PayPal against Bitcoin

Will Phillips is £5, 300 out of pocket after falling victim to a very 21st-century financial scam involving hacked PayPal accounts and the digital currency bitcoin.

For the uninitiated,bitcoin is a "virtual currency" that,depending on who you believe,is going to change the world by turning e-commerce on its head,or end very messily like a modern-day version of the "tulip mania" that gripped the Netherlands in the 17th century.

In recent months it has become a magnet for speculators and,last autumn,32-year-old Phillips,who freely admits he is a "a bit of a geek, " decided to grab a slice of the action.

At the start of 2013,one bitcoin was worth around £7. At the end of November the price hit £750 while on Wednesday this week it was around £350.

What seems to have happened is,in the space of one night,fraudsters hacked into legitimate PayPal accounts and,posing as these people,bought his bitcoins on eBay and made off with them. This type of scam is not new,and usually PayPal comes down in favour of the individuals whose accounts were hacked. In this case,the account holders have had their money refunded. However,Phillips is now being pursued for more than £1, 300 that PayPal says he owes them.

Bitcoin has been around for about five years,but it was in 2013 that it started to move from the tech chatrooms into the public consciousness – helped by a high-profile news story in November about a man who realised that the computer hard drive he had chucked out contained bitcoins worth £4m,and was in a landfill site in south Wales.

A virtual currency (AKA "cryptocurrency") can be bought on an exchange using conventional money and then transferred to your personal digital "wallet". You can then use this "money" to pay for goods and services – mainly drugs and porn,some claim – or convert it back into pounds,dollars or whatever. The "coin" doesn't exist physically – it exists only as a computer file.

Last year,Phillips,a London-based visual effects artist,could see that bitcoin was starting to become a phenomenon. "The price was increasing and increasing,and a lot of articles were being written. I didn't want to miss out,so I started buying a few. Then I started trading with smaller cryptocurrencies,and had some success." At one point he owned 4.8 bitcoins.

By November,bitcoin's value had soared,fallen,then it rose again. Concerned about this volatility,Phillips decided,as he had "done quite well",now was the time to sell. So he listed his bitcoins on eBay and had no problems finding buyers. A man in Hounslow,Middlesex,bought half a coin for £520. Phillips waited until the money was in his PayPal account,then sent the currency to the wallet address provided. Hours later,the man reversed the payment.