Bitcoins can be spent online, in a pub and now even have ATMs - but would you put money in the world's newest currency?

The way we spend money is constantly evolving. If you have an Oyster card or use contactless payments on your phone or debit card, then you are already part of the rapidly emerging cashless society.

The latest challenger to cash is the bitcoin, a virtual currency that is unregulated, separate from the banking system, and based on complex computer codes and data 'mining'.

Bitcoin has only been around since 2008. It initially g ained notoriety after stories emerged of the currency being used to buy drugs online anonymously and the currency hit the headlines earlier this year after a spike and collapse in its price, rumoured to have been triggered by wealthy Russians flocking to the currency amid fears governments were about to raid savings accounts.

Bitcoins: A safe solution to online shopping or a shady currency?

However, bitcoins are growing up. It has already given life to a series of exchanges, hedge funds and now an ATM.



Investors are even soon to be given the chance to put money in without having to actually buy the virtual currency, with a plan to launch an exchange traded fund that tracks its value and is backed by a stash bitcoins.



This week the second bitcoin conference took place in London . So what is this all about? We explain bitcoins, with the help of some of the cryptocurrency's biggest supporters at the bitcoin conference.

What is a Bitcoin?

A bitcoin is a virtual currency that is based on a decentralised system of finance, separated from bankers. Its value is derived from the amount of transactions and supply and demand in the market. There is no person or central bank controlling the supply of bitcoins.

Bitcoins are created by computer programmers using complicated data 'mining' that makes blocks of the virtual currency online. Mining involves individuals undertaking difficult and time-consuming computer calculations. The process ensures that the bitcoins it creates have some tangible value - they haven't been magicked out of thin air.



There will only be a maximum of 21million bitcoins and so far around 10million have been mined. The finite nature of bitcoins means it performs more like a commodity, such as gold.

There is no central bitcoin body, but a series of peer-to-peer organisations providing exchanges, wallets and commerce tools.

Where did it come from?

Bitcoin first emerged in 2008 and launched as a network in 2009. It was created by an obscure hacker whose identity is a mystery but is known as Satoshi Nakamoto, which is thought to be a pseudonym for the person or group who created it.

Peter Vessenes, chairman of the Bitcoin Foundation, a trade body for the various groups in the sector, says the currency has been a 'coming together' of technology enthusiasts, finance people and nerds.



He explains: 'The Libor scandal has led to questions about how real interest rates are. People want a way to be more private on the internet. It provides privacy in the same way cash does.’

VIDEO: What happened when we visited the bitcoin conference?



Why would I want to use bitcoins?

CAN I GET A PHYSICAL BITCOIN?

Several companies, such as Coinedbits and Casascius, have created physical coins that can be purchased, like the one pictured in this article. However, as bitcoin is a purely digital currency, to spend them you will have to enter a code, featured on the coin, online into your digital wallet.

Enthusiasts insist the 'cryptocurrency' provides a safer solution to online shopping as it is cheaper and less open to fraud compared with credit cards.



Others suggest it could help developing nations, where millions may not have access to bank accounts, use and transfer money more safely.



One bitcoin enthusiast, Jez San, says bitcoins provide the best way to shop online.

He explains: ‘Credit cards and wire systems were not designed for internet use. We are doing our best to make them work,

‘The bitcoin protocol allows you to send money more quickly and cheaply.

‘Currently, if you are selling goods online and someone pays by credit card, you have to wait days for the money to come through and you run the risk of fraud and never receiving the money in the first place. bitcoin does not have any of those risks.



‘We should all be doing our online shopping and ordering pizza over the internet using bitcoin.’



Bitcoin users claim paying for goods online using this virtual currency could make goods and services cheaper as there are no merchant fees to add from the credit card company. It also means you can order goods from abroad without worrying about exchange rates or hefty charges.

Josh Harvey, co-founder of Lamassu, a business that is manufacturing the first bitcoin ATMs, adds that cash can be clunky and inconvenient to carry around, while bitcoins are virtual and protected from inflation.



How does it work?

The first step in owning and spending bitcoins is setting up a digital wallet. This is a piece of software that can be downloaded to your desktop, accessed online or used as an app. It contains a code for receiving bitcoins and a separate code for spending them.



As bitcoin is an open-source operation, there are a number of wallets available for use either on your phone, online or offline..

You coul d get an app called Blockchain for your smartphone, or download s oftware called MultiBit to keep on your computer.

There are more security benefits to keeping your wallet on your desktop rather than storing it online as there is less chance of it being accessed.



You can also buy bitcoins direct from an exchange such as Mt.gox

Bitcoins can be transferred by exchanging addresses or scanning a QR code on your phone.

Once a transaction is made it is processed by computer programmers, known as miners, who create a 'blockchain' or public record of the exchange, and earn bitcoins from transaction fees.

To make a deposit in a bitcoin ATM, you scan the QR code on the machine with your bitcoin wallet and insert the amount of cash you are putting in. This will then be transferred into your bitcoin account.



THE BITCOIN ATM: BITCOINS IN YOUR VIRTUAL WALLET IN SIX SECONDS Return to tender: Bitcoin ATMs could give access to the virtual currency from retailers and airports An American-based company called Lamassu is manufacturing hundreds of bitcoin ATMs to sell to distributors around the world. The ATMs are not for withdrawals - spending the currency is typically done electronically - but allow deposits of traditional currencies that are then converted into bitcoins.

Josh Harvey, co-founder, explains that they could be used in restaurants, pubs or airports for people to turn their physical money, known as fiat, into bitcoins.

He says: 'With this machine you can walk in off the street and within six seconds have Bitcoins in your virtual wallet.

'This could be good for people to send money abroad or to use to use as foreign exchange.'





Where can I spend bitcoins?

As bitcoin is still in its infancy there are few mainstream places that accept bitcoins. A trawl of the internet will take you to specialist websites that let you purchase music or electronics, or Bitfash.com , which gives shoppers access to fashion brands that will take the virtual payment.



There is a trend of physical places where you can spend your bitcoins such as pubs, cafes and restaurants.

There is a sushi restaurant in New York that takes bitcoins, but few places in the UK. The Pembury Tavern in Hackney, London, lets you buy your beer with bitcoins.

Can you make money out of bitcoins?

'I MINED £100 INTO 150,000 COINS'

Technology entrepreneur Kate Craig-Wood purchased 30 bitcoins for £3 each a year ago. After seeing the value soar to £2,000 in the past year, as the virtual currency grew, she decided to set up her own mining company called CipherMine. This business is dedicated to a sister currency called Litecoins, which works like bitcoins but can be mined faster. She says: ‘To find new coins you have to mine them, which involves a computer doing huge numbers of difficult computations. 'The catch is that the more people are mining them, the harder it becomes to find new ones so that the supply is limited. This means that they effectively have built-in deflation. ‘CipherMine's market capitalisation currently stands at roughly 150,000 Litecoins, or about £250,000.’

The most straightforward way to make money out of bitcoin is through mining. This is performed by sophisticated computer programmers who buy their own equipment and help create blocks of bitcoins using complicated coding. Miners are rewarded for recording transactions and creating new blocks of bitcoins with more of the virtual currency.



Bitcoins are treated as an asset similar to gold. There is already a bitcoin hedge fund and plans for a Bitcoin exchange traded fund to list in Luxembourg.

The Winklevoss brothers, known for their legal dispute over who founded Facebook, are big backers of bitcoin and this week launched a Bitcoin trust fund in the US.

Are Bitcoins safe?

As bitcoins operate outside of the banking system, they would not fall under the Financial Services Compensation Scheme.



Having a bitcoin wallet is the same as carrying around cash. As long as you keep it safe, no-one can steal it. All users are given a specific code that is needed to spend bitcoins. As long as this is not revealed, there is no way that someone can spend your virtual money,.

Creators admitted one major security scare in August 2010 where a vulnerability was exploited and a user created billions of coins before the transaction was noted and erased from the log.

There are still uncertainties over the tax status of bitcoins. The advice of the Bitcoin Foundation is to check how you would report any use of bitcoins with your relevant tax authority.

Many observers claim bitcoin will be seen as a more reliable asset once the exchanges have a longer track record of allowing trades and when more retailers take the payments and provide more legitimacy.



