Unless you’ve been living in a self-imposed media blackout throughout 2013, you’ve seen and heard bitcoin become a mainstream news topic. With its higher profile comes an inevitable increase in popularity and acceptance as payment. For example, DWI Attorney Jay Cohen of Houston, TX now accepts bitcoin. In Cypress, the world’s first Bitcoin ATM is about to go online. Even eBay’s chief executive, John Donahoe, claims he’s looking at ways to integrate bitcoin with PayPal. In a recent Wall Street Journal interview, Donahoe stopped short of making any promises, but said, “It’s a new disruptive technology, so, yeah, we’re looking at Bitcoin closely.”
All of this attention isn’t lost on government regulating bodies either. The Treasury unit called FinCEN, the Financial Crimes Enforcement Network, already has rules about bitcoin, and the IRS is expected to create a bitcoin center too. While bitcoin’s anonymous nature may encourage individuals to attempt to dodge taxes, current IRS tax rules are relatively clear. If you provide services or sell goods in exchange for bitcoin, you have income. The IRS taxes income, regardless of its nature. At this time, it’s debatable whether bitcoin should be considered a currency or a commodity. But if the IRS sides with the commodity argument, bitcoin holders will be subject to taxes on any appreciation in its value as well. Things get more interesting if employees are paid a salary in bitcoin. (While not yet too common, 13 employees of the Internet Archive recently elected to receive some of their pay in bitcoin.) There’s no way to withhold some of the bitcoin to send to the IRS, so these employers have to pay employees a portion of the wages in cash, so the money can be sent to the IRS for taxes.
Things aren’t getting any less complicated for those trying to mine bitcoin. Traditionally, mining was accomplished with free software running on off-the-shelf PCs with 3D graphics cards (the GPU of a graphics card turns out to be far more efficient than a computer’s own processor at doing the repetitive math calculations needed for mining), but the complexity of the calculations increase as new bitcoins are created. We’re just starting to see purpose-built bitcoin mining machines with ASIC processors hitting the market. With processors designed for the sole purpose of mining bitcoins, these machines 
are destined to become the only cost-effective tools for the job. In the meantime, only those with access to large numbers of computers can mine worthwhile quantities of bitcoin. This, of course, results in some individuals resorting to less than ethical means of obtaining sufficient processing power. ESEA (e-Sports Entertainment) admins were recently caught inserting a bitcoin mining client into anti-cheating software downloaded to all of its customers. ESEA, who facilitates competitive video game leagues and tournaments, earned over $3,500 worth of the e-currency before customers complained of performance issues with their computers.
The difficulty of mining bitcoin with a standard-issue PC has also led to the development of companion virtual currencies. Litecoin is explained by some advocates as analogous to silver versus bitcoin gold. Litecoin’s design allows running on the same consumer-grade hardware traditionally used for bitcoin mining (even in tandem with it, if desired). With faster transaction confirmations, Litecoin mining currently remains viable for the hobbyist or computer enthusiast without a large upfront investment. One Litecoin recently had a value of $2.31 when a bitcoin had a simultaneous value of $93.70.
A third alternative is PPCoin, which purports to have several improvements to bitcoin’s design. Most importantly, it uses a “proof of stake/proof of work” hybrid system of coin generation. Rather than limiting the rate of new coin production with exponentially increasingly difficult math problems to solve, PPCoin generates new coins based on the holdings of individuals. (A person holding two percent of the currency will generate two percent of all proof of stake coin blocks.) PPCoin only uses bitcoin’s proof of work model of coin generation in the early stages, transitioning to the proof of stake model as difficulty levels increase. Unlike bitcoin, PPCoin has no ultimate cap on how many coins can exist.
So do we need all of this? Certainly, it’s not clear to some people what problem these experimental virtual currencies solve. Lead software developer of the bitcoin project, Gavin Andresen, believes the fact that politicians are cut out of the monetary loop is a major factor. Andersen points out the $10 trillion bill once minted by the government of Zimbabwe. (Andresen recently purchased a stack of them from a Polish man for a single bitcoin.)
“There are places in the world where the government hasn’t been so responsible, like Zimbabwe. And actually before they got to those bills I think they knocked nine zeros off of their old currency.” Andersen told the Wall Street Journal.
Andresen suggests bitcoin might gain the most traction in a country where few citizens have credit cards or bank accounts, yet have a volatile currency.
In the end, competition, not regulation, poses bitcoin’s greatest challenge. Governments will never give private currencies the status of “legal tender,” but a virtual currency’s value is determined more by its number of users. As more people use online services like eBay, the associated usage fees become a necessary payment, similar to a tax. Accepting a virtual currency such as bitcoin for these payments could dramatically increase its legitimacy and stability. On the flip side, if an alternative virtual currency is selected for these purposes, it could mark a phasing out of the first generation (bitcoin, Litecoin, etc.). The best advice for now is probably not to invest any more in virtual currencies than you can afford to lose.
This is ‘Virtual Currencies’ and people are starting to use them instead of ‘Fiat Currencies’ because people cannot trust governments and federal reserves in the age of continuing to just print more ‘fiat currency’ to solve economic problems and increasing the debt of a nation, causing hyperinflation and double digit job losses. The first one I can recall is Emperor Josh Norton I, http://en.wikipedia.org/wiki/Emperor_Norton he printed his own money, called it Imperial Dollars and people would accept them and trade them just like the US Dollar. In some cases they were even worth more than the US Dollar because of how rare they were, and each one was a work of art.
Bitcoin has a SHA-256 Hash to verify the coin is real, and Bitcoin mining tries to solve these SHA-256 hashes in transactions to run the transactions in a P2P network so there is no central bank that processes the transactions, the mining software does on each computer and then rewards the miner a fraction of a Bitcoin as a fee. Most people join Mining Pools and won’t get paid off until they earned 10 BTC or Bitcoins (BTC is the Bitcoin symbol).
The Federal government is basically treating it like a foreign currency.
With the ASIC Miners moving mining from thousands of cycles per second to millions of cycles per second the difficulty rating of earning Bitcoins has increased and people with GPU Miners won’t earn as much as they used to, so many switched to Litecoin which has a lower difficultry rating than Bitcoin because it does not use SHA-256 that the ASIC mining rigs are designed for, but uses a different one called Scrypt instead and ASIC mining rigs don’t work for Scrypt only CPUs and GPUs.
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