Bitcoin is a cryptocurrency and a new and unique financial vehicle, unlike anything the world has ever seen. It’s called a cryptocurrency because it uses cryptography to control the creation and transfer of money. Despite the name, there is no physical coin to speak of, Bitcoin is a completely electronic form of money.
Bitcoin solves the so called ‘’double spending problem’’ present with digital goods. For example, if I have an mp3 file or an ebook on my computer, I can freely copy that file a thousand times and send it to a thousand different people. For a digital currency, the possibility for unlimited copying would mean a quick hyperinflationary death. Bitcoin solves this by maintaining a peer to peer network and recording each transaction in a public ledger called the block chain. Say I send 1 bitcoin from my trading bitcoin address to my friend John. The bitcoin network records that transaction in the block chain and I no longer have possession of that bitcoin. The coin ‘’moved’’ from my bitcoin wallet to John’s wallet.
What’s so special about Bitcoin? There are many arguments on whether the new virtual currency will succeed or fail. We will not get into this nor discuss the politics behind the project. Our concern is strictly with the profit opportunities provided by this new payment phenomenon. In the next few pages on the new digital currency we will outline our thoughts from the perspective of a trader and a potential investor in this upcoming market.