Is bitcoin legal?

Bitcoin is of interest to law enforcement, tax authorities, and legal regulators, all of which are trying to understand how it fits into existing frameworks. The legality of your bitcoin activities will depend on who you are and what you are doing with it.

Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the virtual currency in an attempt to control its use. We are still early on in the game, and many legal authorities are still struggling to understand the cryptocurrency, let alone make laws around it. Amid all this uncertainty, one question stands out: is bitcoin legal?
The answer is yes, depending on what you’re doing with it. Read on for our guide to the complex legal landscape surrounding bitcoin. Most of the discussion concerns the US, where many of the legal dramas are currently playing out.

What are the concerns about bitcoin?

Tech People Are Passing Around This Paul Krugman Quote On The Internet After He Called Bitcoin 'Evil'

Paul Krugman upset the Bitcoin community over the weekend when he wrote a blog post titled "Bitcoin is Evil."

In the post he said he was "deeply unconvinced" that Bitcoin can actually work as a form of currency. He doesn't think it works as a "store of value" because there isn't anything underpinning it. 
After writing the post, Bitcoin supporters started flogging his inbox with "rage-filled missives," says Krugman in a follow up post.

A Trip Through The Bitcoin Mines

Once upon a time, money - in the form of precious metals - used to be literally dug out of the earth. Limitations on the amount that could be mined, and on how much growth could be borrowed from the future (all debt is, is future consumption denied), is why eventually the world's central bankers moved from money backed by precious metals, to "money" backed by "faith and credit", in the process diluting both. It was the unprecedented explosion in credit money creation that resulted once money could be "printed" out of thin air that nearly destroyed the western financial system. Which brings us to Bitcoin, where currency "mining" takes place not in the earth's crust, or in the basement of the Federal Reserve, but inside supercomputers.

It is these supercomputers, that are the laborers of the virtual mines where Bitcoins are unearthed, that the NYT focuses on in a recent expose:

Bitcoins are invisible money, backed by no government, useful only as a speculative investment or online currency, but creating them commands a surprisingly hefty real-world infrastructure.

Instead of swinging pickaxes, these custom-built machines, which are running an open-source Bitcoin program, perform complex algorithms 24 hours a day. If they come up with the right answers before competitors around the world do, they win a block of 25 new Bitcoins from the virtual currency’s decentralized network. The network is programmed to release 21 million coins eventually. A little more than half are already out in the world, but because the system will release Bitcoins at a progressively slower rate, the work of mining could take more than 100 years.

As the following chart shows, in addition to the surge in the price of Bitcoin, another explosion witnessed recently is in the processing power of the Bitcoin network: from non-existent a couple of years ago, the "mining" power dedicated to hashing, or the calculations used to extract new Bitcoins, has risen to nearly 10 quadrillion per second!