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Here's our best shot at explaining why bitcoin has been soaring all year

  • Two of the world's biggest exchanges are about to begin bitcoin futures trading.
  • Banks and financial companies see tremendous promise in the blockchain technology underlying bitcoin, which could revolutionize payments and securities settlement.
  • Price volatility is only one of bitcoin's risks.

No, you are not imagining things. Everyone is talking about bitcoin, even your mom.

With a price approaching $20,000 a coin this week, it's not hard to understand why. The digital currency started out the year below $1,000.

Why is it rallying?

A mere curiosity until recently, Bitcoin is about to get a big dose of legitimacy, something that could be helping to boost its price. This month, two of the world's biggest exchanges will begin trading bitcoin futures, pushing it further into the mainstream and establishing a layer of official oversight that hadn't previously existed.

JAPAN BITCOIN
Yuriko Nakao | Bloomberg | Getty Images

Professional traders have piled into the bitcoin trade, too. Dozens of funds have sprouted up this year to trade digital assets such as bitcoin, and some big-name money managers like Bill Miller and Michael Novogratz have also taken an interest. Exchange-traded funds are in the works, though skeptical regulators earlier this year rejected an application for one created by Cameron and Tyler Winklevoss.

What is it?

Bitcoin isn't actually a coin. Nor is it a piece of paper or anything physical you can hold or put in your pocket. It has no bank or regulator. It's a computer code that exists on the internet on a thing called the blockchain, a ledger of transactions.

Anonymity originally made bitcoin and other digital currencies popular for illegal activities, especially on the internet. But retailers gradually warmed to accepting bitcoin, and there are even bitcoin ATMs. Online trading sites allow people to buy and sell it in fractions of a whole, meaning ordinary people don't have to plunk down a big bundle of money all at once to get a piece of the action.

How do you buy it?

To buy it, you have to get a so-called digital wallet to store your coins and then link to a place where you can buy them. Coinbase is one such site. It's an app where you create an account and link it to your bank and then use it to buy, sell and store coins. There is a transaction fee.

Banks and financial companies have taken a keen interest in the blockchain concept, seeing uses for it in securities settlement, payments and other transactions far beyond tracking a digital token.

But bitcoin has some obvious problems, extreme price volatility being just one.

What are the risks?

Futures industry participants, including major banks that clear securities transactions, have warned about the risks to the system if the bitcoin price collapses and people trading bitcoin futures get hit with margin calls.

And if the origins of bitcoin aren't sketchy enough — created by a shadowy and unverified person or persons going by the name Satoshi Nakamoto — sites where it has been trading and where people store their coins in virtual wallets have been subject to hacking and theft.

Just this week some $70 million of bitcoin was stolen from a site called NiceHash, and the previously best-known exchange, Mt. Gox, collapsed in 2014 after 850,000 bitcoins, then worth $450 million, went missing.

No less than JPMorgan Chase CEO Jamie Dimon and billionaire investor Warren Buffett have called it, respectively, a fraud and a mirage. Though on Friday, Dimon told CNBC he was open to the use of cryptocurrencies if properly controlled and regulated.

Will it last?

Bitcoin bulls point to its scarcity value as a reason it will have staying power. Only 21 million bitcoins will be in existence. To "find" them, people do something called mining, which means using a computer and a lot of electricity to solve math problems that unlock bitcoins as a reward.

By devoting resources to developing blockchain technology, banks have legitimized it, but the question is whether bitcoin will last.

Thomas Peterffy, the CEO of Interactive Brokers and a pioneer in the markets in his own right, is allowing his brokerage customers to trade the futures starting Monday, with a big 50 percent margin and hefty $5 per-contract fee.

"I'm extremely curious. This is an amazing thing," he said on CNBC's "Fast Money" on Thursday. The price could go over $100,000 before it crashes to nothing, he said. "How silly people are, it's just amazing to me."

WATCH: Futures trading for bitcoin coming this weekend