Q: What’s a bitcoin?

 A: Bitcoin is an online currency that allows people to make one-to-one transactions, buy goods and services and exchange money across borders without involving banks, credit card issuers or other third parties. As a result, this exotic new form of money has become popular with libertarians as well as tech enthusiasts, speculators – and criminals. Bitcoins are basically lines of computer code that are digitally signed each time they travel to a new owner.

Q: Who’s behind bitcoin?

A: It’s a mystery. Bitcoin was launched in 2009 by a person or group of people operating under the name Satoshi Nakamoto and then adopted by a small clutch of enthusiasts. Nakamoto dropped off the map as bitcoin began to attract attention, but proponents say that doesn’t matter; the currency obeys its own, internal logic. 

Q: What’s a bitcoin worth?

 A: Like any other currency, bitcoins are only worth as much as you and your counterpart want them to be. In its early days, boosters swapped bitcoins back and forth for minor favors or just as a game. As the market matured, the value grew. At its height three months ago, a single bitcoin was valued at $1,200. On Tuesday, it was around $500. 


Q: Is the currency widely used?

A: That’s debatable. Businesses ranging from blogging platform WordPress to retailer Overstock have jumped on the bitcoin bandwagon amid a flurry of media coverage, but it’s not clear whether the currency has really taken off. On the one hand, leading bitcoin payment processor BitPay works with more than 20,000 businesses – roughly five times more than it did last year. On the other, the total number of bitcoin transactions has stayed roughly constant at between 60,000 and 70,000 per day over the same period, according to bitcoin wallet site blockchain.info

Q: Is bitcoin particularly vulnerable to counterfeiting?

A: The bitcoin network works by harnessing individuals’ greed for the collective good. A network of tech-savvy users called miners keep the system honest by pouring their computing power into a blockchain, a global running tally of every bitcoin transaction. The blockchain prevents rogues from spending the same bitcoin twice, and the miners are rewarded for their efforts by being gifted with the occasional bitcoin. 

Q: If that’s the case, what’s all this talk about fraud?

A: A lot of the mischief surrounding bitcoin occurs at the places where people store their digital cash or exchange it for traditional currencies, like dollars or euros. If an exchange has sloppy security, then the money can easily be stolen. 


Q: So does the Mt. Gox incident means it’s all over for bitcoin?

A: Some fear that a sudden loss of confidence in online exchanges’ ability to protect stored bitcoins could kill off the currency’s appeal.

A coalition of bitcoin businesses sought to portray Mt. Gox, once the biggest and best known bitcoin exchange, as an isolated case of incompetence but the document published by bitcoin enthusiast Ryan Selkis speaks in dire terms of what would happen were the scale of its losses to become public.

“The likely damage in public perception to this class of technology could put it back 5-10 years, and cause governments to react swiftly and harshly,” it says.

Bitcoin’s value fell sharply once the document started circulating but has stabilized around $500 per bitcoin, suggesting that many already assumed Mt. Gox was insolvent. And at $500, the cybercurrency’s value is still 17 times what it was at this time last year.

Q: What about Mt. Gox’s customers?

A: If the draft strategy document is correct, Mt. Gox has lost some $370 million worth of bitcoins and has liabilities of $55 million against only $33 million in assets – more than $5 million of which has already been frozen by the U.S. government. That’s a catastrophic balance sheet as far as Mt. Gox’s customers are concerned.

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