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Bitcoins: Could they change the financial world?

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PHOENIX (KSAZ) -

Bitcoins -- they've been called crypto-currency -- virtual coins and electronic cash.

They're being accepted by some businesses, but have been linked to drug trafficking.  Some say bitcoins can change the world -- others say they're a bust.

A bitcoin isn't something you can touch or feel.  It's virtual -- it exists as a computer algorithm.  In fact, many people don't even know what it is.

"It's such a complicated question because a bitcoin really doesn't exist anywhere," said Erick Johnson, a retired network engineer from Mesa, who's called a bitcoin "miner."

"There was originally CPU mining.. we have A6 processors," he said.

In other words, he uses computers to find or "mine" for bitcoins from his Mesa home.  The computers work to solve a complex math problem.

"A bitcoin is a concept and it exists only as a set of numbers inside a very very large data file," he said.

Much like people who mine for gold, bitcoin miners mine for numbers, constantly running computers to pull out random numbers from a cloud. Similar to gold mining, most of the numbers are dirt, but about every 10 minutes, key numbers are released, allowing the virtual miner to solve a numerical puzzle, releasing 25 new bitcoins.

The value of a bitcoin fluctuates, but it can trade at $1,000 a coin, meaning that block of bitcoins is worth $25,000.

Johnson and his friends spent about $7,000 on computing equipment to mine bitcoins. They're part of a pool of thousands of others who are combining computer power, mining coins, then splitting the profits.  As part of the group, Johnson mines around a quarter of a bitcoin a day, which comes to about $300, depending on the market.

"The result is we're having a lot of fun with it and we recognize this is one step above going to the casino with our money," he said.

But some are investing in warehouses full of computing equipment just to mine the coins. All 21 million coins are expected to be mined by the year 2140.

Early investors have made money.

From 2009 to 2011, the value of a bitcoin went from 32 cents to $32.  Today, it trades between $850 and $1,000.

Many bitcoin owners are believed to be speculators, but Johnson says he wants to see bitcoins become a global currency.

"I'm really doing this because I believe bitcoin has the opportunity to help us as people exchange money in a better way.  This could be something that could change the way the world works financially."

For the bitcoin to become a workable currency, Johnson says the market must stabilize. Then people have to start using it and businesses have to start accepting it.

In fact, more retailers are starting to accept bitcoins. Overstock.com accepts the digital currency.   The Sacramento Kings basketball team recently announced they will become the first professional sports franchise to accept bitcoins and someone in California reportedly paid 91 bitcoins to buy a Tesla car.

"It's opened us up to a new world of clients," said Ryan Hurley of the Rose Law Group, which accepts bitcoins.  

The law group, like many others, use a bitcoin processor called Bitpay to turn the digital dollars into cash.

"We actually use a service called Bitpay.. there are a number of services like that.  They take difficulty and risk out for you," said Hurley.

People can buy bitcoins at exchanges online.  Virtual wallets, which can be found as a free app, make it easier for people and businesses to store and accept bitcoins.

Johnson teaches businesses how to make transactions and he took us through an exchange.

"You have .01 bitcoins, which is U.S. $9 worth.. and so you take this to your coffee shop and they scan that.. scan their QR code and send them some amount of either U.S. dollars or bitcoins.  I'm going to send .001 bitcoins or equivalent of 91 cents. I like that you can either send it in dollars or bitcoins."

Transactions can be done anonymously, like cash, but because of that, the bitcoin has been linked to illegal activities.

Recently, the Feds charged a bitcoin dealer and executive at a bitcoin company with money laundering for allegedly selling more than $1 million worth of the cyber currency to people doing business on a black market drug dealing web site.

"As a faculty member and researcher, my interest really is to see how this plays out," said Ajay Vinze, Associate Dean and Professor of Arizona State University's W.P. Carey School of Business.

He says right now, the bitcoin market is being driven both by people who think the coin is in short supply and by those who see its value as a global currency.

Bitcoins are not backed by anything.  Some say they're only worth whatever a buyer is willing to pay.

"I think the beauty of bitcoin is it's a truly unregulated currency and the beauty of bitcoin is no single person or institution controls it," said Vinze.

That could soon change, as government agencies are now holding hearings to discuss the regulation of bitcoins.

Bitcoins have been called gimmicky and groundbreaking.

One of the great mysteries is who or what group designed the bitcoin algorithm in 2009.  Whatever the case, they fell off the radar.  No one knows who he, she or they really are.

"They've kind of released their baby into the world and probably sitting back somewhere watching the thing grow," said Johnson.

Financial experts have mixed opinions on the future of the bitcoin.  Some speculate one bitcoin will top $10,000 by the end of this year, but others have compared it to the Beanie Baby phenomenon.

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