You may have heard of Bitcoin, but you may not understand precisely what it is, how to use it, or its investment potential.
Don’t worry — you’re far from alone, and Bitcoin is not as simple as its name might suggest.
Here’s a brief primer on this increasingly popular innovation.
Bitcoin is what’s known as a cryptocurrency — a type of digital asset that works as a medium of exchange. Currency ownership is stored in a computer database known as a distributed ledger that is synchronized across multiple systems and geographies. The most well-known form of distributed ledger is blockchain — a series of financial records known as blocks connected by cryptographic algorithms.
There are primarily two methods for obtaining Bitcoin: mining and direct purchasing. Bitcoin mining is a complex process by which Bitcoin miners work collectively to generate new blocks to record new Bitcoin transactions.
To do so, Bitcoin miners must leverage their machines’ computing power to solve increasingly complex algorithms to maintain the blockchain’s integrity and security. Miners use specialized computing equipment, for which they are periodically rewarded a set amount of Bitcoins. However, only 21 million coins can be mined in total; this scarcity fuels demand and price volatility.
Mining Bitcoin can be expensive and complicated, whereas directly purchasing Bitcoin is easier for most people. You must first download a Bitcoin wallet, which will store the actual code that comprises the Bitcoins you purchase and verify your identity with your driver’s license and social security number. Once you do, you can purchase Bitcoin on a Bitcoin exchange, such as Coinbase, Coinmama, or Gemini using an ACH transfer, debit card, or credit card.
Investing in Bitcoin
Investing in Bitcoin does have its fair share of pros and cons. First, the cons: while Bitcoin has significant security advantages over other types of electronic financial transactions, Bitcoin investors can lose their investment if they do not secure the unique information they use to access their Bitcoins. Additionally, Bitcoin pricing is volatile, so a Bitcoin investment may not be advisable if you are risk-averse.
However, on the positive side, that very volatility can lead to massive surges in price. If you ride out the price fluctuations, you can make a lot of money investing in Bitcoin. Additionally, Bitcoin is the most widely accepted form of cryptocurrency given its relative longevity.
As such, it’s accepted at many major financial institutions.