Bitcoin has surged to values beyond $900 (as of November 27, 2013). It took a while for it gain attention but once it did, it caught on like wildfire. It was launched in 2009 but, it was in 2013 that things started moving to such an extent that even the US senate wanted to understand what it was all about.
Needless to say, Bitcoin is a fascinating innovation of open source computing. To understand Bitcoin fully, one has to understand three facets of it. The first is the macro-features of Bitcoin that make it an attractive alternative to VISA/MASTERCARD/PAYPAL for internet commerce, the second is Bitcoin's status as a separate currency and its implications as an investment destination and the third is the algorithmic innovation and behind-the-scenes computer science that makes the first two facets possible.
To get a grip on the first facet, we can visit Bitstamp.net to understand the features that make Bitcoin attractive to consumers and merchants. We would have to warn you to take the rest of the claims outside of "CONSUMERS LOVE BITCOIN" and "MERCHANTS LOVE BITCOIN" with a heavy dose of salt. Here's Alex Likhtenstein the owner of EVR (a club in Manhattan, NY) giving credence to Bitstamp.net's claims (quote: "Lower fees and no chargebacks are great. We also see deposits in our account less than 24 hours after the sale; credit cards transactions that go through banks usually take about three days.") In our opinion, the main attraction pushing the adoption of Bitcoin based commerce is the elimination of 2-3% transaction fees that credit card companies usually charge merchants.
To understand the second facet, one can visit multiple primers online including the ones we found especially useful from Bitcoin Wiki and Washington post.
Finally, for the third facet of technology, the Bitcoin Wiki page and the Wikipedia page on Bitcoin are excellent resources.
Our main question that couldn't be answered even after scouring the internet was: Why should Bitcoin be launched as a separate currency? Surely, the security features and the advantages of decentralization could be made available to merchants and consumers without having to launch a separate currency? After giving it some thought, it hit us! Executing and implementing the transactional features of internet commerce requires resources and resources cost money - be it the resources of a central authority (e.g. VISA/MASTERCARD/PAYPAL) or the resources of the open source community. There has to be some reward to the owners of the resources for making them available for the purposes of internet commerce. These rewards are in the form of make believe money (bitcoins). This way instead of charging the customers and merchants for enabling the transaction, Bitcoin community rewards itself using bitcoins. This is why Bitcoin is way cheaper than VISA/MASTERCARD/PAYPAL and other e-commerce vehicles.
This brings us to the next question, what value do bitcoins really have? Note that, currently, there is no pure bitcoin based economy. Merchants and consumers do not directly deal in bitcoins. Bitcoins are only used as a temporary medium of transmitting the dollars the merchandise is actually valued in. So, where is the current value of $900 coming from? It is only coming from the belief that a bitcoin has value and people continuing to believe it has value. This is exactly the same belief system that drives Gold prices.
The inherent value of bitcoin is what merchants and consumers are willing to pay for ensuring a successful transaction over the internet. The rest is all speculation!
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