Call it currency for the digital age. With a bitcoin, there's no paper or hard metal to change hands. So why is this virtual coinage receiving so much attention? Because in early May, 11 million bitcoins worth $1.3 billion were in circulation (the maximum that can be created is 21 million bitcoins). Every hour, an average of 2,000 transactions take place and roughly 33,000 bitcoins trade hands.
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Bitcoins are created, or "mined," using complex computer codes, and transactions are processed and confirmed between PCs. You use conventional currency, such as dollars or euros, to buy them at an exchange (such as BitInstant.com or MtGox.com), and you store them on your computer. You spend your bitcoins at merchants that will accept them — and dozens do. Some sites, such as Bitcoinstore.com and Bitcoinin.com, even aggregate goods you can buy with the currency. One site, Bitspend.net, will help you spend your bitcoins anywhere — for a fee — even if the merchant doesn't accept them.
How much is a bitcoin worth? Good question. Speculators are driving the value. A bitcoin was worth just over $20 in January. The value surged to $230 in April, then plunged to $68 a week later.
Still, "virtual currencies are not going away anytime soon," says Aleia Van Dyke, an analyst at Javelin Strategy & Research. The government is starting to take notice. Take the virtual currency that federal prosecutors say Liberty Reserve, an online currency exchange, used to run a $6 billion money laundering operation. That digital currency, according to the indictment, was commonly referred to as "LR. "The U.S. Treasury Department's Financial Crimes Enforcement Network recently issued guidelines that bring those that issue or exchange virtual currencies, including bitcoins, under its regulations.