Is Bitcoin, the cryptocurrency of the underworld, poised to enter Main Street or be forever relegated to the shadows?

By the time the F.B.I. shut down Silk Road in early October by arresting its leader in a San Francisco public library, the online black market for illegal substances had amassed a million registered users and processed sales worth 1.2 billion dollars.

The site only accepted payment in the form of Bitcoin, which enabled transactions to remain anonymous. The creator and administrator of the site, Russ Ulbricht, also known as Dread Pirate Roberts, is said to be worth at least $80 million dollars… in bitcoins!

What is Bitcoin?

Bitcoin was created in January 2009 by a developer known as Satoshi Nakamoto. It’s a math-based currency, or cryptocurrency, that is traded using peer-to-peer technology.

Bitcoins are mathematically generated by any computer connected to the Internet executing a number-crunching procedure known as Bitcoin mining. The rate of new Bitcoin creation will be halved every four years until there are 21 million in circulation, which will happen in 2140.  No central authority controls the currency.

Unless you decide to run the free software that mines Bitcoin, buying them (currently worth $144 each) is accomplished through several exchanges—a local favorite is Coinbase.com. Once you own one, you can trade it anonymously for goods or services through a digital wallet.

Benefits of Bitcoin

Immune to politics. In the past decade, we have witnessed our fair share of financial collapses. Speculation, human emotion, and more importantly politics influence monetary policy and thus the value of money. Bitcoin was designed to bypass all that.

Since bitcoins are not pegged to any world currency, no central authority can later devalue them by issuing new ones. Some people in Cyprus, Greece, Spain and other unstable economies have turned to Bitcoin to safeguard their savings.

Available to all. Anyone with an Internet connection can have a Bitcoin wallet. Bitcoin could therefore empower many of the 2.5 billion people who don’t have access to a bank account  to finance schooling, housing, healthcare, and real estate.

Free and fast. Sending money internationally is expensive and takes time. Bitcoin makes the world flat, with transactions lasting seconds without any fees. In 2012, the flow of money from developed to developing countries was estimated at 414 billion dollars, a 6.3 percent increase from the previous year. With fees as high as five percent of remittance value, it’s easy to see the potential impact of Bitcoin.

Secure. When you send Bitcoin, you send the exact amount and not a penny more—a “push” transaction rather than “pull.” It’s those pull transactions that are the source of most of the fraud associated with credit card use.

Bitcoin economy heads mainstream

Bitcoin may be the currency of choice for drug dealers on sites such as Silk Road, but there’s a growing list of merchants and service providers accepting it for totally above board transactions.

WordPress and OkCupid now accept bitcoins as payment. You can make a donation in Bitcoin to Reddit, Khan Academy, and Wikileaks. There are plenty of exchanges that allow you to buy goods from regular establishments, and you can even use Bitcoin.travel to find brick and mortar shops on a map that accept the currency.

Could there be a Bitcoin-only economy? That’s what the citizens of the Kreuzberg neighborhood in Berlin are trying to do. Soon you might be able to use Bitcoin ATMs, currently in operation in Canada and coming to the US. Read Forbes’ Kashmir Hill’s effort to live on Bitcoin for an entire week.

Here’s a list of some West Coast companies innovating with Bitcoin and other cryptocurrencies:

Coinbase

The most funded Bitcoin startup, Coinbase allows you to purchase and sell Bitcoin. With more than 303,000 consumer wallets, and 11,000 merchants, it’s no wonder it received a $5 million investment in May 2013—the largest sum to date for a Bitcoin related startup.

Ripple

Borrowing the concept of a decentralized system, Ripple allows users to benefit from peer-to-peer transactions even enabling peer-to-peer lending. Every person could become their own bank and lend to friends of friends. Ripple is not the only alternative system to Bitcoin. There are a plethora of other cryptocurrencies available.

Coinbase

The most funded Bitcoin startup, Coinbase allows you to purchase and sell Bitcoin. With more than 303,000 consumer wallets, and 11,000 merchants, it’s no wonder it received a $5 million investment in May 2013—the largest sum to date for a Bitcoin related startup.

Draper University of Heroes

Created by Tim Draper, Founder and a Managing Director of Draper Fisher Jurvetson, this school of entrepreneurs cares not about academic credentials but rather about its students’ appetite for risk-taking. In June 2013, Draper University became the first learning institution to accept Bitcoin as form of payment for tuition to the eight-week program.

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Ripple

Borrowing the concept of a decentralized system, Ripple allows users to benefit from peer-to-peer transactions even enabling peer-to-peer lending. Every person could become their own bank and lend to friends of friends. Ripple is not the only alternative system to Bitcoin. There are a plethora of other cryptocurrencies available.

Like Father Like Son

Boost VC is a venture capital firm based in San Mateo that has invested in seven Bitcoin related startups including Bitbox, BitPagos, Vaurum, and Verify BTC. Adam Draper, son of legendary Tim Draper of Draper Fisher Juvertson, leads Boost VC and has personally invested in other bitcoin related startups such as Coinbase.

Draper University of Heroes

Created by Tim Draper, Founder and a Managing Director of Draper Fisher Jurvetson, this school of entrepreneurs cares not about academic credentials but rather about its students’ appetite for risk-taking. In June 2013, Draper University became the first learning institution to accept Bitcoin as form of payment for tuition to the eight-week program.

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Could Bitcoin Save Publishing?

The young founders of Bitwall think it can! A Bitcoin integrated paywall allows users to pay for just what they want to read using their Bitcoin digital wallet. Micropayments are unthinkable today with average credit card fees of 30 cents plus three percent of the sale price. But Bitcoin changes everything.

Like Father Like Son

Boost VC is a venture capital firm based in San Mateo that has invested in seven Bitcoin related startups including Bitbox, BitPagos, Vaurum, and Verify BTC. Adam Draper, son of legendary Tim Draper of Draper Fisher Juvertson, leads Boost VC and has personally invested in other bitcoin related startups such as Coinbase.

Bitdazzle

Emerging peer-to-peer marketplaces and collaborative economies are a natural fit for Bitcoin. Bitdazzle, a San Diego startup,  allows small businesses to accept Bitcoin as payment for their goods. With more than 1,000 merchants already using Bitdazzle, the marketplace guarantees zero transactions fees.

Could Bitcoin Save Publishing?

The young founders of Bitwall think it can! A Bitcoin integrated paywall allows users to pay for just what they want to read using their Bitcoin digital wallet. Micropayments are unthinkable today with average credit card fees of 30 cents plus three percent of the sale price. But Bitcoin changes everything.

Bitdazzle

Emerging peer-to-peer marketplaces and collaborative economies are a natural fit for Bitcoin. Bitdazzle, a San Diego startup, allows small businesses to accept Bitcoin as payment for their goods. With more than 1,000 merchants already using Bitdazzle, the marketplace guarantees zero transactions fees.

Where government is wary, others hope for equality

Governments are starting to realize the implications of cryptocurrencies. Some economists even warn of the government backlash against them. While for now the focus has been on the use of these currencies for illegal transactions, the bigger question of taxation looms on the horizon.

The U.S. government has cracked down on the illegal side of Bitcoin transactions with the seizure warrant on the Bitcoin exchange market, Mt.Gox and the shutdown of Silk Road site. However, to date, the F.B.I. has been unable to seize the funds belonging to the site’s administrator and creator, Ross Ulbricht. Those are in bitcoins.

Who's Whow in the Bitcoin Landscape

Germany recently defined Bitcoin as units of account, or a financial instrument, to which sales tax will follow. Thailand has moved to ban bitcoins altogether.

But what’s most significant about the shutdown of Silk Road, argue Bitcoin’s defenders, is the chance to disassociate the currency from illegal activities and bring it to the mainstream.

The promise of no middleman, fee-free transactions could make a difference to millions of people around the world, especially those in the developing world or areas of the world with unstable economic systems.

However, just as the Internet promised to revolutionize commerce and change our lives forever in the late 90s, it is likely that the era of cryptocurrencies has just begun. Perhaps Bitcoin heralds the arrival of still new entrants bringing in further economic disruption and potentially further innovation.

Update: On Friday, February 28, 2014, the Bitcoin exchange Mt. Gox filed for bankruptcy, calling into question the future of the currency.

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