Bitcoin is often referred to as a new kind of currency that can be exchanged for dollars and vice versa.
But it may be better to think of its units as being virtual tokens that have value because enough people believe they do and there is a finite number of them.
Each of the 11 million Bitcoins currently in existence is represented by a unique online registration number.
These numbers are created through a process called “mining”, which involves a computer solving a difficult mathematical problem with a 64-digit solution.
Each time a problem is solved the computer’s owner is rewarded with 25 Bitcoins.
To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of about 3,600 new Bitcoins a day.
To receive a Bitcoin, a user must also have a Bitcoin address – a randomly generated string of 27 to 34 letters and numbers – which acts as a kind of virtual postbox to and from which the Bitcoins are sent.
Since there is no registry of these addresses, people can use them to protect their anonymity when making a transaction.
These addresses are in turn stored in Bitcoin wallets, which are used to manage savings. They operate like privately run bank accounts – with the proviso that if the data is lost, so are the Bitcoins contained.