2. That's where financial institutions come in. They sit in the middle of every online transaction, and confirm that, yes, this money hasn't been spent before. These intermediaries add trust to the system, but this trust doesn't come cheap: They typically charge 2.5 percent per transaction.

3. Bitcoin's genius is it confirms transactions with a decentralized network of people who don't charge fees instead of financial institutions that do. Who are these people doing something for nothing? Well, they're Bitcoin miners, and they're not actually working for free—they're getting paid with new bitcoins.

For the uninitiated, Bitcoin is a virtual currency with a strictly limited supply that only grows at a slow, preset rate. Basically digital gold. And like actual gold, the only way to get new bitcoins is to "mine" them—but by solving computationally-taxing math problems, not with a pick and pan. In this case, though, the invisible hand is plenty easy to see. Solving these math problems doesn't just win new bitcoins for individual miners. It verifies all Bitcoin transactions for the entire network.

4. So why do people bother mining for bitcoins? Well, the question answers itself: because it's profitable, and they expect it to be even more so if Bitcoin keeps going up in value. This last point is critical. Bitcoin mining has become incredibly competitive the last few years—just look at the supercomputer fortresses in Iceland that use geothermal power and Arctic air for cooling—and that competition drives down margins. That means miners are really counting on Bitcoin to continue its journey to infinity and beyond, to keep rising forever.

5. When the price of money goes up, the price of everything else goes down. It's called deflation, and it's death for an economy. People put off buying things when they'll cost less tomorrow than today. Companies put off investing when their customers put off buying. And people who borrowed money are stuck trying to pay debts that don't change with wages that do—and have fallen.

But Bitcoin's deflationary bias is a feature, not a bug. It's why miners want to mine, and why there are no transaction fees. In other words, Bitcoin can't work as a technology without deflation. The question is whether Bitcoin can work as a currency with it.

Probably not. At least not when there's this much deflation. You can just how much there's been in the chart below from Peter Coy. It shows how much prices would have had to fall in 2013 if they'd been set in bitcoins instead of dollars.

Now, to be fair, prices aren't set in bitcoins, and never will be. As Joe Weisenthal points out, it doesn't matter how much prices fall in bitcoins as long as prices are set in dollars—it won't hurt the real economy. But what about the Bitcoin economy? Will Bitcoin deflation hurt it? Almost certainly.