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What in the world is a Bitcoin? Should I take note?


A Bitcoin is a digital currency that can be used to pay for goods and services, just as dollars can. It can also be exchanged for the dollar and other currencies at rates that fluctuate daily. All transactions are publicly anonymous, with only the buyer and seller knowing who’s who, although transactions are kept on a public ledger to track the virtual financial system that Bitcoins have created, and the supply of Bitcoins is increased at a steady, moderate pace to support their value and limit the risk of inflation. Some honest businesses have begun to accept Bitcoins as payment, but not so many as to indicate that the currency will threaten the use or value of conventional currencies, and recent developments suggest that Bitcoins could prove to be a fad and go the way of mood rings and Hula-hoops.

Bitcoins have begun to circulate rapidly within one niche of society: criminals. The anonymity inherent in the exchange of Bitcoins has made them popular among drug dealers and hit men. Their use to fund criminal activity and perhaps to evade taxes and launder money has attracted scrutiny from government authorities around the world. That could restrict the use of Bitcoins. A likely impediment in more savory corners of society occurred in late February when the largest American Bitcoin exchange was taken offline amid reports that software flaws had allowed several hundred million dollars worth of Bitcoins to be stolen. That helped to send the price of a Bitcoin down to $544; it had been as high as $1,147 in December.

Beyond the complexity, the possible use to fund criminal activity and the lack of security, the extreme volatility of the price of Bitcoins could keep them from catching on. There’s something vaguely cool about Bitcoins, but it’s hard to see how they’ll become a common form of money when other forms are far more widely accepted and trusted and their prices don’t bounce all over the place like Internet stocks and commodity futures contracts. So you may want to take note of Bitcoins, because their rise and apparent fall are an interesting financial and social phenomenon, but you may want to avoid buying them. The greenback is far more stable, and with inflation remaining low for several years, it can still buy you what you want and need.

-Conrad de Aenlle