Bitcoin Basics: The Cool Virtual Currency Gets Real

NEW YORK (MainStreet)—So what's wrong with actual U.S. dollars? Meet the twenty=first-century cool currency, Bitcoin - the virtual, peer-to-peer currency that operates without the backing of any nation state and which is making a run at becoming the hipster currency du jour.

"Bitcoin is the online equivalent of a bag of cash," said Kevin McIntyre, an economics professor at McDaniel College in Maryland. Two distinctive facts about Bitcoin: anonymity is baked into the system ("it's almost impossible to match up a person with a transaction," said McIntyre) and almost all transactions are irreversible. That latter fact appeals to merchants - who are pestered by "chargebacks" when credit card companies void a transaction and leave the merchant out of the money.

A third fact: Bitcoin transactions involve negligible transaction fees, typically under 1%, compared to over 3% for most credit card transactions.

Do the math. There is definite appeal of Bitcoin to merchants.

"We like Bitcoin a lot, especially for international orders," said Alex English, a partner in ProtoParadigm, an online retailer that sells supplies for 3D printers. "We know we would have chargebacks and that is peace of mind."

Peace of mind for a retailer doesn't necessarily mean peace of mind for consumers. Plunging into Bitcoin is not without risk. In this spring's Cyprus currency crisis - when the government there suggested it would balance its books simply by grabbing cash out of bank accounts - Bitcoin vaulted from under $100 per unit to $260 in a few blinks of an eye.

It has since slid down to under $100.

What spawned Bitcoin in the first place, though, has been distrust in traditional currencies, said Jacqui Dunne, who authored Rethinking Money: How New Currencies Turn Scarcity Into Prosperity (Berrett-Koehler, 2013). She added that people who have been burned in the banking crisis of the last decade - or the economic turmoil in countries like Greece and Spain - "are asking what else can we do?" For some, she suggested, Bitcoin, with its lack of government ties, looms large.