WHAT IS BITCOIN?
It's an innovative new form of digital money. Instead of being minted from a precious metal, or printed by a government or bank, bitcoins are generated by computers using the open source bitcoin protocol.
Bitcoins or "BTC" have the form of cryptographic keys, long strings of numbers and letters called hashes that look like this: “c959a89848510840d1f87456c61074477922ae18e”.
The SHA-256 encryption technology used is the most secure system in the world for transmitting data safely from one computer to another.
While you may have heard that bitcoins are "mined", in reality bitcoin miners are an ad hoc network of computers working independently towards the goal of authenticating transactions. The miners earn a reward in the form of bitcoin proportionate to their contribution to the security of the network.
Any computer can jump in and mine, but the rewards are infintesimal for miners who are not using optimized systems referred to as “mining rigs”. The blockchain is a dynamic record of every single bitcoin transaction. Anyone can download and review this record.
THE EVOLUTION OF MONEY
Throughout history coins were used as a store of value and a medium of exchange. A central entity such as a government or bank created a mintage in order to authenticate the purity and quantity of the metal contained in the coin. This was a way for the state to better organize trade, improve the efficiency of the economy, and simplify the collection of taxes and tariffs.
Over the past few decades the western governments have been replacing the higher value metals traditionally used in common coins (silver, copper) with some of the cheapest usable metals (steel, zinc). Simultaneously, they are printing ever-greater quantities of paper money. Fundamentally, paper currency or fiat money is backed only by government decree and has no intrinsic value.
Modern monetary policy in the US includes quantitative easing (“printing money”). This creates inflation and gradually debases of the dollar. This policy effectively allows the Federal Reserve Bank to decide the value of a dollar. Many economists recommend diversifying assets internationally and owning physical precious metals in order to avoid the downsides of US monetary policy. This is also why some economists love bitcoin, and why many bitcoiners believe the US dollar is decrepit.
THE VALUE OF A BITCOIN
Bitcoin provides a medium of exchange in a deflationary environment. Bitcoin, like gold and silver, is scarce. There will only ever be 21 million bitcoins created. Early speculation on the price of bitcoin has seen the price for one BTC rise gradually from less than a penny in 2009 to a high of $49 on March 6th 2013. The total value of the bitcoin economy is currently half a billion dollars.
If bitcoin became the ubiquitous worldwide form of digital cash for the internet it would be used in 1% of all monetary transactions. In this case the size of the bitcoin transactional currency market would be approximately 600 billion dollars. (source: (falkvinge.net/the-target-value-for-bitcoin - Falkvinge.net)
While the price of bitcoin may continue its steady rise to 120,000% of its curent value, it may also go to zero. The incredible amount of risk associated with bitcoin must be carefully factored in to any assessment of its long term value. There is no precedent for analysis of the future price of bitcoin.
1 - A government or corporation could attempt a takeover. Super-computers optimized to perform the same functions as the bitcoin network could theoretically threaten network integrity by flooding the network with false transactions. In other words, if the US government was highly intent on crushing bitcoin its attacks could be crippling or fatal.
2 - A competitor could emerge. The #2 crypto-currency today is called litecoin. It was created using the bitcoin source code and touted as “the silver to bitcoin gold”. One litecoin is worth roughly $0.50 USD (as of March 11th 2013). Litecoin isn't designed to usurp bitcoin's position as #1.
In a recent conference Erik Voorhees, Director of Marketing for Bitinstant stated that he would be happy if a superior competitor emerged as this would be indicative of progress. Nevertheless, the potential is there for a new technology to emerge and disrupt bitcoin.
3 - For a non-technical person there is a significant learning curve to understanding and using bitcoins. Despite much improvement in this area there is still a significant barrier to entry which will continue to impede widespread adoption.
1 - Bitcoin is (virtually) anonymous. This means you can send any amount of money, anywhere in the world, instantly and anonymously, for a fee of approximately one penny.
3 - There is development and innovation happening everyday. Therefore, by being involved in bitcoin and in the crypto-currency revolution you are able to benefit from advancements immediately.