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How Bitcoin Works

        Money | Currency

Extralegal Activities

If bitcoins seem a bit anarchist, well, that's because they are. They dodge the traditional paradigm in which government regulators control and manipulate the money supply.

With bitcoins, people all over the world can engage in online gambling, which the U.S. federal government seriously disapproves of. Bitcoins are also infamously and irrevocably linked to Silk Road, a black market Web site where people can anonymously purchase about anything, including illegal drugs. On a related site, called The Armory, you can ring up a few weapons with little hassle.

Or you can visit a site called Black Market Reloaded and buy just about any product or service you can imagine. Need a kidnapper or hired gun? With enough bitcoins and some investigative work, you could potentially find the right person for any job [source: Buterin]. If you're into sabotage, you could buy classified information from anonymous informants. Or less nefariously, you could snag some tasty (but banned in the U.S.) Cuban cigars [source: Brito].

On Silk Road, bitcoins are the only accepted currency. After perusing illicit goods and seller ratings, a buyer transfers bitcoins into escrow. Once the buyer confirms that he or she has received the items, those bitcoins are released to the seller and the deal is complete. Millions of dollars in goods and bitcoins change hands through Silk Road's site each year [Source: Economist].

The relative anonymity of Bitcoin could eventually enable tax evasion, too. Traditionally, hiding your assets in some offshore account takes some real legwork. With Bitcoin, though, you can potentially stash millions of dollars in your digital wallet, safely out of view of all tax collectors, and you could complete this process in just an afternoon.

Governments and concerned citizens obviously take issue with this sort of backroom Internet wheeling and dealing. Governments don't want citizens skimping on taxes, and their drug and arms enforcement agencies understandably aren't happy about people finding high-tech ways to skirt their laws.

In spite of these sort of legal or ethical concerns, and even though their value is crazily unpredictable, Bitcoin has endured. That leaves a lot of economists and consumers wondering just what's in store for the future of currency.