What are Bitcoins?

What are Bitcoins?

Bitcoins are a crypto-currency.  That means they can be used like a currency, but don't physically exist like dollar bills.  They are an online currency which can be used to buy things.  They are digital cash that exist as bits on people's computers.  You can't put them in a drawer, like dollar bills or gold Krugerrands.  Bitcoins are used to complete transactions - just like any currency.  Even though they are virtual, rather than physical, they are used like cash when transferred between people through the web.

Being virtual is not inherently a bad thing.  The dollars on our financial institution statement, viewed online, are considered real money, even though those are just digital dollars.  The fact that Bitcoins aren't available in physical form is not really a downside, any more than the numbers on your financial statement are not available as physical currency either. Just like we use credit cards or debit cards to transfer value, Bitcoins can be spent in many locations, just like dollars.

Why are currencies different from everything else?

Currencies are sort of magical things.  If we didn't have them we would have to do all transactions by barter.  Want some gasoline?  Without currency you would have to give the seller a chicken or something else the seller wants.  That is less than convenient.  So currencies were created to represent the value of things.  Instead of saying a gallon of gas is worth one chicken, we can say it is worth $2.50.  And the chicken can be worth $2.50.  So currency represents the value of everything.  The dollar, itself, is a small piece of paper that is worth nothing.  But it represents buying power.  Thus, it is stored value.  We hold dollars so we can use the value they represent to obtain the things we want.

Currencies are not the only form of stored value.  People buy gold and lock it in a safe because they believe the demand for gold will rise, increasing its value, and thus the gold is stored value.  People buy collectible art or rare coins because they believe that as time passes the demand for such artifacts will increase, and thus their value will increase.  The art becomes a stored value.  Some people buy real estate not just to live on, but because they think the demand for that real estate will grow, and thus the real estate is stored value.

But these forms of stored value are risky, because the stored value can disappear.  If new mines suddenly produce vast new quantities of gold, its value will decline.  If the art is a fake, its value will be lost.  If demand for an artist or for ancient coins cools, its value can fall.  The stored value is dependent on someone else, beyond the current owner, determining what that person will pay for the item.