This Week in Bitcoins: All time highs for BTC

What is a bitcoin worth? For the growing band of people who follow the virtual currency, the answer is self-evident: The price of a bitcoin this week surpassed $780, a record. On Jan. 1, you could have bought a bitcoin for merely $13.50. At Friday afternoon's price of about $730, that bet would have grown about 54-fold. The bitcoin phenomenon, and the technological innovation that made it possible, is interesting—but for investors large and small, the more pertinent question is whether they should buy the virtual currency or avoid it. Is bitcoin another flash in the pan? Or are the early investors onto something -- that will make them rich? WSJ's Jason Bellini has #TheShortAnswer. Unlike traditional money, bitcoin exists only online. To create, or "mine," the currency, computers guess solutions to complex math problems and send them to other computers on the bitcoin network. (More on that below.) As time goes on and more coins are mined, it becomes more difficult to create bitcoins. Right now, about 12 million bitcoins have been found, with about 9 million yet to be discovered. Once created, bitcoins can be traded on currency exchanges or used as money to purchase goods and services from merchants that accept it. Its limited supply has made bitcoin attractive to people worried about inflation, while its anonymous nature makes it a favorite among those making illegal transactions. Enlarge Image On Monday and Tuesday, bitcoin's strengths and weaknesses were discussed in Congress, with U.S. Senate committees hearing testimony from federal officials who attempted to explain how bitcoin worked, what its legitimate uses are and why it has been attractive to criminals. Even Federal Reserve Chairman Ben Bernanke weighed in, writing in a letter to a Senate committee that bitcoin and other virtual currencies "may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system." Yet some economic historians are already comparing bitcoin fever to legendary manias of the past. Larry Neal, a professor emeritus of economics at the University of Illinois, is in the midst of writing a textbook on the history of international finance. He says he's thinking of including a passage on bitcoin and how it embodies investors' struggle for returns. "Where's the backing that would persuade random strangers to accept this?" says Mr. Neal, who in his book "I Am Not Master of Events" wrote about a currency bubble in 18th-century France that ended with investors losing most of their money. But on the flip side of the coin are investors such as Raoul Pal, a former hedge-fund manager and founder of the Global Macro Investor, a macroeconomic research service. This month, Mr. Pal issued a research report to his subscribers that concluded with the words: "Trade Recommendation: Buy Bitcoin." Mr. Pal admits there's a likelihood that bitcoin ends up being worthless. But there's also a chance, he says, that it ends up taking over at least part of gold's traditional role as a store of value. Other bitcoin proponents believe it could become an integral part of the remittance market, since bitcoins can be sent to relatives abroad with lower fees and less hassle than traditional money-transfer services. Bits and Pieces Mystery still surrounds Bitcoin. Its creator -– or creators -– has remained anonymous and specific details surrounding the history of the virtual currency remain fuzzy. Still, buzz is growing. Here's a rough timeline of the Bitcoin evolution. View Graphics If it replaces some or all of gold's role, given the limited supply of bitcoins relative to that of gold, the potential upside for bitcoin is huge, possibly hundreds of times the current price, Mr. Pal says. In other words, a small amount of bitcoin is a kind of lottery ticket. It will probably be worth nothing, but if it's worth something, it could be worth a lot. That gives individual investors two legitimate choices. The safest, and least expensive, route: "Just ignore the whole thing," says Mr. Neal. But for the more daring: Buy one or a fraction of one, or a handful of bitcoins, with money that's set aside for speculation and can be lost, says Mr. Pal. Here's a guide to how bitcoin works, how it's performed as a speculation so far and why it might not be a terrible idea to buy a tiny stake.