BitCoins are a secure, decentralized, anonymous, non-inflationary digital currency.
Just like the market for Canadian dollars is built on the group of people who believe that dollars are valid currency, the market for BitCoins is built around a distributed network of computers that “believe” in BitCoins. Each transaction, including minting new coins, requires the network to do heavy algorithmic calculations. The network is immune to attack by any group of malicious processors that is less powerful than the good group. The algorithm stops producing new coins once there are 21 million in circulation, so inflation will stop.
BitCoins themselves have no id, like the serial number on a bill. Instead, the transactions have cryptographic proofs. So you can verify that Alice gave 100 coins to Bob, but then Bob can change his name to Bruce and give 50 coins to Carol. Carol can determine that Bruce has 50 coins but not where they came from. Bruce can’t then give 75 coins to Dave because he can’t prove that he has that many – BitCoins are immune to the double-spending problem.
Like items in massively multiplayer online roleplaying games, BitCoins can be converted to and from real world currencies. BitCoins are of interest for tax evasion, including the tax called inflation collected by fractional reserve banking. At the moment their killer app is buying drugs online, but an untaxable currency holds a lot of potential.
Although they are cryptographically secure, the BitCoin market is probably susceptible to a coordinated political attack like the one that crippled WikiLeaks. Because they’re non-inflationary, there is a concern that people may stop spending them once their value is guaranteed to increase relative to inflationary currency. Because the market is small and unregulated, they may also be susceptible to market manipulation.