LAUNCHED IN 2009 by an unknown person using the alias Satoshi Nakamoto, bitcoins are an example of a growing category of digital money known as cryptocurrency-the first decentralized virtual currency that can be used to make electronic purchases. The idea was to produce a currency independent of a central authority, transferable almost instantly, without incurring a transaction fee.
Bitcoins are kept in your digital wallet and linked to your unique bitcoin address. When user A initiates a transaction to pay user B, he adds B's address to the bitcoins payable, and signs off with a private key. This is then broadcasted to the global bitcoin network for validation. 'Miners' on the network use computing devices to pack a few hundred such transactions into a 'block'. They then compete to 'mine the block', or validate and process the transactions. The winning miner is rewarded with newly gene-rated bitcoins for successfully verifying a block. All verified transactions are recorded in the 'blockchain'-a transparent public ledger.
Compared to other digital currency, bitcoins have a number of advantages. The transaction fee is much lower since it eliminates the middleman, and your account cannot be frozen. The currency is also free from government interference. The downside: names of buyers and sellers are never revealed, which, unfortunately, has made it the go-to currency for unlawful activities. In addition, acceptance of bitcoins is currently limited-some countries do not recognize it as a valid payment instrument. Also, their price is volatile and their real value is hard to determine.
Nonetheless, the e-currency has opened up a new platform for innovation; the software is open-source, meaning anyone can review the code or look at it to make sure it works. India has a small but growing community of bitcoin users.
Bitcoins are changing finance the same way the internet changed publishing: When everyone has access to a global market, it leads to more choices for the general public and greater innovation.
Sources: bitcoin.org, mashable.com, coindesk.com