Bitcoin: the virtual currency built on math, hope and hype

Bitcoin's sharp rise in value this year has many questioning whether the virtual currency is sustainable in the long term

By , IDG News Service |  IT Management

Bitcoin is occasionally called a Ponzi scheme, a type of scam where money from new investments is used to pay off a few early investors with the rest skimmed until the scheme goes bust. While Bitcoin is clearly not a Ponzi scheme, the frenzied get-in-now enthusiasm of late belies the fact that it is a very new and immature software experiment.

As a result, Bitcoin's buzz is offset by suspicion, doubt and, occasionally, contempt.

"I've always had the view that Bitcoin is a very beta project," said Evan Schmidt, who runs Buttcoin.org, a mocking blog. "It seems a lot of people are basically saying 'Get some bitcoins, hold onto them forever and you'll be rich'."

He launched Buttcoin.org in mid-2011 after becoming fascinated by the community around Bitcoin -- libertarians, scammers, developers, hackers, early-adopters -- as well as its embrace by the Silk Road online drugs market.

"There were a lot of weird things that were going on," Schmidt said.

Buttcoin immortalizes Bitcoin supporters at their most hyperbolic moments, with heavy doses of sarcasm. The blog gets more than 15,000 hits a month, said Schmidt, who said he's fine with Bitcoin as a speculative play but doubtful of it as a currency.

It's clear Bitcoin could be positive for e-commerce. Once a bitcoin is sent, the transaction cant be reversed unless the receiver gives it back, similar to a cash deal. Thats good for merchants, who may end up liable if someone uses another person's credit card to pay for goods and the money is reclaimed in what's known as a "chargeback."

In addition, consumers don't have to submit personal information when sending bitcoins, reducing opportunities for identity theft.

No major website was quicker to seize on bitcoins than the Silk Road marketplace, shut down in October by the FBI for facilitating contraband sales using the virtual currency as its only payment method.

For vendors of illegal goods, Bitcoin is close to perfect. "I think it is one of the best innovations coming from the modern computing era," said a former Silk Road methamphetamine and heroin dealer, via instant message. The dealer, who confirmed his role in Silk Road, has a strong background in technology and said he'd place Bitcoin high on the list of the most important creations in the last few hundred years.

For the Silk Road, it also meant the site didn't have to interact with credit card companies or banks, which would have led to a swifter end.

Bitcoin transactions are considered final after six verifications are received from computers on its decentralized network. Since computers verify the transaction, people don't have to trust the person who sent them a bitcoin, or any other entity.

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