Yahoo Finance is answering your most-asked finance questions in 2014, as searched on Yahoo.com. Coming in the number 10 spot, you asked, "What is bitcoin and how does it work?"
Well that's a doozy. If you go on bitcoin.org it says, "Bitcoin is a consensus network that enables a new payment system and a completely digital money." It then goes into another paragraph that buries the lead – that bitcoin is pretty much like cash for the Internet.
So let’s back up. At its most basic level - Bitcoin is an online currency. If you’re a serious finance type, you may note that it behaves slightly like a commodity, but for the sake of explanation, it’s best to think of Bitcoin as an online currency.
No one is precisely sure who created it, but it's steeped in a sort of anarchic "damn-the-man" legend because it's the first modern currency not tied to a central bank or a government. Proponents say that makes it the currency of the future.
So how does it work? Once upon a time, you could only get bitcoins by "mining" for them, i.e. computer nerds would sit around solving complex computer things and be rewarded with Bitcoins. Back in the day, they were worth practically nothing. Now, a bitcoin is worth roughly $350. Earlier in the year, that value came close to $1,000.
If you're not a computer nerd - you can still use Bitcoin. While it was once the currency of shady online dealings, Bitcoins are now being accepted by a growing number of mainstream businesses – think Expedia (EXPE), Overstock (OSTK), Paypal (EBAY) and Zynga (ZNGA).
You can go about getting them a few different ways. Several online exchanges allow you to purchase them. You can accept them as payment for goods or services. And lastly – you can avoid the internet entirely by going to a Bitcoin ATM, though be forewarned, there aren’t many of these in the U.S.
If you want to know if Bitcoin is worth the hype, that's a separate question.
A number of investors are hugely bullish on the currency – notably Marc Andreessen. The infamous Winklevoss twins have a Bitcoin-based ETF listed on the Nasdaq. Even former Fed Chairman Ben Bernanke seems excited about it, or at least as excited as Ben Bernanke ever gets. He said the currency “may hold long term promise."
There are plenty of bears, too. Legendary investor Warren Buffett calls Bitcoin a “mirage” and warns investors to “stay away.” The SEC has warned investors to beware as well.
What is Bitcoin?