The crypto-currency is back in the news after the closure of one of its biggest marketplaces. But what is Bitcoin?

This article is more than 6 years old

This article is more than 6 years old

When the Silk Road, the internet's biggest marketplace for illegal drugs, was taken down earlier this week, the price of Bitcoin plummeted.

The two were "intrinsically linked", according to Jeremy Cook, chief economist at currency brokers World First, but with Silk Road gone, does Bitcoin have a future?

What are Bitcoins?

Bitcoins are an anonymous, decentralised, peer-to-peer digital currency.

In contrast to older forms of electronic money, no company controls Bitcoin, nor ever could: all the rules about how it works are embedded into the very operation of trade, including the rate of inflation and how to verify transactions.

How do I get them?

For most users, the easiest way to get Bitcoins is to buy them. But due to strict anti-money laundering controls, even that is tricky.

Most Bitcoin exchanges, such as Mt Gox, the best-known, require users to wire money from their banks to the exchange.

A small group of hardcore users get extra Bitcoins through 'mining' for them: running computers which perform the calculations needed to make the currency work, in exchange for a share of the built-in inflation.

What do they look like?

Files of seemingly random data.

Bitcoins have no physical existence, although some have devised ways to spend the digital currency by printing the necessary information on paper notes. Instead, they are long lists of the digital signatures of previous owners. When a Bitcoin is spent, the old owner adds their digital signature to the end of the list, combined with the digital signature of the new owner.

How do I spend them?

With difficulty: few mainstream places accept Bitcoins, though the number is growing and now includes fashion websites, pubs, and online dating service OKCupid.

If your tastes are on the geeky side, however, you might have more luck. You can buy web hosting, geeky t-shirts, and even membership of the Reddit social network with Bitcoin.

Who's making money from Bitcoin?

People who bought early and sold at the peak. The currency has been through two boom-and-bust cycles, with the cost of one Bitcoin rising from $2 to $30 in 2011, and then from $13 to $266 earlier this year. But having a fortune in Bitcoin is a bit like having a fortune in gold: you have to sell your holdings to really make the most of it.

Why would I want them?

The big driver in Bitcoin’s early growth was the online drug marketplace Silk Road, which took advantage of the currency’s qualities to provide anonymity to patrons.

While Silk Road no longer exists, a number of smaller outfits offer the same services.

But beyond access to illicit substances, for many fans Bitcoin use is a political statement: its existence proves that a currency with no centralised control is possible.

How secure is Bitcoin?

As secure as its user.

Although there have been some bugs with the currency’s programming, all of the reported thefts have come from the outside.

If users don’t keep their "private key", the password which lets them spend their Bitcoins, well hidden, they can easily lose everything.

And, of course, anonymity cuts both ways: if you get tricked by a scammer into parting with your bitcoins, there’s no higher authority to turn to.

Will it ever be a mainstream currency?

Economists and developers point to several flaws in the implementation of Bitcoin which render it unsuitable for widespread use. One problem is that the currency has deflation built in to its very core: only 21m bitcoins will ever be produced, and we're already halfway there. Most economists believe deflation is disastrous for an economy, but the Austrian school of economics, beloved by the libertarian creators of Bitcoin, disagrees.

A more immediate problem is that it's not clear that the backbone of the currency can withstand the increased use that going mainstream would take. Transactions can already experience relatively lengthy delays in processing (taking minutes to clear), and that's just with Bitcoin remaining mostly popular amongst enthusiasts.

• Was Silk Road's creator a genius who masterminded an online criminal underworld? Or did he actually do five very stupid things to get himself arrested?