Bitcoin has been a hot topic for some time. The price of a bitcoins has soared from $1 in 2011 to more than $1,000 today. Of late, the digital currency has attracted the interest of a number of major regulators, and that includes Federal Reserve chairman Ben Bernanke. Alex Hern of The Guardian says speculators have been piling up Bitcoins like digital gold.

Bitcoins

Bitcoins are a digital currency generated by computers after complex mathematical calculations. Your bitcoins are stored in a computer or digital wallet in virtual form. A network tracks all transactions performed using bitcoins. You can’t use the same “Satoshi” in two different transactions because the network notes the IDs of from and to digital wallets. A Satoshi is a subunit of a bitcoin (one bitcoin = 100 million Satoshi), and each Satoshi can theoretically be spent separately.

Although a growing number of legitimate businesses now accept bitcoins, the digital currency has been used to purchase guns or drugs online because users can make these transactions anonymously. Taxing bitcoin transactions is also difficult because of built-in user anonymity. The number of bitcoins will not increase above 21 million. If things go as currently planned, that figure will be reached by 2140. As of October 2013, more than 57% of bitcoins have already been mined, and the percentage is expected to increase to 75% by 2017. The number of businesses accepting bitcoin payments has also been steadily increasing.

Will the Fed legitimize bitcoins?

What surprises many is that some mainstream economists and regulators have started considering bitcoins as a part of the future economy. Last year, the European Central Bank said bitcoin shows the characteristics of a Ponzi scheme. But earlier this month, the Chicago Federal Reserve said in a letter that it is an exceptional technical and conceptual achievement. Some day, existing financial institutions and even governments may use this digital currency, or issue their own bitcoins.

Federal Reserve chairman Ben Bernanke discussed virtual currencies in a letter sent to the US Senate Committee on Homeland Security. Bernanke noted that the Fed has “ongoing initiatives” focused on additional areas of concern that need more attention from the financial organizations the central bank supervises. Alex Hern interprets Bernanke’s statement as his willingness to bring bitcoins under the umbrella of U.S. currency regulation. That means legitimizing the virtual currency. If that happens, it would be a big blow to online payment systems that take a cut such as PayPal and credit cards, given that bitcoins are both a virtual currency and a built-in payment transfer system at the same time.