What is bitcoin?
Bitcoin is an open-source protocol enabling the transmission of value across the Internet in the form of a digital asset, digital currency, or payment mechanism – it is essentially a peer-to-peer decentralized monetary system. Exchange across the network is pseudonymous (not anonymous) because there is a trace if you give someone your wallet address for a transaction. Transfers use a public key/private key system, and a record of transactions in kept in the blockchain. Bitcoin is just one of hundreds of virtual cryptocurrencies (e.g.; cryptography-based) as illustrated in Figure 2; yes, there is a BaconCoin, BBQCoin, [YourNameHere]Coin...
Bitcoin Mining Ecosystem
In addition to exchanging physical-world currencies for bitcoin or other cryptocurrencies on exchanges (example: DealCoin), bitcoins can be earned by ‘mining.’ An extensive cryptocurrency mining ecosystem has arisen. Mining or hashing is using home-based GPU rigs (like SETI@home but for crytocoin mining) in resource pools with others (like Coinotron), or renting cloudhashing processing resources, to algorithmically make as many guesses as possible on the number of the next block of coin to be released, sort of like a lottery. There is a safeguard against money-printing and inflation as in the case of bitcoin, only 21 million total bitcoins can be created.
Sophisticated mining operations have driven the profit in bitcoin mining below zero so erstwhile traders mine more volatile currencies that may be up-and-coming like ScryptCoin (USD $27/week profit), MicroCoin (USD $20/week profit) and other riskier alt.currencies that may yield USD $16-$20/day.
Prospects for Long-term Success
The reason why a few top cryptocurrencies like bitcoin could succeed are the huge worldwide liquidity of the Internet, the demand for flexible, digital, cross-border, pseudonymous payment systems, and the practical and social political support for peer-to-peer payment systems, financial empowerment, and self-sufficiency as part of the ongoing Occupy response to the 2008 banking crisis, global capitalism, and corporate hegemony. Transfers within the crytpocurrency network are pseudonymous and not directly trackable by authorities, but network ingress and egress exchange to physical-world currencies can be monitored. Regarding regulation and taxation, bitcoin is already being classified as falling under regulatory jurisdiction as a ‘payment system’ or ‘taxable voucher’ and being enfolded into the traditional financial world, with VAT now levied in Germany, Sweden, and Finland, and discussions ensuing in other countries.
Esprit of Financial Empowerment
Bitcoin and the cryptocurrency movement asks ‘who should be in charge of printing money?’ and suggests individuals not governments. Alt.currencies are just another step in the long tradition of decentralization, access, and self-empowerment in the financial industry that includes web-based stock trading and portfolio management, real estate and mortgage transactions, and peer-to-peer lending, and that is also emerging in other sectors like education with MOOCs, and health and biology with citizen science, biohacking labs, and synthetic biology liberating research from institutions.
Update: Dec 18, 2013 - With market-crashing volatility and regulatory oversight, bitcoin is already seeming short-lived: "Bitcoin value drops 40% after more bad news from China"