By Cina Coren

With technology leaping ahead at a rapid pace, I’m sure you have been wondering when and how we would be able to buy something over the internet and pay for it with coins. Enter bitcoins.

Bitcoins are the first decentralized currency. They are digital coins that can be sent through the internet. Sounds strange, right? Well it is a concept that not everyone has grasped yet but it is on its way. Here’s how it works:

Bitcoins are generated all over the internet by anyone who wishes to set up a free application called a ‘bitcoin miner.’ Bitcoins are always generated at a predictable and limited rate and are stored in a digital ‘wallet.’ Transferring bitcoins requires an electronic signature. It takes only a few minutes for the transaction to be completed, confirmed and stored anonymously in the network. Small businesses find using bitcoins quite advantageous.

The main idea behind bitcoins is to facilitate cheap, anonymous transactions policed by its community of users. Bitcoins are very much like gold. There are a finite number of Bitcoins – 21 million exist and they are predicted to last until 2140. (What happens after that to holders of bitcoins is anyone’s guess.)

Also like gold, Bitcoins are mined. But instead of digging in the ground, Bitcoins are extracted online via complex algorithms. The value of Bitcoins fluctuates like gold, too. There are currently several online currency exchanges available where one can exchange dollars, euros and other currencies for bitcoins. The bitcoin is now selling at approximately $93.00

The main advantage of using bitcoins is that one doesn’t have to go through a bank. As we all know, banks can be expensive. They charge for every transaction and then some. Bitcoins can be transferred directly from person to person via the internet, eliminating the use of banks, clearing houses or transfer agents and saving us mucho money.

Bitcoins can be used worldwide and accounts can never be frozen. In addition, there are no stipulated limits or pre-requisites. Bitcoin proponents claim that the crypto currency is flexible, durable, secure and transportable.

Bitcoins are still experimental, however and using them does have certain drawbacks. The currency has seen wild gyrations, with new investors rushing in, then rapidly finding out that prices can go down as well up. Regulators are all over this virtual currency and are looking to keep it clean and away from criminals and money launderers.

Bitcoins must be backed up properly or they can get lost floating somewhere in an internet cloud. It is easy to lose large quantities of money. Often, getting the money is not a problem; spending it is as not all that simple since there aren’t many manufacturers or service providers using the system. So you can end purchasing bitcoins and not be able to buy what you want with them.

The major controversy about bitcoins stems from its use in drug trafficking. The U.S. Drug Enforcement Administration recently arrested the 31-year-old man who was transferring bitcoins to a shady online drug clearinghouse site that only accepted bitcoins as currency. His bitcoins became the first ever seized by the U.S. government, to the tune of 11.02 bitcoins worth $814. Confiscating the coins can be problematic and the police will either have to use the same computer the dealer used to make the transaction when buying the currency or undertake an online sting operation.

So are bitcoins the wave of the future? That’s anyone’s guess.

Cina Coren is a contributing editor at Daily Forex and a freelance financial writer.