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Hack attack deflates virtual currency Bitcoin

Within 10 days of hearing about Bitcoins, Matthew Thompson had spent more than $10,000 to acquire some of the online currency.

"I like to be sort of leading edge and if my customers want to pay me in a certain way, I'm going to do my best to accept it," said Mr. Thompson, a 29-year-old from Markham, Ont., who runs an online start-up.

The unregulated currency got Mr. Thompson's attention when a customer asked if he accepted them as payment. He began researching and found the virtual currency to be unlike any payment method he'd seen before.

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"It's sort of an experiment; nobody really knows what's going to happen," Mr. Thompson said.

The decentralized, digital currency can be used to buy a limited products and services online including alpaca socks and cloud storage.

The coins can be acquired in four different ways. Mr. Thompson acquired bitcoins in the most mind-bending way, using powerful computers to solve increasingly difficult algorithms to receive bitcoins as a reward. This is known as "mining."

Simpler ways include buying them on an online exchange, accepting them as payment or trading for cash.

Bitcoin, less than two years old, has received much attention in the U.S. recently as the volatile value darted from a few U.S. cents to $30. Two senators are demanding a crackdown after it surfaced that the currency was being used on a drug trading website. As well, one person claimed to have thousands of coins lost or stolen online. And last Sunday, trading website Mt. Gox was hacked and accounts compromised, causing the exchange to shutdown. Prices plummeted from $17 to pennies.

"There's no security. Its sort of a marketplace right now that's a little bit like the Wild West," said Perry Sadorsky, associate professor of economics at the Schulich School of Business in Toronto. "It's attractive but there's no regulation, nobody can really track easily the flows of money."

One of four core developers behind Bitcoins, Jeff Garzik, calls the currency experimental.

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"It's the first truly global currency. It's not controlled by any one nation," Mr. Garzik said, adding that a major selling point is the currency being capped at 21 million Bitcoins (or BTC), which works against inflation.

But even Mr. Garzik, who works as a software engineer in Raleigh, N.C., admits to struggling with the currency's concepts.

"Everyone had to learn a lot because bitcoin is in many ways technical and economic unlike anything that has ever been seen before," he said.

A level of anonymity for users has been both a source of success and criticism for Bitcoin, attracting some users who want to shield their identities. A public ledger displays recipients and senders of bitcoins only as a series of numbers.

With its recent troubles, some experts say Bitcoin is unlikely to move beyond its niche market.

Lawrence White, a professor of economics at George Mason University in Virginia, said Bitcoins are interesting now because of the peer-to-peer transactions but it might not be enough to go mainstream.

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"You want to be paid in something that's easy to spend, [but]until other people are accepting Bitcoins for ordinary payments there's not much incentive for you to accept it," Prof. White said.

However, it could be paving the way for something else, according to Prof. Sardorsky.

"It shows that with some clever thinking you can actually develop a new commodity space and that people will actually appreciate it," he said. "They [virtual commodities]are going to piggy back off each other."

The makers of Bitcoin are working on a more mainstream product, according to Mr. Garzik. A phone app would allow customers to use bitcoins at checkouts by waving a barcode generated to represent a certain amount of currency.

In Canada, there are Craigslist postings from people in Alberta, B.C., Ontario and Quebec asking to make bitcoin trades. Some advertise mining equipment while one asks to sell a pair of Tragically Hip concert tickets for Bitcoins.

So far, Mr. Thompson only has one customer using bitcoins them as a form of payment and he's yet to buy anything with his.

"No one really knows if this whole bitcoin concept is going to be successful or not. In my opinion, it's either going to go to zero, nobody's going to use them, or it's going to catch," Mr. Thompson said.

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