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Virtual Currency Refresher: What Is a Bitcoin, and Why Is It Worth $1,170?

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This virtual money is a phenomenon, or a bubble, or both.

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On Thanksgiving Day, the bitcoin traded at a record-high value of $1,170.

Everyone was astonished when it hit the $1,000 mark, and that was Wednesday's news.

If this is a bubble, as many say it is, it's got to be the first in history involving speculation about a product that doesn't even exist in any physical sense. You can't touch a bitcoin, or bite it to see if it's real, or jingle it in your pocket, or even crinkle it like a new dollar bill.

But you can flip it, which is what investors around the world have been doing since the bitcoin concept became a reality in 2009.

You can also trade it against other currencies, like the US dollar.

It's supposed to be a virtual currency, but buying stuff with bitcoins is very much beside the point, at least for now. Even a newly-minted bitcoin millionaire could starve to death trying to find somewhere for lunch that accepts this so-called money.

Despite the flurry of coverage that bitcoins have received lately, even investing in them has been a pastime for a small but very oddly assorted set of bedfellows.

Bitcoin has been adopted enthusiastically by computer geeks sprinkled around the globe, a few forward-looking entrepreneurs, risk-loving investors, and quite a number of people who have good reason to keep their activities, financial and otherwise, strictly anonymous.

At least some of the above truly believe that the bitcoin concept is a revolution in the making. But even they have trouble explaining what a bitcoin is.

The bitcoin concept was given to the world in 2008 by "Satoshi Nakamoto," a pseudonym adopted by a mystery geek who has never been identified. (See our story from April 2013: The Basics on Bitcoin: 11 Things You Need to Know.)

It is a virtual currency that is not issued or regulated by any government and, crucially, eliminates the bank as middleman. That means minimal fees and, at least for now, little or no tracking of transactions. It can be used by any person to pay any other person who accepts it as such.

It also can be traded against any other of the world's (real paper) currencies, and that is its main function today.

Read More: The Bitcoin Wealth Effect: The Currency's New Record Is Chilling Sign

The system is regulated by a software algorithm that is run on independent computers in a decentralized network. The people who accept that task are called "miners" because they produce more bitcoins to feed the network as part of the process of verifying transactions. The ultimate number in circulation is limited, though, to $21 million. There might be about $12 million in existence now.

That freewheeling lack of regulation has its downside. It's fairly easy to set up an exchange to trade in bitcoins. Though Mt. Gox is the biggest and best known, there are or were others, including one in China that disappeared off the face of the Internet with about $4 million in bitcoins. Mt. Gox itself was created in Japan, but recently was absorbed by a Chinese competitor.

​In fact, though the bitcoin is legal, its reputation is growing mostly through reports on the many borderline or downright dodgy enterprises that are finding it useful.

The most notorious of these is the Silk Road case, in which the FBI shut down an alleged online marketplace in illegal drugs. Bitcoins also are allegedly a favorite currency of online gambling and porn operations.

The Economist suggests that the recent surge in its value has been driven by wealthy Chinese hoarders who want their money offshore. It's also prized by the wealthy in nations with unstable currencies, like Argentina.

Read More: Bitcoin is Inching Toward Mainstream Use

If the bitcoin is to go mainstream, it has to move beyond the currency exchange game and start working like money. That may be why its promoters define it as "an innovative payment network and a new kind of money."

Only a handful of businesses currently accept bitcoins as payment. The biggest by far is Chinese online giant Baidu, but it also is accepted by OKCupid, Reddit, and WordPress. This holiday season, Gyft.com is allowing customers to use bitcoins as payment for gift certificates to major retailers.

The biggest boost for bitcoins so far - and a reason for its recent run-up in value - was the unexpectedly mild treatment of the bitcoin operation by a Senate committee last week. That was seen as a seal of approval from the US government - or, at least, a signal that heavy-handed regulation is unlikely in the near term.

And that sounds terrific for Bitcoin, except for one thing: If it's that easy, and that risk-free, to mint money, why aren't more entrepreneurs doing it?

The answer is: they are. The competitors of the bitcoin are already circling.

Also see:

America's Internet Speeds Are Embarrassingly Slow

Why Every Day Is Cyber Monday Now


No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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