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Cryptocurrencies: Beyond Bitcoin

The first quarter of 2013 has been a roller-coaster ride for Bitcoin. At the end of 2012, a single unit of the digital currency cost less than one cent. By January 2013, the price had crept up to $15. After an unprecedented rise in value, soaring to highs of $266, investors suddenly panicked and fled in droves. Bitcoin nosedived to $55. It later rallied, however, hitting $139 per coin. At the time of writing, it has been fluctuating around the low and middle hundreds for some days.

Most experts agree that the current elevation in Bitcoin’s prices is an unsustainable bubble rather than a lasting boom. What’s more interesting is the mark that current events in the world of digital coinage may leave on the financial landscape. It’s clear that Bitcoin can no longer-be seen as a passing fad or a quasi-legal scrip for the criminal underworld. At least for now, it has become a financial tool for currency traders and a respectable option when paying for goods and services both online and in the real world.

Not everyone is enthused by the recent surge in popularity, however. Bitcoin has never been without its critics. Even proponents of crypto currencies in general have expressed skepticism and frustration over the limitations of the digital coinage. Over and above predictions that the current bubble must inevitably burst, various experts from the worlds of finance, law enforcement and computer-security have raised concerns regarding the novel currency.

Some argue that Bitcoin is unnecessary given the existence of more conventional digital payment methods: credit cards, PayPal and Internet-based bank transfers, to name but a few. Others point to the limited number of legitimate places to spend your coins. Those who are chiefly concerned with government scrutiny of their finances have expressed doubts over Bitcoin’s supposed intractability.

Bitcoins must be stored in “wallets” — something like an individual PO Box to which only the wallet owner has the key —which are vulnerable to theft or loss. Additionally, you can buy them through reputable exchanges – here is a great list of the Best Bitcoin Exchange.  If the codes allowing access to a user’s wallet are discovered, it can be emptied by someone else. A hard drive crash that wipes out digital information relating to the wallet can permanently destroy any Bitcoins belonging to the owner.

The legal status of Bitcoin is hazy. Under many existing laws, it both is and is not a currency. If a government were to come down firmly on the side of illegality, using the Bitcoins in your wallet might become a crime overnight. If determined to be a legitimate currency, on the other hand, they might be subject to heavy taxation.

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The Bitcoin name has been inextricably linked with criminality virtually since its inception. It’s become a favorite among those who want to cover their tracks with an anonymous payment method. In particular, Bitcoins are used by traders on the Silk Road. This anything-goes marketplace is accessible only by those using the anonymized Tor network, a part of the unsearchable deep web. Customers on the Silk Road can buy or sell virtually anything — a gun, hard drugs, the services of hit-men — and Bitcoin is the preferred currency.

Unlike conventional currencies, Bitcoins are not issued but “mined.” To mine a coin, a user must volunteer computer resources to solve a complicated equation. The computing power needed to mine Bitcoins is fairly large, putting them out of the reach of anyone who doesn’t own a high-end machine. This has inevitably resulted in the creation of malware that hijacks infected computers and forces them to mine Bitcoins. The rising value of Bitcoins has meant a rise in the spread of this kind of malware. The mining and wallet concepts, along with other technological restrictions, mean that Bitcoins are hard to acquire and difficult to use.

These and other issues have prompted the development of other digital currencies that attempt to get around the problems inherent in Bitcoin. Litecoin, a successor to Bitcoin that is explicitly modeled on its parent crypto currency, is intended to permit effective mining on ordinary consumer-grade computer. The startup OpenCoin has launched the Ripple: instead of needing to be mined, Ripples are simply issued by OpenCoin. The company has issued a fixed number of Ripples (100 billion) and vows never to issue more. Another new player is Peer to Peer Coin, also known as P2PCoin or PPC. Although a very young and already attracting criticism of its own, PPC is already thriving: as of mid-April 2013, it’s the third largest digital crypto currency.

One thing is certain: when the Bitcoin bubble finally does burst, there will be plenty of other currencies waiting to steal its crown.

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