If You've Ignored Bitcoin Up Until Now, This One's For You

Enlarge this image toggle caption Frank Jordans/AP Frank Jordans/AP

One of Bitcoin's largest trading exchanges shut down Tuesday, and you probably couldn't care less.

So what if rumors are circulating that millions of dollars' worth of Bitcoin are stolen? If you don't understand Bitcoin in the first place, it's hard to figure out why this matters. So we're using this as an opportunity to go back to the basics: what this b-word means, where it came from and why it just might matter.

The Birth Of Bitcoin

This is the stuff of a Dan Brown novel.

Bitcoin emerged from the work of Satoshi Nakamoto. The hook is, no one actually knows who Satoshi Nakamoto is. (It's inaccurate, of course to say "no one," but the people who do know aren't talking.) In 2008, he/she/they released a detailed concept for a self-regulating crypto-currency and wrote a whole bunch of incredible code to support it. But Satoshi Nakamoto stopped responding to emails in 2011. It's been a wild goose chase ever since.

Satoshi Nakamoto's concept is that of a democratically organized currency: no government regulation, no centralized bank. It's been embraced by, among others, libertarians trying to undermine monetary regulation policies and entrepreneurs trying to avoid financial corruption in developing countries.

While it's a difficult concept to grasp — we'll get to that in a second — it's worth at least getting familiar with because Bitcoin will continue to be covered regardless of whether the media understands it, says Vili Lehdonvirta, a research fellow at the Oxford Internet Institute.

"It's the perfect story. It has the mysterious background, started by a pseudonymous character," he says. "As humans, we like to dream about how things could be different. ... I think that for many people Bitcoin allows them to dream those dreams."

Not to mention, there's a lot of money involved. After all, it fundamentally is about money. Think of this as a Hollywood "inspired by a true story" blockbuster waiting to happen.

OK, I'm Hooked. So What Is It?

In the great words of Shrek, Bitcoin is like an onion: It has layers. At its most superficial, it's a virtual currency, allowing you to transfer money to other people anywhere in the world without any physical exchange of dollar bills — just as you can with, say, PayPal or online credit card payments.

But the system behind it is much different. There's no central organization, like a bank or government treasury, organizing and keeping track of it. The bookkeeping is completely decentralized and is supposedly impossible to bamboozle, the way a bank could cook its books without anyone else looking. There's no intrinsic value, the way you could make a necklace out of gold, or government backing, the way modern "fiat" money has. And it's completely anonymous — you never have to give anyone your name or Social Security number or credit card number.

The whole process is made much more complicated by the technical aspects of how it works on a molecular level. There's lot of encryption and computational power involved. I don't pretend to be an expert in it, so I'll refer you to the source: Satoshi Nakamoto's original whitepaper.

Trials, Tribulation

Ready for more of the Hollywood blockbuster plot line? Bitcoin's intrinsic anonymity makes it a prime currency for shady dealings. A Texas man who allegedly ran a Ponzi scheme used Bitcoin. An online black market called Silk Road, which the FBI shut down in October, used Bitcoin.

Silk Road got back into business shortly after, but earlier this month, hackers allegedly exploited a Bitcoin glitch to steal millions from customers. The value of Bitcoin fluctuates wildly, at one point dropping from $1,200 to less than $600 per coin after the Chinese government denounced it.

On top of all these, the failure of one of its largest exchanges, Mt. Gox, led some to speculate that this would ruin Bitcoin's legitimacy for good. But William Luther, an economics professor at Kenyon College in Ohio, says this might actually help Bitcoin in the long run because it forces people away from this first-generation business to more sophisticated exchanges.

"Now there will be an air of professionalism surrounding Bitcoin that wasn't there before," Luther says.

Bitcoin is also accepted by a growing number of businesses — including Overstock.com, two casinos in Las Vegas and a Subway sandwich shop in Allentown, Pa. Overstock's executive vice chairman, Jonathan Johnson, says the Mt. Gox news won't affect whether the company continues to accept the currency.

In fact, he says, Bitcoin has been great for business. It brings in new customers and prevents online shopping fraud. And Overstock converts bitcoins to dollars immediately after payment, so the fluctuations don't really affect the company.

It also has cut Overstock's credit card transaction fees, Johnson says. That's a benefit that could very well appeal to everyday consumers, too.

We recommend: NPR reporter Alan Yu's How Virtual Currency Could Make It Easier To Move Money

The Bigger Benefit

This stumbling and growing revolution has done something remarkable: In order to truly wrap your head around the concept, you are forced to contemplate how money works.

Is assigning value to a piece of paper any different than assigning value to encrypted electronic signals? Can we have a sustainable currency without the backing of powerful people assuring us that our money's good? Are there ways to secure money outside of banks?

Luther, the economics professor, calls himself a "Bitcoin skeptic" — he's not convinced it will last — but he says questions like these are worth the ride.

"Bitcoin has brought the question of alternative currencies back to the table, and I think that's a good thing," he says. "Money is a very old concept, and it's difficult for me to think that there's not a better way to make transactions."