What is a Currency?

What is Bitcoin? from CNBC, July 20, 2011

Currencies are normally issued by governments and are backed either by a commodity or by a legal mandate.  But Bitcoin is backed by neither.  In fact, it does away with a financial intermediary almost entirely.  Unlike Paypal or other online monies, Bitcoin is peer-to-peer exchange of "tokens."  The Bitcoin transfer protocol is the only intermediation that occurs.

"The process also lets people conduct transactions with virtual (but not complete) anonymity, perhaps the biggest key to its success so far. And as online transactions continue to grow and online data theft becomes a more common occurrence, bitcoin backers see an opening for the system."

"The bitcoin system is designed so there will never be more than 21 million bitcoins in existence.  Every four years, the number of new coins that will spring into existence--or be mined--will be cut in half, until the supply is exhausted in approximately 2030. After that, the only way to get bitcoins will be via exchanges. (At present, there are about 6.6 million in circulation.)."

"The value of bitcoins in real world dollars fluctuates wildly--often as much as 8 percent per day. As little as two months ago, the exchange rate was $1 USD per bitcoin. That was before the mainstream world learned about them, though--which sent their value through the roof.  Speculators quickly saw potential in this new currency and began buying them through Mt. Gox and other sites. Given the currency's instability, that led to rapid inflation and the currency value peaked at nearly $28 on June 9.  These days, you can expect to pay somewhere between $15 and $20 per bitcoin."