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Virtual currency comes with real life rewards — and risks

Bitcoin is a digital currency with similarities to cash and gold.

Like gold, bitcoins can be mined — but there's no digging involved, just considerable amounts of computer processing power. Any computer can mine bitcoins with the right software and an Internet connection, but the speed of mining depends on the speed of the hardware.

At regular intervals, a new "block" is generated, currently worth 25 bitcoins, all of which go to the miner whose computer happens to perform the correct math at the right time.

Unlike gold and cash, however, the currency has a hard upper limit. Sometime around the year 2140, the final bitcoin will be mined, and 21 billion will be in circulation.

Along with minting bitcoins, all of that mining work keeps the ledger in line. As people spend (or keep) their bitcoins, the transactions themselves create the math problems that need to be solved by miners.

Each bitcoin has a digital signature. All that math means the Bitcoin system knows where each bitcoin is at all times, so counterfeiting is out of the question.

Bitcoins are stored in "wallets" — digital files stored on individual computers. Transfers are direct. They do not go through a financial institution like credit card transactions do.

The name is apt. Delete the wallet file, and the results are the same as losing a physical wallet full of cash: bye-bye, bitcoins.

There's an ever-expanding list of merchants who accept bitcoins for payment, but for now, the most popular options are selling bitcoins online for cold, hard cash or holding onto them in the hope their value will skyrocket.

Mining isn't the only way to get bitcoins. The currency is bought and sold on websites anyone can join — one of the most widely used is mtgox.com — so boarding the Bitcoin bandwagon is just a few clicks away.

Reach copy editor Pete Hahnloser at phahnloser@mailtribune.com.