The basics of Bitcoin

RENO, (Nev) At a Sinclair gas station in Sparks, a Bitcoin exchange machine sits right next to a traditional ATM. According to the clerk, the machine is used frequently, and it is the only machine of its kind in the area.

But look at the center of the screen, and you will see the value of one Bitcoin is constantly changing.

“It is just a very volatile asset. More volatile than gold. More volatile than the stock market,” says Gerald O’Driscoll, Senior Fellow with the CATO Institute.

Bitcoin is what is called a crypto-currency. It is initially purchased with any kind of currency, like a US dollar, Swiss franc, or British pound.

The Bitcoin is then put into a virtual wallet and placed on your desk computer, or in a cloud. You can buy or trade bitcoins by using a mobile app or by computer much like sending cash digitally.

All of this is done anonymously. There is no way to trace these transactions back to you. There is no government control. There is no agreed upon universal worth of a Bitcoin.

“Its value to you depends upon how valuable it is to other people. And they haven't sort of gotten to that yet,” says O’Driscoll.

That lack of government control or oversight may be attractive to people who want to invest in Bitcoin. But keep in mind there's a lag in time to buy or sell a Bitcoin, which means what you thought it was worth today, may have dramatically changed three or four days from now.

In money controlled by governments and other entities, there is an agreed-upon value, and there are rarely big swings one way or the other in that value.

Bitcoin transactions are processed though what's called mining. Bitcoin miners approve those transactions to legitimize and prevent the re-use of coins that have already been spent. But they also mine for Bitcoins, looking for a sequence of numbers that when found, creates a kind of new generation of bitcoins.

“Originally it started with computers and eventually people realized typical home PCs are slow at this thing. And then they developed computers for this purpose,” says Mehmet Gunes, Professor at UNR Computer Science and Engineering Program.

“The amount of electricity being used by these miners equals the amount of electricity used every year in Ireland,” says O’Driscoll.

Neither O'Driscoll nor Gunes is willing to speculate what will happen to Bitcoin in the future. But they say it's best to see Bitcoin as an asset rather than money---that when transferred to cash, may be less or more than what you paid for it.