply to keep prices steady. They can print more money or withdraw some from circulation if they think it’s needed, as well as using other monetary policy controls such as adjusting interest rates.
Bitcoin has no central bank and isn’t linked to or regulated by any state. The supply of the cryptocurrency is decentralised – it can only be increased by a process known as “mining”. For each bitcoin transaction, a computer owned by a bitcoin “miner” must solve a difficult mathematical problem. The miner then receives a fraction of a bitcoin as a reward.
A record of each transaction, using anonymised strings of numbers to identify it, is stored on a huge public ledger known as blockchain. This acts to ensure the integrity of the currency.
Check out the video below for a graphical explanation.