They are doing cryptographic hashes called SHA-256 (look it up). A hash can't be decoded, it can only be brute force matched. What all the miners are doing are computing hashes, which are entered in the blockchain (ledger) when the hash meets a certain criteria. The criteria today is harder than it was two weeks ago, but not as hard as it will be in two weeks. There are something like 300,000 blocks in the blockchain, recording all BTC transactions for the last 4.5 years. Part of the genius of BTC is that the hash of block 300,001 depends on the hash of 300,000, which depends on the hash of 299,999, etc. So an attacker (someone who wants to rewrite block 275,095 to take back a BTC he already spent) has to recompute ALL the hashes from that block forward, and to do that he has to have more hashing power (computer power) than all the other honest miners. He has to have 51% of the BTC network hashing power, which today costs about $15 million in very specialized, hard to come by computer chips, and requires about 5MW of power to run . Therein lies the security of the ledger. (Although Dr. Evil or a government could put 51% hashrate together, they couldn't do it secretly. Everyone can see the blockchain, and an attacker would be visible, although I don't know if they would be stoppable. Somebody smarter has to answer that.)

In traditional banking the banks keep a record of how much money you have. They deal with all the security to make sure people can't claim they have more money than they do. Bitcoin is designed to do away with this centralisation. Each customer keeps track of their own balance through owning a unique piece of data that identifies a bitcoin as belonging to their account. It's difficult to fake this point of data to the point of requiring more computing power than is reasonable, eg you'd have to spend years running your computer to generate a "fake" bitcoin which actually belongs to somebody else, and if there's two conflicting claims one will be obviously fake because the real one will have a record of that bitcoin's ownership all the way back to when it was discovered. In addition, there are "undiscovered" bitcoins which anyone is allowed to find and claim as their own, although this process is getting harder and harder (see "years of computing time", above). A bitcoin is essentially just a solution to a mathematical function which is so tricky there are only a limited number that are likely to be discovered, hence rareity, hence value, as long as at least one other person wants one.

One one level it's basic economics; if there is a demand for something and it is scarce it's price goes up, the scarcer it gets the more it's value increases. With bitcoin the scarcity is created by any user downloading software that will give the computer a unique problem to work on, when it's done you get bitcoin. However electricity and hardware prices limit this, unless the market demand for bitcoin increases it's value further. This calculation/scarcity mechanism should prevent inflation. Bitcoin transactions are conducted not through a central bank but peer-to-peer, you exchange a public record that runs on everyones computers that has downloaded the software. So you go to Mt Gox, exchange sterling for bitcoin then that transaction is logged on the public record, you then transfer the bitcoin onto an online wallet or a wallet on your own computer that the software can run and update, but you could easily have transferred that bitcoin to a merchant, all that's known is a value and unique wallet address. That's were it becomes harder to trace. To exchange it back you can go to trader website or other exchanges and look at their rates and they will credit your account. Simples.

To start it took 1000 calculations to reward a bitcoin, something easily achieved by one computer that was doing 100 calculations per second. However there were a few other computers/miners all mining the SAME bitcoin. After 999 calculations were made the computer that (by luck) mined the last bitcoin to complete tot 1000th calculation is awarded a bitcoin. When this bitcoin was mined the calculation became harder. This has been going on exponentially until now, and now many billions of calculations are needed to mine a single bitcoin. The more power your computer has, the more likely it is to be the one that makes the last calculation before the bitcoin is rewarded. Think of it like 100 diggers all digging for a single piece of gold. The one who strikes the gold gets it. The value is simply created by desire and rarity. It is again comparable to rare metals in that the more scarce they become the more value they have. There is no way for the government to know what you are doing (without a personal hack) with your money. You can buy drugs, or guns, or anything else, and other than the usual digital trail we all have when using the internet (that can be minimised or wiped out) there is no paper or digital trail.

Well, some people say you can still get in before the real boom. Many are predicting the bitcoin to go from 200 to 360 in the next few months and eventually end up at 100,000+ You see there is only 21 million bitcoins that can ever exist. The more people use the greater the demand. So you think its all a scam? Well Germany has accepted it as legal tender. China is accepting it, many people are using it to trade online because the can't use paypal in their countries. Also, you can get free bitcoin (fractions of ) from many sites. Many cafe's are also starting to accept it. Wordpress accepts it and Amazon and paypal are looking into using it too. Time to take it seriously I think. There is a crowd source funded project called GBBG that allows people to get free coin for watching ads and video etc... You can go to the bitnews and blog links on their website to learn more about bitcoin. They are a technology group looking to launch bitcoin related products. People may not believe it, but this new currency is about to change the way we use money online. I've posted this link before and many people liked it, so here it is again http://bit.ly/133rHGa This is an easy way to get your own coin for free and start watching it grow, It's a bit of fun anyway.