In 2009 the online currency Bitcoin was launched by an anonymous developer known by the pseudonym Satoshi Nakamoto. The protocol was based on a 2008 white paper by the same author (Nakamoto 2008), and every aspect of it is public and open source. This quickly led to the launching of several alternative online currencies based on the Bitcoin protocol.

Two international economics experts provide some analysis of Bitcoin in brief interviews.

Charles Wyplosz, Professor of International Economics and Director of the Centre for International Monetary and Banking Studies

Do you think Bitcoin will ever have a place as a widely accepted currency all over the world?

Bitcoin is a privately issued currency. There have been thousands of "parallel currencies" in the past, mostly issued by private banks, but this one (and other similar ones) is innovative in two ways. First it exploits the new technology of social networks, replacing the old mouth-to-mouth mean of spreading information. Second, it seems (as far as one can tell) entirely automated. Older parallel currencies imploded because their issuers could not resist the temptation to produce ever more of them.

This being said a parallel currency is only backed by its originator, unknown in this case, while actual currencies are backed by central banks.

Why is that better? We invented modern paper money because gold or silver was too crude to adjust to economic conditions. Bitcoins, being automatic, are not adjustable either. As long as they remain small, that's OK. If they ever grow big, then they will be unfit. The best that can happen is that they survive as a small medium exchange among its aficionados.

Bastiaan Quast, PhD Candidate, Development Economics and Researcher, Centre for Finance and Development

What are the advantages of Bitcoin?

The system is self-regulating, meaning that no government or institution controls it. For the user that means that their holdings cannot be used as a policy instrument.

Users control their own holdings on their own computer, which eliminates the need for a bank. This brings the advantage that users are not dependent on open hours, waiting lines, or e-banking websites, it also means no fees.

Transactions are as easy, instant, and costless as sending an email. Lastly, the instant nature of transactions means it is well suited for online retailing.

Bitcoin exists online digitally, which means that there is no physical counter-part that needs to be moved, such as with gold, or paper money. Additionally, it is equally valid across countries, which means that there is no need to exchange it.

Two of the most often mentioned drawbacks are first the fact there will only ever be around 21 million bitcoins, and some will be lost, which makes the system deflationary and troubling to economists.

The second issue is the process of mining, solving of computational problems, in order to secure the integrity of the Bitcoin network. The solution for both these lies in the multiplicity of cryptocurrencies.

Why is bitcoin often associated with criminal use?

The anonymous of Bitcoin nature makes it ideal for illegal transactions. Since there was no existing system for anonymous transactions, bitcoin was quickly adopted in underground communities. Bitcoin first became known through the anonymous online marketplace 'The Silk Road'. This marketplace was mostly used for purchasing illegal drugs such as marijuana or XTC. However, it has also been connected with contract killings and other serious crimes. On October 2nd the alleged operator of the Silk Road was arrested by the FBI, and the website was taken down.

Since bitcoin became more mainstream in the past year, many bitcoin Payment Service Provides (PSPs) have arisen. Most online bitcoin purchases are conducted through these PSPs and these transactions are thus regulated by financial authorities. In addition to this, the purchase of bitcoins is also being regulated.

Altogether, bitcoin was the first anonymous online transaction mechanism, which led to a rapid adoption in the underground communities on the internet. Initially these flourished for lack of intervention and regulation. With Bitcoin becoming more mainstream, financial regulation has increased, leading to more regulated trading.