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A guide to Bitcoin

Many Bitcoin investors think it's only a matter of time before paper money is completely redundant. Bitcoin technology, launched in 2009, is an electronic, peer-to-peer cash system protected by cryptology. No, this isn't Dan Brown's next novel, but an internet-based network that instantly transfers currency without middle men.

One's mind immediately sees the similarities to PayPal, and indeed, it's confusing as to why Bitcoin is a currency and not just an international payment provider.An easy way to understand Bitcoin is likening it to cheques - only digital - which don't have to go through a bank or clearing house. In essence, Bitcoin allows for the decentralised transfer of currency between individuals. Purchased as currency, bitcoins have the same value in any country. A Bitcoin account can't be frozen, nor are there limits on transaction amounts.

Bitcoins are bought using secure online servers called bitcoin miners. Once purchased, the currency is held in a digital wallet, similar to that of MasterCard's MasterPass or the Commonwealth Bank's Kaching app. A 34- to 36-digit Bitcoin address is associated to that wallet, allowing you to remain anonymous if you wish to. You can then log in at bitcoin.org (or another wallet provider) via any internet-connected device, and transfer funds to another Bitcoin user.

Upon registering a transfer, a digital encryption is added as an electronic signature. After a few minutes, the Bitcoin funds are anonymously stored in the Bitcoin network and can be received when the recipient chooses - just like when cashing a cheque. Whether the transfer takes place within Australia or between someone in Shanghai and their friend in Baghdad, the transfer is almost as instant as email, so bitcoins never sit with third-party banks.

 

Already Bitcoin is being used by individuals, some retailers and corporates, and interest is growing daily. It should increasingly gain prominence among larger companies.

If stock prices are anything to go by, Bitcoin is already a success: at the beginning of the year Bitcoin was trading at $US13.51; in early April it rose and fell between $US100 and $US266.

Of course, as with anything in the tech trading world, Bitcoin is a bubble that may burst. A clear difference from conventional currencies is that the inflexible supply (there are about 11 billion bitcoins in circulation) can't be adjusted with economic conditions. Then again, neither was the gold standard.

Bitcoin isn't a real-world commodity such as gold, though; so investing in the currency isn't for the fiscally conservative.

Indeed, Bitcoin's seedy history may be enough to scare off many: because of its anonymous nature it is believed to encourage illicit dealings. ''An obscure digital currency, [Bitcoin is] used mostly for running drugs and laundering money for dictators,'' said The Guardian's US finance and economic editor, Heidi Moore.

''Bitcoin is a currency created years ago by an obscure hacker in the spirit of subversion, to trade goods while dodging the gimlet eye of financial regulators.''

The ''obscure hacker'' in mention went by the pseudonym Satoshi Nakamoto, Bitcoin's developer. Nakamoto disappeared from the online world in 2011 while his - or her - open-source developer friends continued Bitcoin's progression.

The future of Bitcoin is unclear and if several governments declare it illegal (China is known to curtail the use of virtual money), it may quickly cease and desist. In spite of such criticism, faith in Bitcoin is on the rise every hour of every day.

Fairfax NZ (stuff.co.nz)