I'm not an expert on Bitcoin but I agree with Marchas.
As to how it works, it is essentially something kind of like this: Bitcoins are mined by powerful computers that solve mathematical problems. These problems are complex enough that you can't just create bunches of bitcoins without doing a lot of work. So they remain rather scarce. The number of bitcoins is always increasing but at a very slow rate (sort of like mining for gold). People pay money to buy bitcoins off of other bitcoin holders which could be the people who own the mining computers or other people who originally bought bitcoins from a miner and want to sell them. Once I have exchanged cash for bitcoins, I can use those bitcoins to make purchases at retail establishments that accept them. I pay my bitcoins to the retailer and they send me my goods. The retailer now has the choice of using those bitcoins to buy things they need or to sell the bitcoins to someone else for cash.
So on and on it goes. There is a current exchange rate for bitcoins to cash. This rate has continued to rise over the years. However, there is nothing keeping the value of bitcoins from crashing overnight leaving their holders left holding the bag. There is always the possibility that the system could be hacked causing faith in the whole system to fail and resulting in the value of bitcoins going to zero. Several of the bitcoin repositories have been hacked and millions of dollars of bitcoin value have been lost. There was also a case of a flaw in the system resulting in massive fraud going on a few years ago. This was quickly fixed and the fraud reversed. But it does show that the system can be vulnerable. All computer systems can be hacked. It is usually just a matter of difficulty vs. potential reward.
