Could you explain how on earth bitcoins work?

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Bitcoins exploit the same basic principal underlying our regular ‘fiat currency’: that it’s worth what people believe it is worth. U.S. paper dollars used to be backed by gold held at Ft. Knox and at the Fed Reserve banks, but now it’s just numbers on paper. The fact that we all believe it is worth something is actually what makes it worth something.

Bitcoin ‘production’ is based on a defined mathematical system that limits the total number of bitcoins that exist, and that provides methods for validating the authenticity of bitcoins you have.
Equations are provided that have a specific number of possible solutions, each corresponds to one of the possible bitcoins. If you’re the first person to achieve a particular solution then you own that bitcoin. That bitcoin can be idenitifed by some key portions of the solution and if you spend a bitcoin those key bits are sent around to validate the transaction.

A few features made/make bitcoins appealing.
One is that they are anonymous and independent of governments and their oversight. This makes them attractive for money laundering which is the most dangerous feature of them IMHO.
Some people like bitcoins because they appeal to an anarchistic anti-government ideal.
Another appealing feature is/was that anyone can ‘mine’ bitcoins by downloading the formulae and crunching the numbers on a computer. The formulae are such that the first solutions achieved are easy and subsequent solutions get progressively harder to solve. The early solutions could be achieved cost-effectively with an ordinary desktop domestic computer in a few hours. At some point the available solutions became hard enough that your computer would use more electricity to compute a solution than the bitcoin was worth (they were worth not so much at that time). Along the way folks figured out how to use the prodigious number crunching capabilities of the graphics cards in their computers to solve the solutions faster, and a new wave of bitcoins were mined.
In the meantime bitcoins have become more valuable, and people continue to try to figure out how to make them in a cost-effective way. These days the solutions are very difficult and word is that the only cost effective way to mine them (i.e. it takes less electricity cost than the bitcoin is worth) is to use custom FPGA computer chips to make the computations.

One of the appealing features, anonymous and independent of government oversight, is also its weakness.

2 months ago an exchange completely disappeared taking $350 million in bitcoins with it. Someone is laughing all the way to the real bank.

Mt Gox exchange $350 million in Bitcoins disappears.

While they are hard to “mine’ now, there is no guarantee they will be hard to mine in the future. If there is economic incentive, custom processors, faster cores, cheaper equipment , etc. will prevail. Also the cost of entry is low. You will soon have “miners” in India working overtime while they are getting paid to man their customer service call bank stations.

It is a risky business.

Don’t get your intro here, fluther wants to keep you and your money safe, the consensus here a while back was that bitcoin was doomed. You’ll be told of the evils of the world and how bitcoin is only used by those unsavory characters to get their drugs. Because anyone who wants to be anonymous is up to no good, except for those good folks who don’t want advertisers and the government to know what they’re up to, those people are ok. ~

Just read a couple different perspectives and see what you think, here’s some different options.

- There’s the basics
– Perspectives from the Fed, who will determine more about the future viability of the currency than most
– Perspectives of an economist who says there was a bitcoin bubble, but looks beyond

It’s not like there’s a lack of opinions, just try to find those rooted in fact, experience, or expertise.