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Bitcoin: the future of global trading or a bubble waiting to burst?

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Bitcoin is currently the world’s fastest growing currency. In January of this year, the value of a single Bitcoin was about a fiver. As of right now, according to MtGox.com, the value of a single Bitcoin is placed at £150, up 13.64% in the last 24 hours alone. So what are Bitcoins, where did they come from and how have they become so valuable?

The Bitcoin is a decentralised digital currency, launched in 2009, which is currently being traded by millions of individuals and businesses across the globe. Bitcoins are an independent currency in that they rely on no central banking system and thus retain their monetary value only as long as users continue to accept them as a medium of exchange. Think of Bitcoins as an electronic equivalent to gold or oil: a finite commodity of fluctuating value which can be exchanged for goods or services.

So where do Bitcoins actually come from? Well, let’s start at the source. One can earn Bitcoins by ‘mining’ them but be warned, this is no easy task. Mining involves solving complex algorithms on your computer in return for ‘blocks’ of Bitcoins. The difficulty of solving these algorithms, and thus acquiring the blocks, increases as the amount of active miners increases. It is this rule of practice that prevents the value of a Bitcoin plummeting as more and more people begin mining. In fact, it is the rapid onslaught of miners, and consequentially the scarcity of new blocks of Bitcoins, that has caused the value of the currency to soar in such lucrative fashion.

However, if this all sounds too much like hard work, Bitcoins can simply be bought using regular money. This can be done through devoted sites, such as MtGox.com, and even from any major UK bank account where you can transfer your newly acquired coinage into your brand new Blockchain.info digital wallet and bask in all your technological glory. The times they are a-changin’ indeed.

So anyway, now that your make-believe wallet is nicely filled with make-believe money, what sort of stuff can you buy? Well, quite a few things actually… pizza, clothes, wine, electronic cigarettes, plant fertiliser, jewellery, gold, silver – even illegal drugs.

In fact, earlier this year, in Austin, Texas, a man purchased a 2007 Porsche Cayman S for a sum of 300 Bitcoins, having initially bought the coins for just $1,200! Even crazier: a Canadian man recently managed to sell his Alberta home for, you guessed it, Bitcoins – 5,362 of them, to be exact. Clearly people are placing a lot of trust in these invisible coins and consequentially, it’s becoming harder and harder to dismiss these illusive little things as the proverbial Magic Beans. Fortunes are being made and lost with the Bitcoin.

As aforementioned, Bitcoins are distributed in ‘blocks’, currently of 15 Bitcoins, every ten minutes or so. Right now, there are over $1 billion worth of Bitcoins in circulation which, although insignificant in a world economy that deals in trillions, is considerable – bearing in mind the relative youthfulness of the currency and the lack of any kind of central reserve. Although Bitcoin has been around for a few years, it’s gained widespread notoriety in the last few months because of its recent surge in value.

However, it is this proneness to fluctuation in value that has caused many to doubt the stability of the currency; likening the climbing value of the Bitcoin to a growing bubble – doomed to burst in spectacular fashion, leaving behind a trail of bankrupted investors. Supporters, on the other hand, praise Bitcoin for its independence from banks, which are being viewed with increasing suspicion and mistrust. Interestingly, along with the increase in mining, a significant factor behind the Bitcoin Boom, so to speak, was the Cypriot Government’s recent taxing, or theft – to be more accurate, of savings which caused many disillusioned savers, inland and offshore, to exchange their Euros for Bitcoins; a move that was mimicked in neighbouring countries who feared their own bank accounts were in danger of legalised governmental theft.

It is revealing that many people across Europe came to the conclusion that an independent, unregulated and uninsured currency (prone to unpredictable fluctuation), stashed in an online ‘Instawallet’ (presumably vulnerable to hacks), was a safer haven for their life savings than the banks – doesn’t say much for ‘the system’, does it?

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