What is bitcoin and how does it work?

What is bitcoin and how does it work?
Some of Bitcoin enthusiast Mike Caldwell's coins and paper vouchers, often called "paper wallets", are pictured at his office in this photo illustration in Sandy, Utah, January 31, 2014.

SAN FRANCISCO - Mt. Gox, once the world's biggest bitcoin exchange, abruptly stopped trading on Tuesday, shaking investor confidence in the digital currency that is struggling for legitimacy.

WHAT IS BITCOIN?

A form of electronic money independent of traditional banking, bitcoins started circulating in 2009 and have become the most prominent of several fledgling digital currencies.

The virtual currency relies on a network of computers that solve complex mathematical problems as part of a process that verifies and permanently records the details of every bitcoin transaction that is made.

Unlike traditional currencies, where a central bank decides how much money to print based on goals like controlling inflation, no central authority governs the supply of bitcoins. Like other commodities and currencies, its value depends on people's confidence in it.

HOW VOLATILE IS IT?

The dollar price of bitcoins quoted on online exchange Bitstamp spiked from around US$30 (S$38) a year ago to more than US$1,100 (S$1,400) in December as more people became aware of the currency and speculators jumped into the highly volatile market. But growing attention from regulators and concerns that bitcoins could be more susceptible to fraud than previously thought have sparked a steady decline in prices, to around US$530 on Tuesday.

Compounding the issue, its price can vary greatly depending on the exchange.

WHERE CAN I USE MY BITCOINS?

Proponents say bitcoins could one day become widely used by consumers for online shopping and other electronic transactions. Certain online retailers such as Overstock.com and physical stores, mostly smaller operations, already accept the digital currency, but its adoption is not widespread.

Critics say bitcoin is too volatile to be widely adopted and warn of its lack of regulation and its use to pay for illegal drugs and other nefarious transactions.

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