AP EXPLAINS: What is bitcoin? A look at the digital currency

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Posted: May 02, 2016 2:43 PM
AP EXPLAINS: What is bitcoin? A look at the digital currency

NEW YORK (AP) — Bitcoin is a type of digital currency that allows people to buy goods and services and exchange money without involving banks, credit card issuers or other third parties. Its origins have long been a mystery — though an Australian man long rumored to have ties to bitcoin has come forward claiming to be its creator.

Who is this man, and how does this system work?

Here's a brief look at bitcoin:

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HOW BITCOINS WORK

Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who "mine" them by lending computing power to verifying other users' transactions. They receive bitcoins in exchange.

The coins also can be bought and sold on exchanges with U.S. dollars and other currencies. Their value has fluctuated over time. At its height in late 2013, a single bitcoin was valued above $1,100. On Monday, it was worth about $445.

Because the currency isn't formally regulated, its legality is a bit fuzzy. The currency has also drawn the ire of many in law enforcement and cybersecurity because it's difficult to trace, making it a currency of choice for hackers behind ransomware attacks. But in September, New York state regulators approved their first license for a company dealing in bitcoin.

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WHY BITCOINS ARE POPULAR

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with libertarians as well as tech enthusiasts, speculators — and criminals.

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SHOULD I TRADE IN ALL MY CASH FOR BITCOINS?

That would be a questionable decision. Many businesses such as blogging platform WordPress and retailer Overstock have jumped on the bitcoin bandwagon amid a flurry of media coverage. Leading bitcoin payment processor BitPay works with more than 60,000 businesses and organizations, while the total number of bitcoin transactions has climbed to over 200,000 per day, more than double from a year ago, according to bitcoin wallet site blockchain.info.

Still, its popularity is low compared with cash and cards, and many individuals and businesses won't accept bitcoins for payments.

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HOW BITCOINS ARE KEPT SECURE

The bitcoin network works by harnessing individuals' greed for the collective good. A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn't be an issue.

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HOW BITCOIN IS VULNERABLE

Much of the mischief surrounding bitcoin occurs at the places where people store their digital cash or exchange it for traditional currencies, like dollars or euros. If an exchange has sloppy security, or if a person's electronic wallet is compromised, then the money can easily be stolen. The biggest scandal involved Japan-based bitcoin exchange Mt. Gox, which went offline in February 2014. Its CEO, Mark Karpeles, said tens of thousands of bitcoins worth several hundred million dollars were unaccounted for. He was arrested on suspicion of inflating his cash account in August.

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HOW BITCOIN CAME TO BE

It's a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn't matter: The currency obeys its own internal logic.

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WHO IS THE REAL NAKAMOTO?

There's been plenty of speculation on Nakamoto's identity over the years. In December, the technology magazine Wired and the website Gizmodo both concluded that Australian computer scientist, inventor and academic Craig Wright was probably the man behind the pseudonym. The reports offered detailed circumstantial, but no hard proof, and hedged their conclusions accordingly.

On Monday, Wright told BBC News, the Economist and GQ that he is Nakamoto. (He also put out a press release .) Wright said he launched the currency in 2009 with the help of others. Wright told the BBC that he decided to make his identity known to stop the spread of "misinformation" about bitcoin.

If Wright is the founder, he is likely a very wealthy person. The person going by the pseudonym Nakamoto is believed to have amassed about 1 million bitcoins, which would be worth about $450 million if converted to cash.

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Follow Bree Fowler at https://twitter.com/APBreeFowler. Her work can be found at http://bigstory.ap.org/author/bree-fowler.