What is Bitcoin?

The idea of currency – that something of value can be exchanged for goods or services – goes back thousands of years to cattle and cowrie shells. Bronze and copper coins pop up around 1000 BC, with silver ones coming into existence roughly 500 years later. The Chinese developed paper money in 806, watched it disappear in 1455, then show up again a few centuries later. Europe, the United States and the rest of the world followed suit. Now central banks regulate money, citizens pay with coins, paper bills, or with debit and credit cards. (The companies distributing the cards profit from fees, of course.)

Satoshi Nakamoto had a different vision: Bitcoin. A document that he uploaded to a cryptology listserve in 2008 – in the middle of the global financial crisis – outlined the plan that didn't rely on governments or central banks. The details are complex, but the simple version is that a network of users keeps track of every Bitcoin transaction by adding each one to the 'block chain.' People use computing power to solve cryptographic puzzles, 'mining' blocks at a rate of about six blocks per hour. The first person to successfully mine the block receives a reward, currently set at 50 Bitcoins. Every 210,000 blocks – roughly four years – the reward is cut in half. By 2140, 21 million Bitcoins will be floating around the digital world. The fixed supply allows Bitcoins to gain value.

On January 3, 2009, Nakamoto mined the first 50 Bitcoins himself. Over the next two years, two things happened: the open source money slowly, steadily, gained traction among a certain subset of technogeeks, libertarians and other early adopters, and Nakamoto disappeared.

The second issue first. No one knew the identity of the Bitcoin creator. He might have been a single person, a group or something else entirely. But by December 2010, he – or it – was gone. While the disappearance surprised the growing Bitcoin community, it also helped. "In a way it's a good thing for the community that he's gone. It's like religion. We had some of the regimes in the 20th century become 'atheist' and replace religion with quasireligions around their heads of state and look what happened. It's better for society in general when central rallying points are more abstract,” Vitalik Buterin, head writer for Bitcoin Magazine, wrote over Skype. (That nearly everyone in the Bitcoin community communicates primarily over Skype gives a sense of the currency's worldwide userbase.)

Nakamoto was gone, but Bitcoin continued to gain traction. The digital currency, which wasn't worth anything initially, suddenly was. A lot, in fact. In February 2011, one Bitcoin could be exchanged for roughly $1 USD. Just four months later, on June 9, one Bitcoin was worth nearly $30 USD. Although the market crashed to around $3 USD by October, it rebounded and hovered around $12 USD in December 2012.