Is Bitcoin about to change the world?

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If you want to buy drugs or guns anonymously online, virtual currency Bitcoin is better than hard cash. Canny speculators have been hoarding it like digital gold. Now the world's leading bankers are even talking about as a rival for real money. How does it work, where can you get it and is it the future?

Alex Hern
The Guardian, Monday 25 November 2013 18.48 GMT

The past weeks have seen a surprising meeting of minds between chairman of the US Federal Reserve Ben Bernanke, the Bank of England, the Olympic-rowing and Zuckerberg-bothering Winklevoss twins, and the US Department of Homeland Security. The connection? All have decided it's time to take Bitcoin seriously.

Until now, what pundits called in a rolling-eye fashion "the new peer-to-peer cryptocurrency" had been seen just as a digital form of gold, with all the associated speculation, stake-claiming and even "mining"; perfect for the digital wild west of the internet, but no use for real transactions.

Bitcoins are mined by computers solving fiendishly hard mathematical problems. The "coin" doesn't exist physically: it is a virtual currency that exists only as a computer file. No one computer controls the currency. A network keeps track of all transactions made using Bitcoins but it doesn't know what they were used for – just the ID of the computer "wallet" they move from and to.

Right now the currency is tricky to use, both in terms of the technological nous required to actually acquire Bitcoins, and finding somewhere to spend them. To get them, you have to first set up a wallet, probably online at a site such as Blockchain.info, and then pay someone hard currency to get them to transfer the coins into that wallet.

A Bitcoin payment address is a short string of random characters, and if used carefully, it's possible to make transactions anonymously. That's what made it the currency of choice for sites such as the Silk Road and Black Market Reloaded, which let users buy drugs anonymously over the internet. It also makes it very hard to tax transactions, despite the best efforts of countries such as Germany, which in August declared that Bitcoin was "private money" in which transactions should be taxed as normal.

It doesn't have all the advantages of cash, though the fact you can't forge it is a definite plus: Bitcoin is "peer-to-peer" and every coin "spent" is authenticated with the network. Thus you can't spend the same coin in two different places. (But nor can you spend it without an internet connection.) You don't have to spend whole Bitcoins: each one can be split into 100m pieces (each known as a satoshi), and spent separately.

Although most people have now vaguely heard of Bitcoin, you're unlikely to find someone outside the tech community who really understands it in detail, let alone accepts it as payment. Nobody knows who invented it; its pseudonymous creator, Satoshi Nakamoto, hasn't come forward. He or she may not even be Japanese but certainly knows a lot about cryptography, economics and computing.

It was first presented in November 2008 in an academic paper shared with a cryptography mailing list. It caught the attention of that community but took years to take off as a niche transaction tool. The first Bitcoin boom and bust came in 2011, and signalled that it had caught the attention of enough people for real money to get involved – but also posed the question of whether it could ever be more than a novelty.

The algorithm for mining Bitcoins means the number in circulation will never exceed 21m and this limit will be reached in around 2140. Already 57% of all Bitcoins have been created; by 2017, 75% will have been. If you tried to create a Bitcoin in 2141, every other computer on the network would reject it as fake because it would not have been made according to the rules of currency.

The number of companies taking Bitcoin payments is increasing from a small base, and a few payment processors such as Atlanta-based Bitpay are making real money from the currency. But it's difficult to get accurate numbers on conventional transactions, and it still seems that the most popular uses of Bitcoins are buying drugs in the shadier parts of the internet, as people did on the Silk Road website, and buying the currency in the hope that in a few weeks' time you will be able to sell it at a profit. Read Full Artical Here

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