Bitcoins: Analysis of the Controversial Digital Currency

Since it was created two years ago, the virtual currency Bitcoin has appreciated significantly. This year alone, the value of the Bitcoin has increased by six thousand percent. Currently, roughly $130 million worth of the online currency exist and the notoriety of the Bitcoin has only been growing in recent months. As demand for the currency increases, the rapid appreciation of the Bitcoin may leave early buyers of Bitcoins with considerable fortunes – at least in the virtual world.

But how do Bitcoins work and why all the fuss?  Part of what makes Bitcoins so remarkable is the fact that they are completely unregulated by governments or banks. Moreover, there is no trusted intermediary such as PayPal to monitor the digital transactions. Instead, transactions are logged within a decentralized public network, running on thousands of home computers using Bitcoin software. Bitcoin transfers are unconfirmed until a “miner” validates the exchange. Miners are individual users who process transactions on behalf of the network. The currency is backed only by the integrity of the system and faith of its participants.

So what are the advantages of using Bitcoins? For starters, Bitcoin transactions are not subject to the taxes of other currency exchanges. While currently the range of companies taking advantage of Bitcoins is limited, more and more are jumping on the bandwagon and offering their products and services in exchange for the digital currency. Lastly, the convenience of transactions via the Bitcoin network provides an added incentive to get involved.

Of course, Bitcoins have generated their fair share of controversy. Hackers have already developed malware to break into personal Bitcoin deposits. In an incident earlier this week, 25,000 Bitcoins, the equivalent of roughly $500,000, were stolen from an individual account. The currency has also been pinned as a way to purchase illegal drugs and potentially transfer money between criminal organizations.

Regardless whether Bitcoin turns into the next big thing or proves to be a bust for early adopters, digital currency as a phenomenon will play a major role in an increasingly sophisticated online marketplace.

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