Bitcoin is a digital currency, or crypto-currency, created and held electronically and is not backed by a government or central bank to regulate or issue it. It thus enables direct payment over the internet by skipping the middleman (which is usually a bank or credit card company). The digital currency is mainly used to purchase goods and services from stores and online retailers.
Recently, Bitcoin has become extremely popular with merchants and retailers, including PayPal, Expedia, Overstock.com and Dell.
In 2009, a software developer called Satoshi Nakamoto proposed bitcoin as an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.
Bitcoin gets "mined" into existence. Bitcoin mining serves to both add transactions to the block chain and to release new Bitcoin. The process of mining 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 inspire further mining and include both the transaction fees (paid to the miner in the form of Bitcoin) as well as the newly released Bitcoin.