Well, first of all, it isn't a US dollar, which means that it isn't counterfeit, which means it isn't illegal. Anyone can manufacture anything (that isn't illegal) and call it valuable. The market determines whether or not it actually is. In this case, the market has decided that Bitcoins have value, so they do, at least for now.<p>There's nothing to suggest that Bitcoin <i>is</i> officially currency, and the government currently doesn't see it as such. You aren't taxed on bitcoin gains or losses like you might be if it were a stock, or interest in a bank account. You're likely obligated to pay taxes for when you cash it out into fiat, but that's normal.<p>If it helps, you can think of it more like a baseball card, or a comic book. If I go and buy a bunch of old comic books for a dollar, then, well, they're worth a dollar. If they happen to be rare comic books, and are actually sought by collectors, then perhaps I can sell them for tens of thousands of dollars. If I sell a comic book for tens of thousands of dollars, then I owe taxes on that sale.<p>In the case of bitcoins, yeah, the coins were 'magicked' out of thin air, but they were done so in a process that prevents (or at least strongly deters) cheating and tampering. Similarly, "Facebook.com" was just magicked out of thin air. For that matter, so are US dollars (Okay, yeah, they're paper, but fiat currencies hold no actual value except for what men with armies say they do -- if the economy collapsed, your dollars are worth kindling, basically). More appropos, perhaps, is the idea of a virtual gift. If I make a virtual flower and send it to you, you have a virtual flower. If you buy a virtual flower from me for a dollar, than you have a virtual flower, and I have a dollar.<p>In the case of Bitcoins, some people had them, and other people wanted them, so dollars were exchanged for Bitcoin and trade occurred.<p>That said, the mechanics for how bitcoins are mined is indeed <i>much</i> more complicated than I'm portraying here, but effectively, there's a pot of gold in the middle, that contains all the bitcoins that will ever exist. Contributing CPU time (or GPU time/ASIC time, whatever) towards processing transactions in the network will occasionally reward you with bitcoins from that treasure pot. The more you help, the more likely you are to receive a reward.<p>In some vague, abstract sense, you can imagine that the blockchain (the pot of gold) is a bank, and everybody contributing CPU time is an employee, getting paid commensurately with the work they put in.<p>Note: This is a string of very bad analogies that oversimplifies things to a ridiculous level, but is meant more to give a general picture than to provide a real explanation.