There has been quite a bit of recent chatter about bitcoin - the independent, decentralized, open-source electronic currency created by an anonymous hacker (or hackers) in 2009.
Bitcoins are "mined" by computers that complete complex programming challenges. There is a limit on how many bitcoins can be "mined" over time, a built-in check against inflation. When bitcoin first appeared, they were traded and sold online through message boards at a rate of around pennies per bitcoin. Today, the currency is bought on massive online markets and can even be puchased for cash through third-parties at places like Wal-Mart and 7-11.
The current value of a bitcoin is somewhere around $100.
The reason bitcoin has been in the news lately is that the market has been going through some extreme fluxuations, what's being described as a bubble by many observers. Possibly sparked by a rush on bitcoins in Cyprus during the bank crisis there, the price shot up to more than $200, only to experience a dramatic sell-off and a dip in prices.
Much of the debate about whether or not bitcoin is in a bubble, or whether or not bitcoin is sustainable as a viable alternative to bank and government regulated currencies, stems largely from curiosity about a currency that, until now, has existed in obscurity among libertarian hackers and programmers-come-economists.
What's the need for a decentralized currency? There could be many, depending on your situation. For a citizen in Cyprus facing a very real bank crisis, bitcoin could be the easiest and safest place to stash your assets. For someone who wants to engage in illegal commerce (such as the purchase of drugs or weapons or, in most of the United States, gambling), bitcoin offers a way to engage in those transactions anonymously. For many bitcoin investors, such as the notorious Winklevoss twins of Facebook fame, who claim to currently own 1% of all the world's bitcoins, the reason to own them is pure speculation.
Prior to "Black Friday," April 15, 2011, the date that the major online poker sites stopped allowing American customers to cash in or out, many gamblers in the United States who played a lot of poker online had their own internet-based economy. Many of them kept their entire net-worth in various online accounts, believing that they were skirting the use of domestic banks and often exchanging online chips for cash or real-life chips in brick-and-mortar casinos and card rooms.
Once the Justice Department cracked down on those companies, however, online poker came to an abrupt halt, and American poker players either moved to states like Nevada or left for Canada. Today, bitcoin offers a glimmer of hope to American poker players who want to get back to playing online.
Using bitcoin to cash in and out on poker sites is possibly a way around the Unlawful Internet Gambling Enforcement Act, since it isn't yet clear how, if at all, the Justice Department can regulate the use of bitcoin on the internet.
For fans of horse racing, bitcoin offers a few opportunities for wagering on races. There are "virtual horse races" where gamblers can bet bitcoins on simulated races on a website, not unlike the video game Derby Owners Club. There are also message boards where bitcoin enthusiasts offer to place wagers at real racetracks on real races on people's behalf in exchange for bitcoins. Until the demand grows (as it has for bitcoin poker, which has already seen two major poker rooms start accept bitcoin), betting on races with this new currency will remain a grassroots, low-key affair.
The biggest horse race that bitcoin offers is betting on the currency itself.
Like the Winklevoss twins, most of the true gambling happening with bitcoin is the speculators who are purchasing the currency up, not to use in any real-world transactions but to hold and hope for a rise in value. So long as the primary use of the currency is speculation, it's hard for bitcoin to emerge as anything more than an investment vehicle and impossible to ever survive as an alternative to regulated currency for anyone other than those looking for the anonymity it provides. For gamblers anxious to play online and too impatient for the repeal of the UIGEA, bitcoin still remains a niche play. But the longer it takes to bring UIGEA down, or for states to figure out a workaround, the more interest and demand for bitcoin gambling will increase. Perhaps one day soon you'll see a sign at the teller's window at your home racetrack: Bitcoin Now Accepted.