How do bitcoin work?

This type of money or currency comes into existence from mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The first participant who solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards incentivize mining and include both the transaction fees (paid to the miner in the form of Bitcoin) as well as the newly released Bitcoin.

Your Bitcoin account balances are kept using public and private "keys," which are long lists of numbers and letters created by the encryption algorithm that was used to mine them. The public key is similar to a bank account number and is used as the address which is published to the world and the way in which people can send you Bitcoin. The private key which is similar to your debit or credit card PIN and should never be given to anyone, this is what you use to authorize sending Bitcoin to others.