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Bitcoin: What is it, and why should you care?

Bitcoin is a digital, electronic currency invented in 2008 by someone using the alias Satoshi Nakamoto. The true identity of the inventor remains a mystery today.

Unlike other world currencies, bitcoins are not issued by central banks or governments; instead, they are “mined” by users. Mining involves solving puzzles to add transactions to the “block chain,” a form of public ledger, to verify legitimate transactions. When a person completes a puzzle, he or she gets rewarded with both transaction fees, as well as new bitcoins. Based on the mathematics behind Bitcoin, only 21 million can ever be mined. Bitcoins can also be purchased, just as one would purchase Euros using U.S. dollars.

People hold bitcoins in digital wallets, which can be spent online at merchants who accept bitcoins. Internet retailers such as Expedia, Overstock.com, and Dell now accept bitcoins from customers as a form of payment. Rand Paul’s presidential campaign even accepts donations in bitcoins.

As an unregulated currency, the value of bitcoins has fluctuated dramatically over time. According to currency exchange site xe.com, one bitcoin was worth roughly $1,000.00 in January 2014, but only about $200.00 in January 2015. Just this week, in fact, the value has ranged between about $410 to $470 per bitcoin. Because of these wide swings in value, bitcoin investing may be seen as a quick way to make money. Such investments are extremely risky, however, and one should only invest money in bitcoins if one is willing to bear the risk of suffering substantial losses.

Bitcoin operations are also fertile ground for fraud. For instance, just this month, the SEC charged two Bitcoin “mining companies” (GAW Miners and ZenMiner) with running a Ponzi scheme. The scheme involved selling shares in a digital mining contract, which promised returns through mined bitcoins. According to the SEC, however, the companies did not have enough computing power to mine the bitcoins needed to fulfill the contracts.

While virtual currencies like bitcoin may be the future of finance and investing, until such currencies are regulated in some fashion, prudent investors should probably stay away.

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