Bitcoins are a type of digital currency that can be created via a free software application and transferred across the Internet without the use of financial institutions or clearinghouses. This means that there is no physical form of this currency; it is not like a U.S. Dollar or a Euro, or even like a piece of gold or silver. You cannot touch bitcoins and be in physical possession of them like you can those aforementioned physical currencies.
The best way for you to understand digital currency is by thinking of it as a code. The strength of the code makes the currency stronger. Cryptography ensures that the code cannot be accessed without proper authorization. This code has never been broken, though many people have tried!
How can Bitcoins be used then? A computer, Smartphone, tablet, or any device with Internet access can easily transfer Bitcoins from one person to another, even in transactions between a user and a business website.
The number of bitcoins you have are stored in your “digital wallet,” which is similar to screens you see when you use online banking forms to authorize transactions.
When a Bitcoin transaction occurs, the bitcoin miners communicate over a Web-based network and add the transaction to transaction logs that record all Bitcoin transactions.
Peer-to-peer file-sharing technology allows all transactions to be processed and documented. An electronic signature is added, allowing the transaction to be stored on the Bitcoin network. This transaction is free for all to see, though you can use multiple bitcoin accounts and not transfer large amounts of bitcoins to each account in order to help camouflage your activities. This hides your accounts from other Bitcoin users, so they do not know which accounts are yours.