What is bitcoin? How do you use it?

Bitcoin is back in the news with the dramatic closure of one of its heaviest users - the Silk Road online marketplace - and the supposed unmasking of Mr Bitcoin in the unlikely form of Satoshi  Nakamoto

What is Bitcoin?

Bitcoin is an experimental new digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: managing transactions and issuing money are carried out collectively by the network. Bitcoin is also the name of the open source software which enables the use of this currency. 
Source: Babbage The Economist

The value of Bitcoin has fluctuated wildly
The bitcoin virtual currency has had a volatile 24 hours that saw values plummet, hack attacks, trading shutdowns and bitcoin-stealing malware.
From the high of $260 (£169) for each bitcoin on 10 April, bitcoins are now worth less than $100 (£65) each.
The main bitcoin exchange shut down for 12 hours to install hardware to help it cope with trading volumes.
In addition, malicious software is emerging that seeks out and empties the virtual wallets of bitcoin owners

Is this a bubble bursting? 

Many suspect so. But the remarkable thing about bitcoin is its robustness as a trading currency. In its short history it has already survived one major crash and a $250,000 virtual robbery from its exchange. Its value had stabilised at around $12 before this recent spike.

Bitcoin is also gaining increasing acceptance as on online currency. And there are even rumours of the first bitcoin ATM machine being set up in Cyprus. This map is a snapshot of bitcoin usage.

The crucial  strength and vulnerability of bitcoin is that it is an unsupported currency. There is no Fed or Bank of England to regulate its value.

Who invented bitcoin?

Much about bitcoin is shadowy, including the identity of its mysterious founder Satoshi Nakomoto. The name is a psuedonym - some believe there is a Banksy-like figure in the background. More likely it represents a group involved in the creation of the original software.

Why are some commentators suspicious of bitcoin?

There have been also been accusations that the relative anonymity of bitcoin transactions encourage its use on what the Economist terms 'dodgy online markets'. Many attribute the recent price strike to Russian from questionable sources forced to find an untraceable home after the Cypriot bank debacle.

So Bitcoin is basically a money laundering device?

This may be unjust. The initial success of bitcoin was largely down to  the enthusiasm and the libertarian idealism of many of its supporters. Like those who endorse Esperanto as a new peace-inducing world language, bitcoin users believe they have found a way of liberating money from the control of governments and financial institutions.

Is bitcoin a good investment?

It is certainly a high-risk one. The potential pitfalls for bitcoin investors are summarised in this Forbes article.

Will it still be around in five years?

The jury is still out. The question is the one posed generally by Nassim Taleb. Is bitcoin fragile, and likely to be shattered by a change of external circumstances? Or is it solid enough for long-term survival?

Some argue that consumers will never adopt a 'virtual' currency. This ignores the fact most financial transactions are virtual - whether via card, cash transfer or cheque. In fact the ideal medium for illegal is physical cash

More on the bitcoin in this New Yorker article

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