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Bitcoin's price hit a new record this week, soaring above $11,000 on Wednesday morning. Which was worth less than $1 in early 2011. It caused a lot of people to wonder if they should be paying attention to the technology.

We're here to help. Read on for a beginner's guide to bitcoin. We'll explain what Bitcoin is, how it works, and what ordinary people should know about the technology.

1) What's a Bitcoin?

It is a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. It allows people to bypass banks and traditional payment methods for goods and services – an idea that has evidently caught the imagination of some investors, because its price has surged by more than 900% in 2017.

What makes Bitcoin different from MasterCard, PayPal, and other payment networks that existed in 2008 (when Bitcoin was invented) is that Bitcoin was the world's first payment network that's completely decentralized. The MasterCard network is operated by MasterCard Inc., but there's no Bitcoin Inc. in charge of the Bitcoin network. Rather, it's a peer-to-peer network that maintains a shared transaction ledger called the blockchain.

And no, those physical "bitcoins" you see in a lot of pictures aren't what a bitcoin "really" looks like. Bitcoins are just entries in the Bitcoin blockchain. If you own some bitcoins, that means you have some cryptographic private keys stored on your computer, on an external drive, or printed out on a piece of paper somewhere. These keys allow people to spend bitcoin balances in much the same way that the password to your bank's website allows you to spend the balance in your bank account. But you can't withdraw bitcoins from the network the way you withdraw physical currency from your bank.

2) If Bitcoins aren't tied to a conventional currency, how did they get so valuable?

When the Bitcoin network was first created in 2009, bitcoins were barely worth anything. Bitcoin lore holds that the very first real-world Bitcoin transaction occurred in May 2010, when one early Bitcoin user paid another user 10,000 bitcoins for two pizzas. At the time, Bitcoins were trading for less than a penny each.

But as the Bitcoin community grew, the currency's value steadily climbed. In April 2011, its value had climbed to $1. Media coverage of Bitcoin attracted new users, which caused the price to rise. The rising price, in turn, attracted more media interest. The value rose to more than $30 by June, before it crashed and fell to $2 before the end of 2011.

This cycle repeated two more times in 2013. In May 2013, Bitcoin's price briefly rose above $250, before falling by about 80 percent. Then in late 2013, Bitcoin's price rose above $1,000 before once again crashing by 80 percent. The current boom—which has taken the currency from a low of $200 in early 2015 to a high above $10,000 in recent days—is the fourth major Bitcoin boom.  

This bootstrapping process has achieved something that most people would have thought was impossible a decade ago: a valuable currency that's neither backed by a commodity like gold or silver, nor by a powerful institution like a government or bank. On one level, Bitcoin's value is rising simply because more and more people are betting that its value will continue to go up over time. The question, of course, is whether they're right about that.

3) Why would I want to use Bitcoin?

One of the most often-discussed applications for the Bitcoin network is international money transfers. Conventional financial networks like Western Union and Moneygram are expensive, and it can often take a long time for money to go through. In theory, a Bitcoin-based money transfer system could be cheaper and faster.

In practice, however, Bitcoin has struggled to gain traction as a platform for remittances. One way to see this is by looking at the prices charged by Bitcoin ATMs, which allow people to exchange cash for bitcoins and vice versa. The average transaction fee for a Bitcoin ATM—at least according to one website that tracks these things—is currently around nine percent for buying bitcoins and six percent for selling them. So to send money to an overseas friend or family member using Bitcoin ATMs, you could wind up paying transaction fees as high as 15 percent. That's on top of the transaction fee charged by the Bitcoin network itself, which has averaged around $5 in recent weeks.

There are a number of companies working to improve the experience of making international payments using Bitcoin, especially in Asia. These companies may eventually figure out ways to make payments fast, convenient, and affordable—but they haven't achieved critical mass yet.

There is also anecdotal evidence that Bitcoin is popular in countries like Argentina and Venezuela with unstable currencies or dysfunctional financial systems.

4) If Bitcoin has few practical applications, how can its market cap be $150 billion?

One possibility is that Bitcoin speculators are simply delusional and Bitcoin's price will inevitably plunge. There are other possibilities, however.

One is that the Bitcoin economy is still in its early years. It took the Internet about 25 years to go from being an experimental technology—ARPANET in 1969—to becoming a mass market phenomenon—Netscape in 1994. Bitcoin is a comparatively young technology, having been around for less than eight years. It's possible that Bitcoin will eventually become a key part of the global financial system—it will just take another five, 10, or 20 years to work out exactly how to apply the technology in useful ways.

It's also possible that Bitcoin will have important applications that are not consumer-facing. For example, the Bitcoin network charges roughly the same transaction fees whether you're sending $10 or $10 million, so Bitcoin could become a standard way to move large sums of money overseas for international trade or investment. Big companies are conservative institutions, so it might take several years to build the infrastructure necessary to support these kinds of transactions—and then several more years after that to convince companies to make a switch.