Bitcoins: Currency catch-up

BitcoinsBut how far can the world go to cash in on a virtual money built on algorithm, hope and hype?

An ounce of gold today costs roughly $1,200. That is only a little more than what a bitcoin trades for. But unlike the yellow metal that has to be dug out from the earth and purified, bitcoins are born out of algorithms, the mathematical calculations that run our virtual world. The only tricky part is that cracking the software puzzle gets tougher as more and more people work on it.

If the Internet and money had a child together, it would be the bitcoin, say users. Since the bitcoin was invented in 2009, it has caught on globally as a virtual currency and has had many such currencies following in its wake. But unlike money, there are only 21 million bitcoins that can ever be generated. And, like gold, its users love to hoard them.

As of today, 12 million bitcoins have been created and, every year, only a fixed number of bitcoins can be generated or "mined". One person can create and download more than one bitcoin. Bitcoins are, however, divisible and one does not need to have $1,000 to own one. One can just buy a fraction of it.

In case one cannot "mine" bitcoins, one can buy them from one of the many bitcoin exchanges that have sprung up recently, by paying in rupees or dollars. The exchanges serve as a platform to connect buyers and sellers. The users hope hordes of people will eventually accept bitcoins as payments for goods and services.

With around 12 million bitcoins in circulation, the total market capitalisation comes to around $12 billion. Only 40% of the bitcoins are exchanged, as people see them as investment and they are hoarded. They are stored in "digital wallets", which could be a pen drive or a hard disk, and have a "key" or a password. One can store more than one bitcoin in a wallet. Every fraction of a bitcoin has a digital address to identify itself.

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