Do we trust Bitcoin?

You have probably heard of Bitcoin before, but can you define it?

Very often it is described as a non-governmental digital currency. Bitcoin is also sometimes called a cyber currency or, in a nod to its encrypted origins, a cryptocurrency. Those descriptions are accurate enough, but they miss the point. It is like describing the US dollar as a piece of green paper with pictures.

I have my own ways of describing Bitcoin. I think of it as store credit without the store. A prepaid phone without the phone. Precious metals without metal. Legal tender without debt, public or private, unless the party to whom it is bidding wishes to accept it. An instrument backed by the full faith and credit only of its anonymous creators, in whom, therefore, I do not trust and to whom I do not give credit, except for ingenuity.

I wouldn't touch a bitcoin with a 10ft USB cable. But quite a few people have already done so, and many more soon.

This is in part because entrepreneurs Cameron and Tyler Winklevoss, best known for their role in Facebook's origins, are now seeking to use their technological knowledge and money to bring Bitcoin into the mainstream.

The Winklevosses hope to start an exchange-traded fund for bitcoins. An ETF would make Bitcoin more widely available to investors who lack the technological know-how to buy the digital currency directly. As of April, Winklevosses are said to have had around 1 percent of all existing bitcoins.

Created in 2009 by an anonymous cryptographer, Bitcoin operates on the premise that anything, even intangible snippets of code, can be valuable as long as enough people choose to treat it as valuable. Bitcoins exist only as digital representations and are not tied to any traditional currency.

According to the Bitcoin website, "Bitcoin is designed around the idea of ​​a new form of money that uses crypto to control its creation and transactions, rather than depending on central authorities." (1) The new bitcoins are "mined" by users who solve computer algorithms to discover virtual currencies. The alleged creators of Bitcoins have said that the final supply of bitcoins will be limited to 21 million.

While Bitcoin promotes itself as "a very secure and inexpensive way to handle payments" (2), few companies have actually taken the step to accept bitcoin price. Of those that do, a considerable number operate on the black market.

Bitcoins are traded anonymously over the Internet, without any involvement by established financial institutions. As of 2012, sales of drugs and other black market products accounted for approximately 20 percent of bitcoin to US dollar exchanges on the main Bitcoin exchange, called Mt. Gox. Recently, the Drug Enforcement Agency led to He made his first Bitcoin seizure, after linking a transaction in the anonymous Bitcoin market, Silk Road, to the sale of prescription and illegal drugs.

Some Bitcoin users have also suggested that the coin may serve as a means of avoiding taxes. That may be true, but only in the sense that bitcoins aid in illegal tax evasion, not in the sense that they actually play any role in genuine tax planning. Under federal tax law, cash does not need to change hands for a taxable transaction to occur. Barter and other non-monetary exchanges remain fully taxable. There is no reason for transactions involving bitcoins to be treated differently.