Since its five-cent debut in January 2009 during the peak of the global economic crisis, shares of the virtual currency startup bitcoin had soared to $250 - an increase of roughly 250% from the start of this year.

However, on Wednesday the company's stock swan-dived 40% to $156 per share.

Bitcoin is based on an algorithm produced by a software development group going by the name Satoshi Nakamoto. It's based on open-source software, allowing for secure transactions online.

It's not yet clear whether the bitcoin phenomenon is another pyramid scheme or a true viable alternative currency. Still, one reason for its popularity has been angst about traditional banking in the wake of the Cyprus bailout, in which the government dipped into private bank accounts to fill a hole in its finances.

The bitcoin economy has been making inroads in Israel, too, though only a handful of businesses have been accepting the virtual currency. These include a multimedia designer, a Balkan-style klezmer music band and a hospitality tent in the Galilee, though bitcoin makes up only a small portion of their sales.

Two months ago Bar-Kayma, a vegan restaurant/bar cooperative in Tel Aviv's Florentine quarter, began accepting bitcoin. "We did it as a good-will gesture," says Ofir Avigad, Bar-Kayma's founder. "We're keen on the notion of an alternative economy and defying the old order. We see this as an opportunity to generate a diversity of currencies that takes away a bit of power from the banks."

Instituting payment in bitcoin wasn't complicated, according to Avigad. "All I needed to do was put the QR code on the menu," he says. "Then anyone choosing to use bitcoin has the application that enables payment, and the waitresses have software in our computers to accept it. It’s like paying with a credit card. The process might take two and a half times longer, but it's still just a matter of seconds."

Keeping the currency buoyant

In the past month, 25 purchases at Bar-Kayma have been made in bitcoin. "A meal costing NIS 50 to NIS 60 costs up to 0.2 bitcoin," says Avigad. "Beer costs 0.1 bitcoin."

Since the currency isn't recognized by Israel's banking system, revenues in it are still registered by Bar-Kayma as cash for tax purposes. "The computer has a 'paid in bitcoin' button, and on each such transaction I put cash in the cash register," says Avigad. "At the next stage we want the ability to record bitcoin currency in our computer and leave some in reserve."

Avigad notes that there have been $25 drops in the currency – one-fifth of its value – 10 times in the past two months, but people haven't given up on it. "Many people have invested in the means for generating bitcoin and have no interest in the currency sinking," he says. "It's an industry on the rise. Six money changers now convert bitcoin into shekels, four of whom started in the past month." Another hedge is that bitcoin is only used in small amounts, Avigad says.

Roy Hershkovitz, owner of the Mooz T-shirt store, was much more spontaneous in his decision to honor bitcoin. "I started looking into bitcoin a month ago. By coincidence, someone came into the shop and asked if we accepted bitcoin. I told him, 'I don't know if you're being serious,' but I thought it over for a few seconds and answered: 'Sure, why not?' So that's how the sale was done."

Hershkovitz then put up a large sign saying that the store accepts bitcoin, though it hasn't made much of a splash. "People who know about it flash me the thumbs-up sign but pay in shekels," he says, adding that some people are probably hoarding the currency because its value is on the rise and are looking to make a profit. "As long as the currency is on the upswing it doesn't pay to spend it," Hershkovitz says. "We'll see real business activity when it stabilizes."

The tax authorities are another issue.

"I'm forbidden to accept bitcoin in payment, so I treat it as cash," Hershkovitz says. "Technically, I register the sale to the customer in shekels and the bitcoin transfer as a private individual. I pay tax and VAT on whatever I bring in, and for the time being the state hasn't interfered. From a technical standpoint it's a transfer of information, not an exchange of money, so legislation would be needed for any sanctions to be imposed."

Emotionally attached

Tel Aviv veterinarian Rafi Kishon started accepting bitcoin two weeks ago, when a client proposed paying in the currency. "My initial reaction was that it's just virtual money, so who stands behind it? But I like being anti-establishment, so I agreed," he says. "It's a protest against the banks to give control back to the masses rather than being controlled by a tiny group of politicians and tycoons."

Kishon, however, doesn't plan to advertise the fact that he honors bitcoin. "I'm not sure it's a good idea to have a large portion of my income in bitcoin," he says. "I also don't guarantee I'll accept this currency in all circumstances, but I feel emotionally attached to the idea. On an intellectual level, I feel it has a chance to succeed."

Hetz Ben Hamo, who runs the Hetz.biz website storage service, has been accepting bitcoin for more than a year. "The idea is to let people pay how they want without needing a third party like a bank or credit card company," he says. Ben Hamo says he sometimes pays for services abroad in bitcoin, too.

So what kinds of people pay in bitcoin?

"The more technically-minded, professional and savvy a person is, the more he'll take an interest. Between 10% and 20% of my customers pay in bitcoin," Ben Hamo says, before adding that this percentage has shrunk recently in tandem with the currency's rise. "People don't want to let go of the currency when its value is rising," he says. "As with gold."