Bitcoin is a crowd-based form of digital cash that only works on the Internet.
It's crowd-based because its security model requires the majority of Bitcoin servers to agree on what transactions take place so money can't be spent twice or counterfeited. Like cash, it is anonymous, and you can spend it without being traced.
Imagine Bitcoin as a room full of people that want to keep score in their economy. Each time someone wants to spend bitcoins, all the interested persons in the room vote on the transaction to validate it. If a majority of them agree that the transaction was a good one, it is recorded in an official transaction log. Their actions provide security to the system, in return for which they are occasionally paid with Bitcoins.
The most important new feature of Bitcoin is that your currency (the coins) doesn't have to come from a trusted party such as banks or a central bank such as the Fed. It is issued by and self-regulated by the crowd, that is, by people running the Bitcoin software over the Internet. Without the Internet, Bitcoin could not exist or be spent.
Bitcoin also differs from other familiar forms of currency, in that:
* It is issued as a debit, or cash value, not as a form of debt that must be repaid with interest.
* It is issued by the people of the Internet, not a national bank, so it is a truly international currency that can be transmitted across national boundaries with no additional costs or rules.
* It has rules that limit the rate of new coin creation to a predictable level, unlike national currencies which can be devalued by supposedly trusted central banks at any time.
* Unlike most digital forms of currency, your transactions are anonymous, so you can do things like buy drugs over the Internet from Silk Road, launder money, etc. that you could not do before.
Bitcoin derives its value as a currency from the fact that it enables certain kinds of business transactions that did not exist before. As long as those basic uses continue to exist, Bitcoin (or something like it) will exist to service it.
However, Bitcoin has several weaknesses.
* It only has a few places, like Mt. Gox, where you can exchange it for other currencies, which can result in bottlenecks or those exchanges being shut down.
* Any number of other similar currencies can be created out of the same open source Bitcoin software, all competing in the same space for the same type of business, resulting in less value for each currency.
* Bitcoin has very limited acceptance except at a few pioneering online stores.
* Trying to act as your own banker and secure your own coins on your computer may result in the theft of your coins by Internet hackers or their accidental deletion.
Hm, nevermind, why don't they just read the Wikipedia article.
