Bitcoins are an online currency with no ties to a government or central bank. Since their inception in 2009, it has become a medium for all kinds of black market activities online. The idea of digital money—convenient and untraceable, liberated from the oversight of governments and banks—has been a hot topic since the birth of the Internet. Cypherpunks, the 1990s movement of libertarian cryptographers, dedicated themselves to the project. Yet every effort to create virtual cash had foundered.

Nevertheless questions have arisen as to how they complement or even perhaps threaten regular markets and financial institutions, as well as the increasing prevalence of market places like the Silk road (the Amazon of illegal drugs) which specialize in the exchange of illicit goods including narcotics. Then there were other more prevailing problems too, such as could you get ripped off?

Says wiki: There is no way for the developers to make money from your involvement or to take money from you. That bitcoins are nearly impossible to acquire without the owner’s consent represents one of its greatest strengths. Bitcoin is an experimental, virtual currency that may succeed or may fail. None of its developers expect to get rich off of it.

Bitcoin is a new and interesting electronic currency, the value of which is not backed by any single government or organization. Like other currencies, it is worth something partly because people are willing to trade it for goods and services. Its exchange rate fluctuates continuously, and sometimes wildly. It lacks wide acceptance and is vulnerable to manipulation by parties with modest funding. Security incidents such as website and account compromise may trigger major sell-offs. Other fluctuations can build into positive feedback loops cause much larger exchange rate fluctuations. Anyone who puts money into Bitcoin should take measures to reduce their risk and consider it as a high-risk currency. Later, as Bitcoin becomes better known and more widely accepted, it should stabilize, but for the time being it is unpredictable. Any investment in Bitcoin should be done carefully and with a clear plan to manage risk.

Reflects Wired: One of the core challenges of designing a digital currency involves something called the double-spending problem. If a digital dollar is just information, free from the corporeal strictures of paper and metal, what’s to prevent people from copying and pasting it as easily as a chunk of text, “spending” it as many times as they want? The conventional answer involved using a central clearinghouse to keep a real-time ledger of all transactions—ensuring that, if someone spends his last digital dollar, he can’t then spend it again. The ledger prevents fraud, but it also requires a trusted third party to administer it.

Posing the following questions to Emily Stewart of onlinemba I received her rather interesting response below. The questions that I posed and then Ms Stewart’s response. Have a think…

If bit coins represent a danger to users why then is their use nevertheless still continuing to grow? Is that to suggest there is a market for such a commodity? Are financial institutions threatened by the growth of such a currency and could it be argued they have a lot to lose if such a community were to flourish? If bit coins are the provence of prostitution and drug sales how is it that it continues to grow? Isn’t the government monitoring such sales?

Emily Stewart of onlinemba:

Black markets are a common phenomena of market driven economies. If bitcoins are thriving as a method for exchanging goods and services, it must be filling a niche that traditional markets either can’t or won’t serve. Bitcoins aren’t just used for illegal transactions but their structure allows people to exploit the currency for illegal purposes. I’m not sure if financial institutions are threatened by the growth of such currencies. Perhaps not now, but their organic growth demand that financial institutions and government entities do their best to understand it’s current and future impact. Regarding the government’s ability to monitor illegal transactions: the key to the Silk Road is that it is run as a for hidden service. But the wiki for the Silk Road speaks to the government’s response to bitcoins and the Silk Road:

In reaction to a Gawker article on the marketplace, US Senators Charles Schumer and Joe Manchin sent a letter to US Attorney General Eric Holder and DEA Administrator Michele Leonhart insisting that the agency shut down the marketplace.[2][15][16] In a press conference Schumer described Silk Road as follows:

It’s a certifiable one-stop shop for illegal drugs that represents the most brazen attempt to peddle drugs online that we have ever seen. It’s more brazen than anything else by lightyears.

—[17]

Subsequently, Silk Road’s administrators posted on the Silk Road forums the following statement:

The die have been cast [sic] and now we will see how they land. We will be diverting even more effort into countering their attacks and making the site as resilient as possible, which means we may not be as responsive to messages for a while. I’m sure this news will scare some off, but should we win the fight, a new era will be born. Even if we lose, the genie is out of the bottle and they are fighting a losing War already.

—[18]

After this attention, traffic to the website increased dramatically, resulting in record sales[citation needed] and the bitcoin saw a corresponding rise in value.[9] The site was also used during the markup hearing for the 2011 Stop Online Piracy Act as an exemplar of the evolution of some websites to distributed networking and computer systems which by design are not blockable by domain namefiltering such as proposed in SOPA.[19]

above image found here