What is Bitcoin?

Bitcoin is the original cryptocurrency, and though it isn't valued as high as it was in the past, it is still the most valuable cryptocurrency on the market. Its proof-of-work verification system is resistant to fraud, but it requires significant power consumption.

Bitcoin caused quite a stir in the financial world when it was introduced by Satoshi Nakamoto. At the time, it was the only cryptocurrency available on the market, and it pioneered many of the techniques shared by other cryptocurrencies (also known as alt coins) to this day. Bitcoin's enforced scarcity, wide user base, first-mover advantage and established reputation have helped to make it the consistently highest-valued cryptocurrency. Its reputation has also allowed it to gain significant acceptance among retailers including Amazon, Subway and even Victoria's Secret.

Like most cryptocurrencies, Bitcoin's transaction record, or "ledger," is kept up to date by the combined effort of all the users of the currency. In Bitcoin's case, users compete for the right to record the next entry by participating in a proof-of-work system. Essentially, each computer on the network spends some of its processing power for a chance at verifying the next block of payments, and receiving a small amount of Bitcoin as a reward. This process is known as "mining," and it is designed to fairly and randomly split the task of verifying payments across all the users in the system.

This system has proven quite effective, but there are two major concerns associated with it. One is the possibility of a 51 percent attack, where one individual or group controls more than half of the processing power on the network, allowing them to consistently win the right to verify payments and thus rewrite the ledger to suit their own ends. While this is a definite possibility, it is unlikely to actually happen. The more immediate concern is the immense power consumption that Bitcoin requires. Participating in the proof-of-work system means that a lot of computers have to be logged in and using electricity at all times, which raises sustainability concerns about the currency.

While Bitcoin has consistently been the most valuable and respected of the cryptocurrencies, its price is still extremely volatile. The price per Bitcoin has fallen from over $1,200 to around $225 in the beginning of this year, and this means it is about 18 times more volatile than the U.S. dollar. However, this volatility may simply be because Bitcoin is a relatively new currency and users are still figuring out exactly what it's good for. For many, the potential advantages of Bitcoin – the ability to securely transfer across international borders, increased anonymity and freedom from central government – outweigh the risks.

Of all cryptocurrencies, Bitcoin is perhaps the closest to the currencies people are already familiar with. It has significant value and can be exchanged for a wide variety of goods and services. For all its reputation and popularity, though, Bitcoin is still a fledgling currency whose bubble recently burst.