A quick guide to how bitcoin works

The Associated Press

NEW YORK — The digital currency bitcoin is the payment of choice for HBO’s cyberattackers. The hackers demand what they say is their “6-month salary” in bitcoin, suggesting it’s at least $6 million.

Bitcoin allows people to buy goods and services and exchange money without involving banks, credit card issuers or other third parties. Although bitcoin isn’t widely used, it has strong appeal in some circles because transactions can be made anonymously. The currency is popular with libertarians, tech enthusiasts, speculators — and criminals.

Here’s a brief look at bitcoin:



Unlike most currencies, bitcoin isn’t tied to any bank or government. Rather, the coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive bitcoins in exchange. The coins also can be bought and sold on exchanges with U.S. dollars and other currencies.



One bitcoin recently traded for $3,385, according to Coinbase, a company that helps users exchange bitcoins. That makes it far more valuable than an ounce of gold, which trades at about $1,265.

The value of bitcoins can swing sharply, though. It’s up 33 percent in the past month. But its price doesn’t always go up. A bitcoin’s value plunged by 23 percent against the dollar in just a week this past January. It fell by the same amount again in 10 days during March.



Yes, to a point. Transactions and accounts can be traced, but the account owners aren’t necessarily known. That’s why it’s a payment of choice among criminals, including the “ransomware” hackers who crippled computer networks around the world in May and June. The shuttered underground e-commerce site AlphaBay required transactions to be done in bitcoin and similar digital currencies.

That said, investigators might be able to track down the owners when bitcoins are converted to regular currency. To combat that, AlphaBay had offered digital money laundering to shuffle bitcoin through several accounts before the conversion.



Some businesses have jumped on the bitcoin bandwagon amid a flurry of media coverage. Overstock.com accepts payments in bitcoin, for example. But most individuals and businesses won’t accept bitcoins for payments.

The currency has about 280,000 daily transactions, according to bitcoin wallet site blockchain.info. That’s minuscule compared with cash and cards.



The bitcoin network works by harnessing individuals’ greed for the collective good. A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. As long as miners keep the blockchain secure, counterfeiting shouldn’t be an issue.



It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto. Bitcoin was then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract widespread attention. But proponents say that doesn’t matter: The currency obeys its own internal logic.

An Australian entrepreneur last year stepped forward and claimed to be the founder of bitcoin, only to say days later that he did not “have the courage” to publish proof that he is.



The bitcoin system was under threat recently when some miners were reluctant to upgrade their systems to improve capacity because it could reduce transaction fees they collect. Refusal would have sowed chaos, as no one could be sure which bitcoin belonged to the old or new system. But miners ended up agreeing to the change by the deadline.

Still, a group of developers created an alternate currency, Bitcoin Cash, last week. So far, many individuals, businesses and criminal enterprises consider bitcoin the digital currency of choice, but that could change if any of the alternatives pick up steam.