But while it has certainly attracted plenty of attention, not just of late but throughout its 11-year-old life, Bitcoin and cryptocurrency remain a mystery to casual and experienced investors alike. This shouldn’t be the case since the basics of Bitcoin and how it works are relatively easy to understand.
Here’s a brief Bitcoin biography: An overview of its origins, operations – and how to invest in it.
What is Bitcoin?
Bitcoin is an electronic version of money that verifies transactions using cryptography (the science of encoding and decoding information).
Bitcoin is decentralized, digital, and scarce money:
- It’s digital because it exists as a set of codes.
- It’s decentralized because this code runs by thousands of computers spread across the globe.
- It’s scarce because its code limits its overall number.
When you use bitcoin to buy something, it records the transaction on a blockchain, which is essentially a ledger or database whose entries can’t be modified or erased.
Transactions are validated by Bitcoin through a process known as a proof-of-work, in which miners attempt to calculate the cryptographic key for the next block in Bitcoin’s blockchain.
It’s called mining because it’s like looking for gold. Anyone with a shovel can dig and look for gold, just as anyone with a computer can look for bitcoin.
These technicalities aside, one of the main draws of Bitcoin – and one of the reasons why it has attracted so much hype in recent years – is that it’s a form of private money that operates without the involvement of a central bank or government.
Bitcoin is used to transfer funds from one party to another without requiring a bank. Moreover, because the technology is open source and entirely decentralized, it is protected from external sources such as governments, who typically control fiscal policy and fiat currency circulation.
Concerns over bitcoin’s legitimacy
One reason for the volatility; considerable suspicion and skepticism that have dogged the cryptocurrency throughout its history. Bitcoin’s blockchain may be immune to interference, but bitcoin itself may not be, skeptics have said.
Then there’s Bitcoin’s association with criminals and shady operators. Most notoriously, it was the medium of exchange used by Silk Road; a clandestine black market eventually shut down by the FBI in 2013.
This stigma has stuck ever since, and not without cause. While recent research suggests that bitcoin is now mainly used for financial speculation or wealth preservation (much like gold), some $2.8 billion was laundered in 2019 using cryptocurrency.
Why invest in bitcoin?
Bitcoin may be a relatively new asset, but it has provided outsized returns in almost every year of its existence. More broadly, its advocates believe that its fixed supply makes it the perfect way to store wealth and that it should appreciate significantly over the long term as more institutional investors – investment banks, mutual funds, pension plans – pile into it.
We have already seen increased interest from institutional investors and corporations in 2020 and 2021.
How to invest in bitcoin
There are two main ways to invest in bitcoin. Either you set up an account with one of the many dedicated cryptocurrency exchanges now in existence, or you buy it through an investment platform that includes the option to purchase cryptocurrencies.
While cryptocurrency exchanges were once shady, unregulated operations, the major exchanges now operating are all regulated and in compliance with applicable laws. In the United States, some of the most popular are:
Alternatively, you can buy bitcoin through several financial apps and platforms, including Robinhood, Cash App, and PayPal. Such apps tend not to offer as wide a selection of cryptocurrencies as the dedicated exchanges, but if you’re interested only in bitcoin, it doesn’t make a real difference.