Bitcoins are a sort of digital IOU note.
Suppose you need to pay me £100 ($150) but Uncle Bob already owes you £500 ($760). You take the IOU from Bob and write down that you owe £100 of that to me, at the bottom. You sign it and give me a copy as proof. I now have an IOU note that allows me to spend up to £100 and you have £400 ($610) of your original debt from Bob left.
Bitcoins work like this except that the IOU notes are electronic and use encryption to guarantee the signatures and prevent tampering. The IOU notes are called the ‘block chain’ and they are distributed around the internet continuously, for anyone to see. This means that Bitcoins don’t need a bank to vouch that the money is ‘really there’.
Bitcoins can be exchanged like any ordinary currency, but they don’t have any physical form as cash. One Bitcoin is currently worth about £220 ($330).
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