Bitcoin has emerged as one of the hottest topics in financial markets in years. This revolutionary, all-digital currency has made and broke investors in recent days. So what is Bitcoin, how does it work, and is it actually a good investment or merely a false mirage?

Bitcoin is a digital currency backed by no government and controlled by no central clearinghouse. In the past many currencies were tied to the value of gold or another commodity. Now most currencies are “fiat,” meaning they are floated on the free market. These currencies are back by the full-faith of their national government.

The Bitcoin, on the other hand is tied to no commodity and backed by no government. The value of Bitcoin is determined exclusively by the free market, with the individual trades of users giving the coin its final value. Whereas national currencies can be heavily affected by the policies, such as quantitative easing, of central banks.

Further, while much of the U.S. dollar, Euro, and other currencies exist only online, the Bitcoin is unique in that it exists entirely online. There is no such thing as a “physical” Bitcoin. Instead, security keys are exchanged online from one person to another. These keys can even be exchanged directly from one party to another, eliminating the need for banks and other financial institutions.

Bitcoins are created through a process called “mining.” Basically, computers are used to solve extremely complex equation. Each time an equation is solved, a new “block” of Bitcoins is created and the solver is awarded with the security keys for 25 Bitcoins. The mining process requires investments in time, money, and electricity. The hardware now required for mining costs thousands of dollars, and electricity bills can easily reach into the hundreds of dollars.

So is Bitcoin the currency of the future? It’s too early to tell, but so far it appears to be growing into a legitimate financial instrument. The total value of all outstanding Bitcoins now tops 1 billion dollars, and now over a 1000 different businesses accept Bitcoin as payment. Exchanges have popped up across the world, allowing people to easily convert their currency into other currencies. These developments have increased the liquidity, or ease of using and converting Bitcoins.

While Bitcoins originally traded for pennies, a single coin now costs in access of 100 dollars. For those investors who bought Bitcoins early on and held on to them, the returns have been huge. Still, Bitcoins have proven prone to wild price swings. A few weeks ago Bitcoin peaked at over 250 dollars before plummeting back below a hundred dollars within the course of a few days.

Whether or not Bitcoin itself will succeed remains to be seen, however, the world financial system may never be the same. Investors should be cautious whether they are considering setting up mining operations, or placing some of their holdings in Bitcoins. Bitcoin is so new and radical that no one really knows if it will survive or how it will develop. Investors might strike it rich with Bitcoin, but there is an extremely high chance that they could lose everything.