Will digital currencies such as Bitcoin become the money of tomorrow?

Coin being placed in piggy bankThe virtual currency Bitcoin enables people to pay companies or individuals anywhere in the world within minutes - and without incurring transaction charges.

But the rise of Bitcoin, first mooted in 2008, has not been problem free. We ask if digital money can really replace cold, hard cash.

What is Bitcoin?
Bitcoins are not printed and minted like pounds or dollars. Instead, they are produced using software that solves mathematical problems - hence the term cryptocurrency.

The brainchild of an anonymous individual or group of individuals known only as Satoshi Nakamoto, the "electronic cash system" has caught on fast.

There are also a number of other digital currencies trying to make a name for themselves, including Litecoin and Namecoin.

How does it work?
Bitcoin's popularity is partly due to the fact that it allows companies to swerve currency risk due to a central authority such as the Federal Reserve changing its monetary policy.

This, coupled with the convenience of making free international payments, has helped it to gain traction with diverse groups of users.

In Argentina, for example, it is being used as a way to avoid the official currency with its double-digit inflation and strict capital controls, and in the US, homeless people are earning Bitcoins by watching Youtube videos on their laptops.

Here in the UK, meanwhile, pubs such as the Pembury Tavern in London are starting to accept Bitcoin payments made using customers' smartphones.

Any downsides?
Security concerns are the main issue for Bitcoin at the moment. Bitcoin users with android devices were left vulnerable to theft last month due to a flaw in android's random number generation.

And, thanks to the relatively anonymous nature of Bitcoin and its nonreversible transactions, tracking down a hacker and returning stolen money could prove a lot harder than catching an everyday thief.

The digital currency also has worrying black market links.

Can virtual currencies replace cash?
While advocates of digital currencies argue that they help people avoid currency risk, there have been massive fluctuations in the value of Bitcoins.

The US dollar price of a Bitcoin – worth about £84 at current values – hit a high of $230 (£143) on April 9, 2013, up from just $13 at the start of the year.

What with the security glitches outlined above, it would therefore seem that even the most developed of the digital currencies still has some way to go before it can be accepted as a true alternative to cold hard cash.