Texas,” says Jeremy Kandah, “is the most Bitcoin-friendly state in the union.” Kandah, a member of the Austin venture capital group Bit-Angels Network, has his reasons for asserting that the Lone Star State is bullish on the headline-making virtual currency. BitAngels, after all, is in the business of convincing Bitcoin-related start-ups that Texas is where they should be turning for capital. But once you start paying attention, you notice that Kandah’s enthusiasm is more than just your typical chamber-of-commerce boosterism. Texas dwarfs even Silicon Valley as a Bitcoin pioneer, which is one reason Kandah, like many others who want a piece of tech’s new big thing, recently moved here from California. “We have one of the biggest concentrations in the country of Bitcoin users and Bitcoin technology companies,” says David Johnston, the managing director of BitAngels’ sister company, the Decentralized Applications Fund.

Though Kandah notes that New Jersey is gaining on us, there are plenty of signs of Bitcoin’s unusually heavy presence in Texas. In April the state’s Department of Banking became the first state regulator in the country to issue guidelines for virtual currencies. That same month Steve Stockman, the Republican congressman from Clear Lake who was one of the first politicians in the country to accept Bitcoin donations, introduced a bill that would require the Internal Revenue Service to treat Bitcoins like any other currency. Even the Second Amendment contingent is getting in on the game: in January Austin’s Central Texas Gunworks began accepting payment in Bitcoins, making it the first firearms shop in the country to do so. A month later, after the Texas Alcoholic Beverage Commission approved the use of Bitcoins to buy booze, downtown Austin beer and cocktail joint the HandleBar installed the country’s first Bitcoin ATM.

Why is Texas so attached to Bitcoin? Our hands-off regulatory philosophy, which could encourage entrepreneurs to take a chance on a virtual currency, likely has something to do with it. And there’s no doubt that the state’s libertarian leanings play a role; embracing Bitcoin is the ultimate statement of disdain for the Federal Reserve, the bête noire of Texas’s Libertarian party standard-bearer Ron Paul. As Stockman said in an online video, “Digital currency’s more about freedom. . . . Freedom to choose what you do with your money and freedom to keep your money without people influencing it by printing money or through regulation.” Texas Bitcoin Association president Paul Snow likes to throw around libertarian boilerplate phrases like “the crumbling, diminishing dollar.”

Yet Bitcoin is in many ways Ron Paul’s worst nightmare: it’s the ultimate example of fiat money, a currency backed not by a tangible commodity like gold but by software code and the faith and labor of thousands of hard-core believers. Bitcoin traces its origin to a 2008 white paper, credited to a mysterious entity or individual known as Satoshi Nakamoto, which describes the workings of an online currency that would be propped up not by a government but by participants around the world, who would be vigilant in maintaining the integrity of the system. The first Bitcoins were released—presumably by Nakamoto, though no one is sure—in early 2009.

Bitcoins don’t exist in the physical world, and they aren’t minted like traditional money. Instead, they’re initially uncovered through a process known as mining. An algorithm created by Nakamoto releases Bitcoins in the form of complex sets of math problems. Miners—those who want to “find” the new Bitcoins, much like gold prospectors of old—volunteer to install software on their computers that works at solving the problem sets. Mining requires hefty amounts of processing power, which means that only those with the most powerful machines stand much of a chance of unlocking new Bitcoins. The miner whose computer solves the problem sets first is awarded 25 Bitcoins, which can then be distributed by buying things with them or selling them to others for traditional money. As part of the mining process, the new Bitcoins are added to the public ledger, known as a “block chain,” in which every transaction—but not the identity of the people engaging in the transaction—can be followed and verified by everyone on the network. This transparency prevents someone from spending the same Bitcoin more than once.

The ability to sidestep the entire infrastructure of global finance is a large part of Bitcoin’s growing appeal. “With Bitcoin, I can send resources in about ten minutes to anywhere in the world,” Snow says. “You can’t mobilize funds like that with dollars.” And Bitcoin users don’t have to pay hefty fees to banks or any other middlemen, some of whom keep your personal data, leaving it vulnerable to hackers. Bitcoin purports to offer solutions on all fronts—it’s fast, it’s cheap, it’s secure, and it’s anonymous.

Since average consumers don’t have the resources to mine Bitcoins, they’re more likely to go to websites that serve as exchanges, where they can buy Bitcoins (paying a one percent transaction fee) and store them in electronic “wallets.” To spend Bitcoins you have to find a merchant who will accept them. But the novel and arguably arcane nature of the Bitcoin system has kept most merchants from embracing it.

Then there’s the gold-rush aspect of the mining process. Nakamoto’s algorithm releases a set number of Bitcoins annually, and the amount will decline each year, finally ceasing after 21 million Bitcoins have entered circulation, which is expected to happen in about 2140. That limited number causes the value of Bitcoins to fluctuate based on demand, much like a commodity.

Snow, for example, says he bought some Bitcoins in 2011, when they were trading for about 77 cents apiece. He didn’t look at them again until last year, when prices had climbed as high as $1,151 each. “I may have accidentally funded our retirement,” he told his wife. After last year’s peak, the average Bitcoin value tumbled to about $400 in mid-April of this year, then climbed to $675 by early June.

These abrupt changes in price pose serious concerns for investors in businesses that accept Bitcoins and use them to finance their operations. “Investments are subject to considerable gains or losses—not over the course of months, not even over the course of days, but perhaps over the course of hours,” says Joe Rotunda, the director of enforcement for the Texas State Securities Board.

That adds a new layer of risk to traditional investments. For example, in March the securities board issued a cease-and-desist order against Balanced Energy, a Southlake oil and gas company that allowed investors to buy a stake in the company using Bitcoins. If the company were to use Bitcoins for its cash reserves, then the value of those reserves, and the company itself, could fluctuate wildly, a risk that the board claims wasn’t properly disclosed to investors.

Rapid run-ups and drops in price are just one of the similarities that Bitcoin shares with classic investment scams. Others include the secretive founder and the breathless “this-changes-everything” attitude of true believers. From one vantage point, the Bitcoin fever sweeping the state is the latest incarnation of some of our more notorious schemes: Enron or emu ranching or Billie Sol Estes’s ammonia tanks, for instance.

Despite its vaunted security protocol, Bitcoin isn’t immune to outright theft. If someone can gain access to your virtual wallet, he can steal your Bitcoins without a trace. Earlier this year, the cyber-security firm Trustwave said that criminals had compromised hundreds of thousands of computers around the world with a piece of malware called Pony, which stole at least 85 virtual wallets. In February Mt. Gox, a Japanese company that was the world’s largest Bitcoin exchange—it handled about 70 percent of all Bitcoin transactions globally—filed for bankruptcy after acknowledging that its computer system was hacked and almost half a billion dollars in Bitcoins were lost.

And though the anonymity Bitcoin offers users has its upside, it also means that we might have no idea who is giving money to political candidates—and that bad people will find it easier to do bad things. Last year, a 29-year-old entrepreneur from Austin named Ross Ulbricht was indicted for running Silk Road, a website that allegedly used Bitcoins to allow people to buy and sell drugs and weapons.

Snow and Kandah are quick to dismiss these failings. Rattling off a list of Bitcoin’s benefits—the lack of transaction fees, the transparency of transactions, and the security of the block chain—they also note one other advantage that has gotten little attention. The underlying protocol that makes Bitcoin possible, they explain, can be applied to countless other things that need to be secure, such as the transfer of legal documents. “The currency is the first app,” says Kandah. “It’s like 1914, and we’re talking about building spaceships while everybody’s looking at cars.”

Indeed, Bitcoin’s protocol may transform our very concept of a computer network. Decentralized Applications has funded a Scottish start-up, Maidsafe, which takes computer files, dices them into millions of bits of data, encrypts them, and then stores them on spare computer space around the world. Only the person with the software “key” can reassemble the data from its disparate parts. Participants, a.k.a. “farmers,” who donate extra hard-drive space get paid in Bitcoins or other virtual currency, and the more people who join in, the bigger the network gets. If successful, it could make centralized server farms obsolete.

“In five years, there’ll be a billion people using the Bitcoin protocol, and most of them won’t realize it,” Decentralized Applications’ Johnston says. “Eventually we’ll take it for granted just like we do the Internet.”

For now, Bitcoin remains a currency largely for the geek elite. But as online transactions evolve, it’s logical to assume that some sort of currency will emerge that is better suited to the instantaneous nature of Internet transactions than our current form of money. “I don’t know if Bitcoin is necessarily the future, but there is something about digital currencies that proves attractive,” says Rotunda. “Digital currencies tie in very well with the fact that there’s Wi-Fi everywhere and that we now carry little computers in our pockets that we can use to effect transactions.”

For Bitcoin to fill that role, though, it will likely have to confront the same sort of existential challenge that has undercut most fringe movements: it will have to go mainstream. That will mean more safeguards, more public scrutiny, and more government oversight.

At which point Bitcoin may lose its appeal to true believers—and Kandah, Snow, Stockman, and plenty of other Texans could find themselves feeling a lot less Bitcoin-friendly.