Unlike existing world currencies, bitcoins are completely virtual, existing only online and not controlled by any Central Bank. All transactions take place in an online marketplace, where users are untraceable. This means you can’t get them from a bank. You hold bitcoins in an online “wallet,” which is an account set up on a secure third-party website.
If your wallet is hacked and your bitcoins are stolen, there is nothing you can do about it. Unlike banks, wallet firms won’t invest your money; nor do they provide any deposit protection insurance. In just five years the virtual currency has gone from being worthless to nearly $600 apiece, leading many to believe they are overvalued and the bubble is likely to burst.
New bitcoins enter the market by a process called “mining.” Available bitcoins are hidden amid a complex encrypted computer program. Users’ computers are working round the clock to solve a complicated mathematical problem in order to release new coins. The easiest-mined bitcoins have already been discovered. Finding new coins requires huge amounts of computing power. That has led some hackers to take over unsuspecting users’ computers to harness their power to mine for more bitcoins. The system is designed to require more work to get coins as time goes by, that makes the currency’s growth rate, also known as inflation, steady and predictable.
About 11 million bitcoins have already been found. But only 21 million exist in total.
You can use bitcoins to buy anything that you would use any other kind of currency for. There’s just one huge snag: the business has to accept bitcoins, and most don’t. To buy something, you need the anonymous identification number attached to the seller’s wallet, and transfer coins from your wallet to theirs. This anonymity has made the currency popular with drug dealers. Like cash they are untraceable but unlike cash they can be transferred anonymously anywhere.
While bitcoins are legal, as long as they’re being used for legal purchases, the Chinese and Russian Governments have banned their use. Other Governments are likely to follow their example.