Bitcoin, a digital currency invented in 2009, has recently gained increased popularity worldwide, but still remains a mystery to many. Even those who consider themselves tech savvy, have questions about how bitcoin was developed, how they can “mine” it, and where to use it. Because of the many benefits of using bitcoins – they are convenient, universal, and totally anonymous – I believe that the popularity of bitcoins will continue to grow and someday could be the primary form of payment around the world. So, even if you are not quite ready to make a financial investment in bitcoin, I’d recommend making an investment in understanding it. Read the following breakdown to decide what the future of bitcoin will be for you.

What exactly is Bitcoin?

Bitcoins are digital currency allowing individuals to transfer money anonymously for purchases. Because there is no middleman or bank involved with the purchase of bitcoins, no fees are applied to any transactions. Many people currently are purchasing bitcoins, and treating it as an investment, because of the fluctuation that occurs. For example, a person could have purchased one bitcoin on May 3, 2013 for $92.55, on November 30, 2013 for $1,126.82, or May 2, 2014 for $450.94. If purchased at the right time, one could multiply their initial investment upwards of twelve times. But as with all investments, risks do exist.

How are Bitcoins Created?

New bitcoins are “mined” by high-powered computers that process other bitcoin transactions. Once bitcoins are mined, they are sold to large distributors such as Coinbase.com or BitQuick.co who then resells them to anyone who is interested in buying them. There are currently 11 million bitcoins in circulation and more are being mined at the rate of 150 per hour. The rate is programmed to half-life every four years until 21 million total bitcoins are in circulation, which will be in the year 2140.

How do I Purchase and Store Bitcoins?

This can be done as easy as online shopping or going to an ATM. Sites such as Coinbase.com allow people to purchase bitcoins using a credit card. Recently in Seattle, a bitcoin ATM was created allowing people to purchase them with a credit card or cash on the spot. Once purchased, bitcoins are stored in a digital wallet such as MultiBit on your computer. Because bitcoins are vulnerable to being hacked, storing your wallet on an external disk that is not connected to the Internet will make it impossible for someone to steal them from you. Companies like Coinbase.com also allow people to store their bitcoins in a wallet on their secure server.

Where Can I Spend Bitcoins?

Small businesses are increasingly accepting bitcoins as a form of payment because they are able to keep more of their own money by avoiding the 2-3% processing fee issued by credit card companies per transaction. Another convenience feature, bitcoin is a universal currency so those who travel and spend internationally do not need to convert their money to the local currency.

The Dark Side of Bitcoin

Sadly, a lot of the recent conversation has revolved around the negative aspects and criminal activity associated with bitcoin. SilkRoad, a black market drug site uses bitcoin as the only form of payment so individuals can make illegal purchases without being tracked down. Also, due to bitcoin being completely digital, if you are not careful, your bitcoins could be easily hacked and stolen. MtGox, formerly the largest distributor of bitcoins, was hacked in February of this year. Nearly $500 million in bitcoins were stolen. Bitcoins can’t be traced so when someone is hacked, it is impossible to ever recover them. There are many programs that can help ensure that your bitcoins are secure but the best thing to do is to store them on an external hard drive or device that is not connected to the Internet.

Learn more about bitcoin in this educational video: