Yesterday a Bitcoin Was Worth $266, But Don't Buy Into the Bubble

You might have been hearing a lot about Bitcoins recently, and if you're like us, you might be thinking: What the heck is this thing, and why does everyone seem to care so much?

The explanation starts with a hacker, a McDonald's napkin, a coinage that looks like something you'd use to operate the skeeball machine at Dave & Busters, and an economic meltdown in Cyprus. Many of these details we can verify; some we can't. But this much we know: The cryptic little currency at the middle of it all, the Bitcoin, is either the most clever monetary revolution of the 21st century, or the overhyped (and shady) equivalent of the Dutch Tulip Bubble of 1637.

Confused? Read on. It won't cost you a single Bitcoin.

Bitcoins Lose 50% Value in 24 Hours

Bitcoins are a decentralized digital currency. That means no government nor any central bank backs it. It's based on an open-source, peer-to-peer Internet protocol. Recently, their value has gone through the roof — and also, conversely, through the floor. In the past four weeks, Bitcoins quadrupled in value. Then came Wednesday, when the value of a single Bitcoin plummeted from a high of $266 to a low of $105. It ended the day at $145, which is still up 1,000% over the last three months. Can you say "roller coaster?"

It seems like everyone wants to get into the Bitcoin act: not just investors and foreign exchange mavens, but hackers trying to manipulate the currency's value, along with thieves, drug dealers, and anyone trying to hide their illegal money-making activities — Bitcoins are nearly impossible to trace. And to be sure, the currency has an occluded history.

Bitcoins are the invention of a cryptographic expert who goes by the pseudonym Satoshi Nakamoto. According to cyber legend, he's actually a hacker and invented the Bitcoin in 2009 after he sold a vintage McDonald's paper napkin online and the buyer defrauded him out of several thousand dollars. (As far a eMyths go, I'm lovin' it.)

Before you start dreaming of the killing you can make on the Bitcoin market, keep in mind that its recent volatility is likely the result of a very nasty bubble. On Tuesday, Slate writer Farhad Manjoo wrote, "Partly due to its growing legitimacy as a currency but mainly because of speculators like me, the value of Bitcoin is entering a bubble phase — its exchange rate with real-world currencies is hiking up at an incredible, likely unsustainable pace." And InvestmentNews puts it more bluntly: "The favored digital currency of disgruntled Europeans, cyberpunks, gold bugs, and good, old-fashioned nerds appears to be wilting like a tulip."

Part of the Bitcoin speculation was fueled by Europeans who, following the Cyprus bank crisis, turned to Bitcoins as an alternative to the Euro and other currencies manipulated by central bankers. You can invest in it, of course, but it turns out you can also buy stuff with it. As Business Insider reports, the crazy fluctuations have meant that some merchants who take Bitcoins, such as BTCZone, haven't been able to keep up with the changing value. On Tuesday BI highlighted this disparity, noting that "[BTCZone's] iPhone 5 now costs $1,158.76; the iPhone 4, $717.44. Amazon price: $702 and $445, respectively."

Will Bitcoins Ever Become Widespread Currency?

It may be a long time before the Bitcoin catches up to any government currency in popularity or stability, as there's a lot about it that may scare off everyday consumers. CNET reports that nearly a quarter of a million dollars was stolen in a virtual Bitcoin heist last year. And a hack at Instawallet earlier this month forced the Bitcoin wallet company to suspend its service indefinitely.

To boot, landing a Bitcoin requires more than walking over to the bank and making a withdrawal. As Manjoo describes, buying a Bitcoin involves a multi-step process where an out-of-state wire transfer goes to a company that acts as an intermediary with an online Bitcoin exchange. Manjoo made his transfer to LocalTill, which he describes like this: "It's something like PayPal, except LocalTill isn't tied to your bank account or credit card, and instead deals only in cash." And by the way, the LocalTill website looks like something designed by a 10 year old, or a fraudster.

So are there Bitcoins in your future? In the Silicon Valley, there's already a rush of startups offering Bitcoin-related services. But it's hard to wrap one's head around the notion of a currency without a bank or a nation — or even a creator who's willing to show himself — making for a sound investment. But we suppose if you're a drug kingpin trying to hide your cash, it's worth a look.

Photo credit: Red Orbit