Bitcoin: What Is It and What's In It For Me?

Like gold, the value of an individual bitcoin on any given day varies, so buyers should beware the hype.

While Bitcoin seems to gathering virtual steam -- and could soon be dispensed at some ATMs or accepted at your local coffee shop -- experts warn that the currency's instability and hype could soon leave bitcoin owners with a big hole in their online pocketbooks.

Bitcoin is a form of virtual money that can be used to buy or sell real objects: kitchen utensils on, tickets to the Sacramento Kings basketball team, or even contraband like drugs, guns or sex. In past, some of those illegal items could be purchased on the now-closed virtual marketplace, Silk Road.

Bitcoins were invented in 2009 by a secretive software developer that calls himself Satoshi Nakamoto; some believe he is a U.S. programmer. Additional coins are "mined" by having computers solve increasingly difficult math problems. Nakamoto made it so the number of bitcoins that could be mined would be limited 21 million coins. As of Feb, 2014, there are about 12.4 million bitcoins in circulation, according to Blockchain.

Bitcoins are traded over the Internet and like gold, the value of an individual bitcoin on any given day varies. The advantage of bitcoins is, like cash, they are passed directly from buyer to seller without going through a bank, clearinghouse or government agency. That makes bitcoins ideal for keeping transactions secret, while avoiding taxes at the same time.

Bitcoin's popularity has led to some businesses to start accepting it as a legitimate form of payment including Tiger Direct electronics, Richard Branson's Virgin Galactic space flights and marijuana dispensaries in Washington State.

"The idea is to have an economy that is truly free," said Edward Castronova, professor of telecommunications at Indiana University and author of the forthcoming book, Wildcat Currency: The Virtual Transformation of the Economy.

"And bitcoin delivers on that," he said.

The problem is that bitcoin is that owners still face big risks, according to Castronova.

"There are certain features that make it great for secrecy people and digital enthusiasts, but I don't see much reason for the average person to get excited about bitcoin in their daily lives," Castronova said. "Right now it's harder to use than the dollar."

To purchase bitcoins, users buy them from one of several digital exchanges, then set up a software program on their computer that operates like a virtual wallet or pocketbook.

In the past few days, Tokyo-based bitcoin exchange Mt. Gox has frozen withdrawals because it hasn't been able to fix a software bug that could allow thieves to steal its customers' digital money. For now, bitcoin owners are stuck and many worry their money could have evaporated. While the value of bitcoins on some exchanges is more than $570, Mt. Gox bitcoins' value dropped to below $100 this week for the first time since July, but they have no real value since they can't be traded.

Such a drastic drop in value is tough-luck for bitcoin owners because the currency isn't backed by a government guarantee. That's a big difference between dollars and bitcoins, according to Joseph Bailey, professor of information systems at the University of Maryland.

"Most of us transact in U.S. dollars and don't think how important it is in guaranteeing the transaction," Bailey said. "One of the issues of bitcoin is the volatility of how much it is worth."

Even for bitcoin traders on the so-called dark Web of illicit online marketplaces, the advantage of secrecy may be losing out to the fear of rip-offs. In October 2013, FBI agents shut down the Silk Road marketplace and took its $3.5 million worth of bitcoins. In November, the similar Sheep Marketplace lost $6 million to hackers, while last week, a revived Silk Road claimed it lost $3.5 million in bitcoins it had in escrow to hackers, according to CNN.

Indiana's Castronova believes that bitcoin is an example of a virtual currency akin to frequent-flyer miles, loyalty programs or other imitators like "Doge Coin," that are experiencing a lot of hype right now, but just aren't quite ready to replace dollars, euros or Chinese yuans anytime in the near future.

"Bitcoin is Myspace," Castronova said, referring to the nearly defunct social media site of the early 2000s. "There's a Facebook coming, but I don't think it will look like bitcoin."

The world's first Bitcoin ATM, owned by the company Bitcoiniacs, goes live inside a downtown Vancouver coffee shop.

Mark Zuckerberg

May 15, 2012 --

Happy birthday, Mark Zuckberg. The Facebook founder and chief executive officer turned 28-years-old Monday. It's a big week for Zuckerberg, whose company is primed to launch the most anticipated IPO of the year -- a move which could value Facebook at nearly $100 billion. The average S&P 500 CEO in America is twice Zuckerberg's age, according to the Associated Press. Zuckerberg is at the forefront of a new generation of young, tech-minded CEOs who have found their fortunes and major successes as other 20-somethings are still getting their feet wet in their chosen careers. Here we take a look at other young, notable entrepreneurs whose success came well before their first gray hair.

David Karp At age 25, Tumblr founder David Karp created a fast-growing international social media, blogging platform. Using money he acquired as a software consultant, Karp began Tumblr in 2007, when other blogging platform had already been widely available. As Karp mentioned in an interview the TechCrunch, Karp saw an opportunity to create a medium for digital postings that were more substantial than a tweet but less verbose than a full blog post. Tumblr has since taken off among users, and Karp has since built a fortune for himself, with an estimated $40 million in funding.

NEWS: Occupy Wall Street: Why It Chose Tumblr Follow DiscoveryNews on Tumblr

Gurbaksh Chahal No one could ever accuse Gurbaksh Chahal of being an underachiever. By the time he reached 25 years old, Chahal, now 29, had already successfully founded and sold two companies, the first of which he began at age 16. Chahal even became a millionaire the same year he legally became an adult. And he wasn't done yet. Chahal currently is at the helm of RadiumOne, an online advertising company that "harnesses social interaction data to fuel new audience expansion." His net worth is upwards of $100 million.

Matt Mullenweg Anybody who's ever read, written or commented on a blog has probably at some point run into Wordpress co-founder Matt Mullenweg's handiwork. The now 28-year-old Mullenweg helped start Wordpress in 2003 and dedicated himself full-time to the platform beginning in 2005. According to VentureBeat, WordPress today is behind around 15 percent of the highest-trafficked site on the Internet. Mullenberg today has a net worth of around $40 million.

Naveen Selvadurai Foursquare's Naveen Selvadurai probably wasn't looking to make a fortune when he and co-founder Dennis Crowley devised the social GPS-tracking site. Instead, he intended to use it simply to explore New York City. Founded in 2009, Foursquare now supports some 20 million users. Selvadurai at 28 has also amassed a fortune estimated to be around $80 million.

Andrew Mason At 31, Groupon CEO Andrew Mason might seem like a senior relative to other entries in this slideshow, but Mason's success derives from a company he helped found in his late 20s. In November 2008, Groupon launched as a means of connecting urban residents to local merchants. The site began by offering users the ability to collectively buy into a discount from a local merchant in the Chicago area. The business model took off, leading Groupon to expand beyond Chicago and spawning a number of copycats. Groupon's seemingly overnight success led it to become one of the fastest company's in history to reach the billion-dollar valuation mark, thanks in no small part to Mason's contribution.

Pete Cashmore At age 26, entrepreneur Pete Cashmore has an estimated net worth of $80 million. Cashmore amassed his fortune by making a name for himself with a website that follows the kinds of products created by these other entrepreneurs on this list: Started in 2005 when Cashmore was a teenager living in Scotland, is now among the highest-trafficked blogs online and Cashmore boasts one of the most popular feeds on Twitter.

Justin Kan Justin Kan is the face of what might be the most popular live-streaming website online: However, the 28-year-old Kan's successful site can also be credited to cofounders Michael Seibel, Emmett Shear and Kyle Vogt. The four hatched the site in 2007, with Kan beginning a constant video stream from a webcam attached to his hat. Broadcasting his life through a never-ending stream over a period of eight months spawned the term "lifecasting."

Ryan Allis and Aaron Houghton Ryan Allis and Aaron Houghton might not be household names. But since 2003 when both were just teenagers, the duo has steadily built a successful e-mail marketing platform that pulled in $40 million in revenue in 2008. Even before they built iContact, both of these young men had started businesses that likely informed their future success. At age 11, Allis began a consulting business to teach senior citizens how to use computers. Houghton started not in tech, but instead in bike repair, looking for spare parts in local junkyards to power his early business.

NEWS: Social Media More Addictive Than Booze, Cigs