Many people have heard the term “bitcoin,” but have no idea of what it means. Is it a like a stock or a work of art? Should I invest in it? After all, many articles note that at bitcoin’s introduction in 2009 it sold for $0.08 and is currently valued over $17,000. In addition, many predict it will rise even more in the future, despite its recent one-day drop from over $19,000 to a little over $17,000.

What is bitcoin? It is a cryptocurrency designed as a medium of exchange that uses cryptography to control its creation and management. What is a cryptocurrency? It is a digital currency that uses encryption techniques to regulate its generation and use, independently of a central bank. In simple terms, it is a fiat currency, but without being backed by a government.

A fiat currency is money deem legal by a government, but in itself has no intrinsic value. For our purposes, we can define money as an object of perceived value that is acceptable as payment for goods, services, and debt.

Historically, many commodities, which have a clear intrinsic value, such as livestock and oil, have served as money. This use of commodities as money was a form of bartering. It required each recipient to have a “coincidence of wants” and agree on “value.” This system of barter still survives today on some parts of the globe. However, as civilization progressed, items widely deemed as “precious” began to serve as money, such as gold and silver, including coins made from gold and silver. Even today, gold and silver are widely valued and find use in monetary transactions.

The next step in the evolution of money occurred when national banks guaranteed to change “paper” money, known as “bank notes,” into gold at a promised rate. For example, on March 14, 1900, the United States adopted the “gold standard,” with the passage of the Gold Standard Act, which stated “…the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard…”

However, maintaining the gold standard during wars and depressions became extremely difficult for the United States, which led to its abandonment in 1971 by President Richard Nixon, via an executive order commonly termed the “Nixon Shock.” Once unhinged from the gold standard, the dollar became a “pure fiat currency,” which meant it had no intrinsic value. U.S. dollars became a legal tender by government order. The dollar then fell to its free-market exchange price versus gold, which as of this writing is over $1200 per ounce.

This abbreviated history of money and the example of the United States dollar demonstrates that a pure fiat currency is only as strong as the global trust in their currency. This is also true of bitcoin. Those people buying and trading it determine its value.

You may at first want to think of this like buying and selling stocks, whose value is determined by sales transactions. However, stocks represent ownership in a tangible asset, such as a company. Bitcoin does not represent value in anything tangible. This is true of all fiat currencies. However, the United States exchanges goods and services for U.S. dollars and accepts it to service debt. If you believe the United States will remain a strong and vibrant economy, then having faith in its currency is justifiable. Countries often base their international trade on U.S dollars. However, even the dollar’s value fluctuates in the world market, as perceptions of the U.S. economy’s strength fluctuate.

Bitcoin, on the other hand, has no country backing it. Much like trading in art, the increase in its value depends on “the bigger fool theory.” When someone invests in bitcoins, they are essentially betting that someone else in the future will pay more them, even though bitcoins have no intrinsic value. That someone is paying more for something whose only value is determined by whimsical perceptions, hence the name “bigger fool.”

In the case of art, even if its price drops, the art is a tangible object that provides a level of joy to the owner. In a sense, it enriches the human spirit. Bitcoin only enriches those that are able to sell it at a higher price than they paid for it.

Eventually, the market for bitcoins is going to vanish, as the bigger fool theory runs its course and businesses refuse to accept it as a currency. When that happens, investors will recognize the world’s pool of fools has dried up and bitcoins will not be worth the digital energy it takes to create and trade in them.