'Legitimate' Bitcoin's value soars after Senate hearing

The US Senate will hear that Bitcoin has the same benefits and risks as other online-payment methods
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The value of virtual currency Bitcoin has soared to over $900 (Ј559), after a US Senate committee hearing.

The committee was told that virtual currencies were a "legitimate financial service" with the same benefits and risks as other online payment systems.

The Homeland Security and Governmental Affairs Committee is exploring the "promises and risks" of Bitcoin for "government and society at large".

The currency has more than trebled in value since October.

Fear and confusion
The US Senate hearing was prompted by the closure of the Silk Road website in October. The site, which sold drugs and other illegal goods, was shut down by the FBI.

Users of the site were required to pay for their transactions using bitcoins.

Representatives from the Department of Justice and financial regulator the Securities and Exchange Commission have been asked to provide their views about virtual currencies to the committee and submissions have been received from the FBI and the US Federal Reserve.

US Senate building
The US Senate committee will hear from the Department of Justice and Securities and Exchange Commission
"Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us," the chair of the committee, Senator Thomas Carper, said in opening remarks.

The FBI, in a letter to the committee released on Sunday, said that it recognised virtual currencies offered "legitimate financial services" but they could be "exploited by malicious actors".

Mythili Raman, the head of the Justice Department's Criminal Division, told the committee: "We have seen increasing use of such currencies by drug dealers, traffickers of child pornography, and perpetrators of large-scale fraud schemes."

Mainstream acceptance
Jerry Brito, senior research fellow at George Mason University told Bloomberg: ''Two years ago it was alarm when Silk Road first came on the scene.

''Since then, Congress has been educating itself and understands that there are great potential benefits, and like any new technology there are going to be some challenges. But they see there is a balance to be struck here and they are generally positive on the technology," he said.

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HOW BITCOINS WORK

Bitcoin is often referred to as a new kind of currency.

But it may be best to think of its units being virtual tokens rather than physical coins or notes.

However, like all currencies its value is determined by how much people are willing to exchange it for.

To process Bitcoin transactions, a procedure called "mining" must take place, which involves a computer solving a difficult mathematical problem with a 64-digit solution.

For each problem solved, one block of bitcoins is processed. In addition the miner is rewarded with new bitcoins.

This provides an incentive for people to provide computer processing power to solve the problems.

To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of about 3,600 new bitcoins a day.

There are currently about 11 million bitcoins in existence.

To receive a bitcoin a user must have a Bitcoin address - a string of 27-34 letters and numbers - which acts as a kind of virtual postbox to and from which the bitcoins are sent.

Since there is no registry of these addresses, people can use them to protect their anonymity when making a transaction.

These addresses are in turn stored in Bitcoin wallets which are used to manage savings.

They operate like privately run bank accounts - with the proviso that if the data is lost, so are the bitcoins owned.

Trade in Bitcoin is small compared with that in countries' official currencies. But since its creation in 2008, Bitcoin has become a popular way to pay for things online. There are currently more than 12 million bitcoins in existence according to Bitcoincharts, a website that provides financial information about the currency.

On one exchange site, Mt. Gox, the value of the currency rose to $900 (Ј559) on Monday before falling back to $727 (Ј452). This compares with a price of $200 (Ј124) in late October.

The closing down of Silk Road and hearings in front of US government committees have led some to believe that prices are increasing as investors think Bitcoin will gain more mainstream acceptance.

"Lots of factors are driving the price action in Bitcoin, including pure speculation," said Garrick Hileman, an economic historian at the London School of Economics.

"Regulatory interest in Bitcoin also traditionally has a positive effect on the price of Bitcoin," he added.

Jan Lambregts, head of financial market research at Rabobank, which does not trade in Bitcoin, said regulators were right to get involved.

"Looking at it from a distance, it very much looks like it could be a speculative bubble. It's a small market, with a lot of interest in it, which is inflating and distorting the price," he said.

"But you can see the concerns for governments - this is a currency outside their normal domain and which is not influenced by central banks.

"It may all be relatively small-scale now, but decisions taken now could have wider repercussions were such virtual currency experiments to be expanded in the future," he added.

Some have questioned whether trading in Bitcoin is insufficiently transparent and therefore easier to use for illegitimate means. Patrick Murck, from the Bitcoin Foundation, which promotes the use of the currency, told the BBC that the network was very open and everybody could see every transaction that happened.

"I would challenge that it's for illegitimate use or bad actions. What we're finding is not that it's a haven for illegitimate activities but that there are many legitimate uses," he said.

Whatever people are using Bitcoin for, Mr Brito thinks it's here to stay.

"These hearings mean Bitcoin is finally coming into its own," he said.

"It's a real thing and it's not going anywhere and these hearings highlight that."

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