Not a lot of people know what Bitcoin is, so we will start this story there. Bitcoin is a digital currency, similar to Microsoft Points, with a twist. Bitcoins are not purchased in unlimited quantities - instead, they are "mined" on servers and personal computers. Essentially, you are paid for the usage of your computer's idle CPU usage. According to the Bitcoin FAQ,
New coins are generated by a network node each time it finds the solution to a certain mathematical problem (i.e. creates a new block), which is difficult to perform and can demonstrate a proof of work. The reward for solving a block is automatically adjusted so that in the first 4 years of the Bitcoin network, 10,500,000 BTC will be created. The amount is halved each 4 years, so it will be 5,250,000 over years 4-8, 2,625,000 over years 8-12 and so on. Thus the total number of bitcoins in existence will not exceed 21,000,000.
Blocks are generated every 10 minutes, on average. As the number of people who attempt to generate these new coins changes, the difficulty of creating new coins changes. This happens in a manner that is agreed upon in advance by the network as a whole, based upon the time taken to generate the previous 2016 blocks. The difficulty is therefore related to the average computing resources devoted to generate these new coins over the time it took to create these previous blocks. The likelihood of somebody creating a block is based on the calculation speed of the system that they are using compared to the aggregate calculation speed of all the other systems generating blocks on the network.
Why does any of this matter? Hit the break to find out where a lot of this money went.
As of this writing, there are currently only 8,471,900 in circulation. This week, 46,703 of those coins were stolen thanks to a security breach at the hosting platform of owner Bitcoinica, Linode. According to current conversion rates, that is $228,000. While, in reality, there is little to no value to this currency since you can't buy groceries or gas with it, for the people involved, it is definitely a slap in the face.
This is not the first time something like this has happened, either. Last June, $500,000 worth of Bitcoins were stolen, as reported by a veteran user. There has been a lot of talk about this currency, at least in terms of theory, over the past couple of months. They even had a presence at CES 2012. Losses like these, however, are certainly going to make it difficult for anyone to trust the digital payment system - as of now, it is even less secure than Google Wallet.