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Bitcoins are accepted by a growing number of merchants, even used to pay some employees

Bitcoin Magazine this week heralded some exciting news. The popular cryptocurrency that's free of regulation by any nation state has hit a new high of $32 USD/Bitcoin on Mt. Gox, the world's largest exchange.  The previous high had been $31.9099 on June 8, 2011.

Right after hitting that previous high, Bitcoin values began a freefall, which we covered in our piece "Digital Black Friday: First Bitcoin "Depression" Hits".  It was unclear whether the plunge was due merely to profit taking or other issues.  Shortly thereafter, the currency was further devalued when MtGox was hit with a database dump attack and users accounts were compromised due to the service's weak MD5 hashing of passwords.  It took the site months to rebuild trust, beef up security, and unwind the trail of fraudulent transfers.

The Bitcoin rollercoaster ride bottomed out at $2 USD/coin in November 2011.  And last fall BitFloor -- another major exchange -- was hacked, and $250,000 USD worth of Bitcoins were stolen.  But despite that, the currency continued to creep upwards.

Bitcoins on the rise
Bitcoins values have soared in the last six months. [Chart]

Inflation remains a serious concern for Bitcoins, as do scammers using classic techniques like Ponzi schemes.  And there's the issue of Bitcoin-mining malware that's afflicted PC and Mac users alike.  However, the currency's utility as an (relatively) untraceable and easy to use digital currency is keeping it sailing high.

Popular social media site Reddit recently gave Bitcoins a boost, by accepting the cryptocurrency as a means of paying for "Gold" premium memberships.  LaCie Group SA's (EPA:LAC) "Wuala" and Kim Dotcom's new "Mega" file sharing services both accept Bitcoins as a means of payment.

Mt. Gox remains the most popular place to buy and sell Bitcoins.

Domain registrar Namecheap is also considering BitCoin.  And is currently accepting BitCoin payments for various services.

Source: BitCoin Magazine

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RE: Not for me
By kleinma on 2/28/2013 4:29:10 PM , Rating: 0
They aren't backed by anything. The money of a country is backed by that country. For example in the US our money used to be backed by gold. Now it is backed essentially by the military. Bitcoins if I understand it correctly are just hashes of data generated from video card GPUs. Meaning that as the GPU gets better, more coins can be produced, and eventually people will be able to make how ever many they want, causing the whole system to fail, or just inflation to cause one US dollar to equal 50 billion bitcoins where it is not worth it to have them.

RE: Not for me
By Lord_Conrad on 2/28/2013 4:39:22 PM , Rating: 3
As I understand it, there is a set upper limit to the amount of Bitcoins. Mining slows down as the hashes get harder. However, once the cap is reached, no more Bitcoins will ever be produced.

RE: Not for me
By NullSubroutine on 2/28/2013 4:40:51 PM , Rating: 2
Actually, not that I'm advocating them, but the more bit-coins that are "mined", the more difficult they are to mine, exponentially.

Think of it as there is a set amount of...oil in the world, at first its easy to get at, makes it worth little. Then as time goes on it gets harder, machines make it easier to get more out of the bottom of the wells, but it gets harder and harder to squeeze every last drop out. Eventually, the well will run dry and no more oil will be found.

RE: Not for me
By Solandri on 2/28/2013 5:40:02 PM , Rating: 2
Actually, not that I'm advocating them, but the more bit-coins that are "mined", the more difficult they are to mine, exponentially.

That's its fatal flaw IMHO. A currency needs to grow slightly faster than the economy. If it doesn't, it becomes more cost-effective for currency holders to stuff it under a mattress and wait for its value to go up, instead of using that currency to increase their productivity through economic activity.

That was the problem with gold - the amount of gold in circulation wasn't increasing as quickly as the economy was growing, meaning those who owned lots of it were getting richer for doing nothing. And here bitcoins grow exponentially slower, while the economy grows exponentially faster. That puts it into ponzi scheme territory IMHO. (I think the premise was that technology would improve thus keeping the difficulty of mining bitcoins relatively constant. From anecdotes I've been hearing from bitcoin miners, that hasn't turned out to be the case.)

RE: Not for me
By PontiusP on 2/28/2013 6:38:56 PM , Rating: 2
We traded gold, which was real, self regulating money, for a ponzi scheme. Bitcoin is not the ponzi, debt-based money is.

In our current system, debt-based money can only be paid off with more debt, leading to an eventual collapse. With gold, you do get the hoarding problem, but at least you don't get guaranteed collapse and rampant currency devaluation.

I'll take gold over fiat debt-based money any day of the week.

RE: Not for me
By Mint on 2/28/2013 8:39:34 PM , Rating: 2
In our current system, debt-based money can only be paid off with more debt, leading to an eventual collapse.
You're forgetting debt default and debt erosion through inflation.

Interest rates exceeded inflation for almost the entire period before the recession. That means just as much debt - private and public - would have been created under a gold standard.
I'll take gold over fiat debt-based money any day of the week.
That's because you don't understand the ramifications.

If we switched to a gold back dollar today, whatever the astronomical value of gold would be to do that, the debt that the wealthy hold would be given a free 1-2% boost in real interest due to lack of inflation. There's ~$50T in public+private debt in the US, so that's a free $500B+ per year going to the wealthy for doing nothing.

That doesn't even take into account the hoarding that Solandri was talking about, which would make the wealth gap skyrocket even more. But does the productive value of gold go up? Of course not. So you're back to a virtual fiat currency anyway, only it's controlled by the wealthy, who profit massively from deflation.

RE: Not for me
By NellyFromMA on 3/1/2013 3:30:03 PM , Rating: 2
LOL, if you think our current currency system if flawed but bit coins ARENT, you are on another planet.

There is a LOT of overlap in the premise.

Both are failed IMO. As to a resolution, good luck with that.

RE: Not for me
By NellyFromMA on 3/1/2013 3:36:13 PM , Rating: 2
Except, gold makes no sense because WHO CARES how much gold someone has? That was great way back before people actually put any thought into the subject but truth is as ridiculous as our current debt-based currency is, gold is even more so. It means nothing, which is worse than debt because at least the valuation is derived from parameters that actually do have tangible use to all citizens involved.

RE: Not for me
By danielravennest on 2/28/2013 5:37:42 PM , Rating: 2
Bitcoins are like any commodity you can trade. The price is determined by supply and demand. What backs gold? Nothing, just the demand people have for it, and the scarcity.

The second part of your comment is incorrect. The software adjusts the difficulty of solving a block of transactions to maintain a near-constant generation rate.

What bitcoins actually are is a data entry in a history of transactions, associating a balance with an account number. They are just like checking account balances. How much is in the account now is just the sum of previous deposits and withdrawls.

New coins are created as a reward for solving a difficult cryptographic problem based on a set of new transactions (a block). Once solved, it is easy to check the solution is correct. The difficulty makes it hard to fake transactions, because if you change any part of a block, even by one bit, the resulting hash will be different. So it is a security measure to ensure the history of transactions has not been messed with.

There will never be more than 21 million bitcoins, no matter how fast future computers get, or how many people try to generate them.

RE: Not for me
By NellyFromMA on 3/1/2013 3:33:39 PM , Rating: 2
This is a bubble just waiting to burst. A worse ponzi scheme than even debt based currency.

Its a currency promoted as a commodity valued in debt based REAL currency.

Thanks, but I'll pass on that. I actually don't need to obfuscate debt-laden currency even further.

RE: Not for me
By deksman2 on 2/28/2013 5:49:00 PM , Rating: 3
Uhm, no.
Money today is not backed by anything.
Its generated out of nothing, or more accurately, out of debt.

"When an individual makes a copy of a song for himself, I suppose we can say he stole a song." -- Sony BMG attorney Jennifer Pariser

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