Key takeaways

- Digital currencies like Bitcoin are different from traditional forms of payment.
- There are benefits and significant risks associated with digital currencies.

What exactly is Bitcoin, and what are the risks involved in using it as a form of payment or as an investment opportunity? Here are some answers to frequently asked questions:

What is Bitcoin?

Bitcoin is the first and largest asset in the growing category of cryptocurrency (also known as digital currency). It was originally intended as a medium of exchange that is created and held electronically. Bitcoin was the first, but there are hundreds of digital currencies.

We'll focus on Bitcoin here to illustrate how digital currencies work. However, the underlying blockchain technology and functionality of Bitcoin are similar to many of the other widely used digital currencies, including Ethereum, Bitcoin Cash, and Litecoin. (For more on blockchain, see below.)

Who creates Bitcoin?

Bitcoins aren't printed by a government organization like the US Treasury does with dollars. Instead, they're produced by people and businesses running computers all around the world, using software that solves a very complex mathematical problem. The mathematical formula is freely available, so that anyone can check it, but you'll need a really powerful set of computers to solve the problem.

Who controls Bitcoin?

One of the important points is that no single person, entity, or organization controls Bitcoin. The fact that Bitcoin is not controlled or administered by a large bank or government entity is part of its appeal for many—but that also makes it harder to understand.

Can I tell who owns Bitcoin?

Bitcoins are sometimes regarded as anonymous. They are stored in digital wallets—essentially electronic vaults—which can have public electronic addresses associated with them. But they aren't necessarily linked to names, home or business addresses, or other personally identifying information. What’s more, you don't need to give your real name or other personal information to make direct transactions on the Bitcoin blockchain; only the digital addresses of the Bitcoin wallets identify the buyer and seller.

Read "What are Some of the Risks of Investing in Bitcoin?" and More