When Ross William Ulbricht was arrested in September for running the online drug store (and we don't mean the kind of drugs you get for a slight cold), Silk Road, eyebrows were raised among the general public, not just at how blazen the 29-year-old Texan's actions were, but also about the method of payment he accepted.
To serve his paying public, the self-styled Tony Montana, operating under the handle 'Dread Pirate Roberts', managed to conceal the identities of operators, sellers and buyers via the Tor anonymity online service and by accepting payment in Bitcoin.
The case pushed Bitcoin into the wider mainstream, but how much is known about this mysterious new virtual currency?
WHERE DID BITCOINS COME FROM?
For a start, not much is known about Bitcoin's inventor, other than he/she is a reclusive computer programmer called Satoshi Nakamoto. (In keeping with the currency's secretive nature, his name may or may not be his real name.)
Bitcoin is a decentralized virtual currency, meaning neither does it exist in the physical world, nor does it have a central bank such as the Federal Reserve. It's an open source project, and it is used by more than 100,000 people. All over the world people are trading hundreds of thousands of dollars worth of Bitcoin every day with no middle man and no credit card companies.
Bitcoin first shot to mainstream financial attention after its value increased by up to 1,000 per cent since the start of 2013. Virtual currencies are nothing new, of course. World of Warcraft fanatics know all about the virtual money formed in the game to allow players to exchange value within the game. Online gamers then established 'gold farms': accruing online points, or virtual gold, which could be exchanged for real currency. However, in essence Bitcoin is similar to store cards where you 'buy' loyalty points and get to 'spend' the points later on.
WHAT IS BITCOIN ALL ABOUT?
Differing slightly to a traditional online payment processor, Bitcoin is a currency in its own right, and you can buy coins at sites like bitcoin.org and send them peer-to-peer across the Internet without going through a bank or clearing house. The fees are also relatively low.
So far, so PayPal, but there's a difference: like gold or other commodities, the coins rise and fall in value as there is a finite number of Bitcoins in the world at any one time - the number of Bitcoins in existence will never exceed 21 million and it is set to reach that figure in 2140. (To see how many Bitcoins are in circulation, you can actually visit https://blockchain.info/charts/total-bitcoins.)
Bitcoin values fluctuate - with the price around $140 not long ago, but you can buy fractions of a Bitcoin (known as Satoshis after its founder). The current market price for a Bitcoin is always changing due to the supply and demand for it.
HOW DO I BUY THEM?
OK, you like the idea, don't you? To buy Bitcoins, go to a site like bitcoin.org and open an account on your computer. Once you've opened an account your computer can then "mine" coins from servers via a peer-to-peer networking system. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.
The most popular way to get your hands on Bitcoin, however, is via online exchanges such at Mt GoX, or via bank transfer on websites like Coinbase. Sellers can also be found directly online. Bitcoins can then be bought and sold in return for traditional currency like dollars and Euros on several exchanges, and can also be directly transferred across the Internet from one user to another.
WHAT DO I DO WITH THE BITCOINS ONCE I'VE GOT THEM?
It's the (relative) simplicity, with no messy bank charges or exchange rates that makes Bitcoin a potentially attractive currency in which to settle international transactions. Some Internet services (such as web hosting, and increasingly, online gambling) can be paid for using Bitcoin.
Blogging platform WordPress and WikiLeaks both accept Bitcoin, while some sites offer gift vouchers for retailers such as Amazon. There are also websites selling electronic goods that exclusively accept Bitcoin. The dark side to Bitcoin, however, is how it can continue to be accepted on sites such as Silk Road, or for money laundering purposes.
WHY ARE BUSINESSES GETTING INTO THEM?
Bitcoin's high security allows it to process transactions in a very efficient and inexpensive way. You can make and receive payments using the Bitcoin network with almost no fees. In most cases, fees are not strictly required but they are recommended for faster confirmation of your transaction.
Businesses that accept credit card or e-wallet payments like Bitcoin as Bitcoin payments are irreversible and wallets can be kept highly secure, meaning that the cost of theft is no longer pushed onto the shoulders of the merchants.
HOW ARE THEY USED IN ONLINE GAMBLING?
Online gambling accounts for a huge portion of Bitcoin activity. It is fast, with an immediate return (or loss), and bets can be relatively small. When done properly, it is also relatively easy to prove that bets are fair, either by tracking payouts in the block chain, or by using some external proof, such as records of cash inputs used to produce random numbers, some of which are controlled by the user. There are also no country restrictions, music to the ears of players living under restrictive jurisdictions.
While SatoshiDice has proven to be the most popular gambling Bitcoin site online so far - one winner bagged 11,000 Bitcoins (or $1.3 million) recently - there are also sportsbetting Bitcoin sites, blackjack games, roulette and even poker. Meanwhile, plenty of mainstream payment options including 'e-wallets' continue to thrive.
ARE BITCOINS THE FUTURE OF CURRENCY?
Some economists regard Bitcoin as a bubble waiting to burst (though possibly not till 2140, when none of us will be about to see the aftermath) and there's no doubt that there have been huge fluctuations in price. Just last April, the value of a Bitcoin fell from $266 to $105, although it did recover slightly.
Fans of Bitcoin, however, point to the freedom the currency has in being safe from government regulation and interference, and highlight the recent financial disaster in Cyprus where the government there raided savers' bank accounts to help facilitate a vital Eurozone bailout.
As "Dread Pirate Roberts" has proved, the currency is open to massive abuse, and even the US Treasury has made moves to apply money-laundering rules to virtual currencies like Bitcoin.
The largest enemy of Bitcoin could well be global currency markets, however, who have long-held vested interests in established currencies, and eventually they may attempt to scupper any moves for Bitcoin to gain any foothold.
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