Everyone has heard about Bitcoin by now, especially its ability to rise (and fall) by thousands of dollars within a single day. Interest in the virtual currency, which was once confined primarily to Wall Street and Silicon Valley, has now reached a fever-pitch even among average Americans. 

So what exactly is Bitcoin and is it something you should think about? Here are answers to some key questions so you can sound knowledgeable about the subject when it inevitably comes up at your next holiday party.

What Is Bitcoin?

Bitcoin is a virtual, or "crypto" currency, which is to say it exists only in digital form.

It was created in 2009 by a coder or coders using the alias Satoshi Nakamoto. The idea was to create a peer-to-peer system of commerce independent of banks, governments, and other financial institutions, says Matt Mitchell, a tech security researcher who founded CryptoHarlem, a foundation that teaches digital security techniques to marginalized communities.

While Bitcoin may be the best-known virtual currency, it is just one of thousands, according to Mitchell. Others you may have heard of are Litecoin, Etherium, Zcash, Ripple, and Monero.

Why Would Anyone Use It?

One reason many early adopters liked using Bitcoin was because they could buy and sell it anonymously. In its early days the currency gained notoriety as it was often used for illicit purposes, such as to pay for sex and drugs, says Mitchell.

Bitcoin also had a particular practical benefit as well. It allowed users to make payments online faster and more cheaply than they could through banks, a situation that has very recently changed as banks have moved to faster payment processing.

Some people like using Bitcoin as a way to buy and sell stuff. A number of retailers, including Expedia, Overstock.com, and Whole Foods, accept Bitcoin as payment. But because of the volatility of its price, using Bitcoin for day-to-day transactions has become trickier, says Justin Brookman, director of consumer privacy and technology policy for Consumers Union, the policy and mobilization division of Consumer Reports.

But perhaps Bitcoin’s chief draw right now is its surging value and attractiveness as an investment, says Mitchell.

The founders of the currency capped the number of Bitcoin that can be issued at 21 million, making it inflation-proof. More than that can’t be created arbitrarily.

Just this week the Chicago Mercantile Exchange opened a market where investors can now place bets on Bitcoin futures. Sixteen million Bitcoin are in circulation at present.

How Do You Buy Bitcoin?

There are only a few methods that are practical for most people.

One is to pay cash money to someone who owns Bitcoin and have that person transfer it to you. The process is similar to the way peer-to-peer cash payment systems such as Venmo operate. The seller accesses his Bitcoin wallet—an app on his laptop or smartphone— which contains the currency. He then selects the number of Bitcoin to transfer to you and hits the send button. You get a code representing the Bitcoin and you add it to your Bitcoin wallet.

Another option is to go to an online cryptocurrency exchange such as Coindesk, GDax or Kraken. You tell the exchange how much Bitcoin you want to purchase and it walks you through the process. Keep in mind that you don’t have to buy a whole Bitcoin—you can buy a fractional share.

If you have a small business, you can also set up the wallet that works with Bitcoin or other cryptocurrencies and advertise that you accept Bitcoin as payment.

What's 'Mining' Bitcoin?

Mining is how new Bitcoin are created. It generally requires special hardware and software, so it's not practical for most people.

The idea is to join a network of computers that processes complex mathematical problems. The computers that solve the most problems first are the ones that usually earn the most Bitcoin. Again, this is not for average people.

It All Sounds Very Risky

It is. The biggest risk for investors is that the value of Bitcoin has risen so much that the market is now considered in a bubble. That volatility was clearly evident in how the currency traded this week. 

After soaring to about $20,000 early in the week--up from about $1,000 at the beginning of 2017--one Bitcoin (BTC) plunged to about $15,000 on Thursday, then to below $11,000 on Friday before recovering to about $12,000.

There are other risks, too. Bitcoin doesn’t offer any consumer protections and isn’t overseen by a regulator equivalent to the Federal Deposit Insurance Corporation, which protects money in banks and savings institutions. There’s also no remedy from a third party in the event of fraudulent transactions. The Consumer Financial Protection Bureau has warned consumers about the risks of Bitcoin transactions and investments.

While there are few regulations of Bitcoin in place, some states are taking steps to regulate currency exchanges selling Bitcoin, says Christina Tetreault, staff attorney for Consumers Union, the policy and mobilization division of Consumer Reports.  

New York, for example, has instituted a “BitLicense” that requires exchanges to hold a surety bond or trust account in United States dollars for the protection of their customers should they lose money. Coincenter, a cryptocurrency advocacy firm based in Washington, D.C., offers a rundown of states and their regulations.