Bitcoin: The Digital Currency and how to buy it?

Bitcoin, the virtual currency, has hit the headlines with DDoS attacks, sky-rocketing value, panic-selling, and even bitcoin-bought pizzas.

Update: After enjoying a sky-rocketing value last week, virtual currency Bitcoin has slumped, but still remains several times its value mere months ago.

There were fears that its biggest exchange had been subject to a cyber attack or had halted trading because of wildly fluctuating prices, but the Mt Gox exchange said the trading delays were caused by the sheer volume of users opening new accounts or selling off their Bitcoins.

“Indeed, the rather astonishing amount of new accounts opened in the last few days… plus the number of trades made a huge impact on the overall system that started to lag,” the exchange said. “As expected in such [a] situation, people started to panic, started to sell Bitcoin [en masse] (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine.”

The exchange, which is the largest for Bitcoin, saw the number of trades triple in the past 24 hours, with 20,000 accounts added each day.

The price of Bitcoin had this week climbed to a record $266 before falling to $105 in the same day. Before halting trade, Mt Gox’s last price was $123. Two months ago, Bitcoin was worth about $20.

In March, Mt Gox reported that it had been hit by a DDoS attack “like we have never seen”. It laid the blame at the door of hackers who were attempting to worry Bitcoin traders into selling, attempting to bring the price of Bitcoin tumbling.

Bitcoin chart

Here’s how Bitcoin works: what it is, how to buy it, and how to spend it.

What is Bitcoin?

Much like money backed by gold, Bitcoin is backed by a finite resource: itself. Only 21 million Bitcoins will ever be in circulation, with around 11 million currently available.

The system comes from an concept known as crypto-currency. Rather than centralised currencies, all money is in the hands of those who actually own it, instead of banks or governments.

Modern-day Bitcoin was created in 2008 by a mysterious programmer using the pseudonym Satoshi Nakamoto. Nakamoto abandoned the project in 2009, releasing it as open-source software. The whole system is now overseen by the Bitcoin Foundation, which creates the rules and tweaks the engines that power the exchanges.

Getting Bitcoins

Bitcoin is introduced into the economy through vast peer-to-peer computer networks performing a “proof of work” operation commonly called “mining”.

Every ten minutes, 25 Bitcoins are added into the system, but they are encased inside a fiendishly complex algorithm, which needs to be solved.

The first mining operation to solve the problem gets the reward of the 25 Bitcoins, and this reward is divided between the users, depending upon their computer’s contribution.

As the computers performing the tasks get more powerful, the difficulty of the problems gets greater while the reward gets smaller. The prize was originally 50 Bitcoins, and it will halve every 210,000 blocks.

Previously, a computer hobbyist with a few desktop computers in a shed could easily claim a share of the spoils. Now, it’s become harder, and demands teamwork and an aptitude for politics, as mining operators take part in discussions with the Bitcoin Foundation, and decide on the future path of how Bitcoins are rewarded.