What is Bitcoin and How Does it Work?

Austrian economists explain

One of the hottest topics lately in Austro-libertarian circles is Bitcoin, which its official website describes as a "peer-to-peer virtual currency." Supporters claim that Bitcoin is the ultimate free-market money of the computer age, because its scarcity is mathematically guaranteed and is virtually impervious to government counterfeiting efforts. Detractors argue that it is a fad, and that only a physical commodity can last as a true money.

In the present article we'll try to explain what Bitcoin is, and how it works. The topic is tricky because Bitcoin's implementation relies on distributed computational procedures (carried out by a network of different machines) and encryption. So in this first article of a series, we will simply try to give an analogy for the big-picture understanding of how Bitcoin actually works, where we hope to strike a balance between accuracy and comprehension for those not familiar with "mathematical trapdoor functions" and "public/private key protocols." In future articles, we'll talk more about its implications, and how it relates to commodity monies like gold in an Austro-libertarian framework.