Bitcoins are the newest form of currency, and they’re also the most misunderstood. What exactly is a bitcoin? It’s a digital currency that’s only been around for four years and that was developed by an anonymous hacker.

bitcoins

Bitcoins are the newest form of currency, and they’re also the most misunderstood. What exactly is a bitcoin? It’s a digital currency that’s only been around for four years and that was developed by an anonymous hacker.

Essentially, it’s a packet of data that’s created digitally and is mined (like gold, except in the digital world) over an Internet connection using computers designed to do it. Bitcoins can be turned into cash through online vendors like BitInstant or Coinbase. Also some vendors like WordPress and Reddit will accept them as actual currency for payments.

But what’s staggering about this new currency is how quickly and suddenly its value has exploded. CNN reports that bitcoins have leapt into the spotlight because they’ve become a safe place for investors in Cyprus to stash their cash. Citizens of the tiny island have been struggling to get to their cash stored in banks in the country. Many investors are still facing major losses, even though a deal was said to have been reached.

Since Cyprus started talking about using bank deposits as part of the International Monetary Fund and European Union bailout, the value of a single bitcoin exploded by 87 percent. They’re now worth around $88, compared to their value of $47 back on March 16. Those numbers come from Mt. Gox, which is the central trading exchange for the currency. And in July 2010 when Mt. Gox began keeping track of bitcoin prices, they were worth just 5 cents.

To put those numbers in perspective…. The S&P 500 today has hit an all time new high. The S&P 500 with dividends re-invested has returned 117,000 percent since 1943. In 1943 the allies started to turn the tide in WWII,  Cyprus was still a British colony, and the investor of the internet was not even born. Bitcoins have produced the same return in only a few years.

In addition to the actual value of the bitcoin, trading volume has also skyrocketed. Mt. Gox told CNN that between 60,000 and 110,000 bitcoins have been trading every day in recent weeks. That’s at least double, if not triple the number that changed hands daily just weeks ago.

Meanwhile, gold prices have been falling dramatically. Although gold was once considered a safe haven for investors, it might not be long before half the industry becomes worthless, according to analysts at Bank of America Merrill Lynch. So are bitcoins the new safe haven for investors? Or are will the bubble burst?