Bitcoin is a decentralized digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin’s creator, Satoshi Nakamoto, originally described the need for “an electronic payment system based on cryptographic proof instead of trust.”
Blockchain is decentralized, which means it’s not controlled by any one organization. “It’s like a Google Doc that anyone can work on,” says Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax. “Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated.”
While the idea that anyone can edit the blockchain might sound risky, it’s actually what makes Bitcoin trustworthy and secure. In order for a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the right encryption pattern.
Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. It’s a tough job. People who choose to mine Bitcoin use a process called proof of work, deploying computers in a race to solve mathematical puzzles that verify transactions. To entice miners to keep racing to solve the puzzles and support the overall system, the Bitcoin code rewards miners with new Bitcoins. “This is how new coins are created” and new transactions are added to the blockchain, says Okoro.
In the early days, it was possible for the average person to mine Bitcoin, but that’s no longer the case. The Bitcoin code is written to make solving its puzzles more and more challenging over time, requiring more and more computing resources. Today, Bitcoin mining requires powerful computers and access to massive amounts of cheap electricity to be successful. Bitcoin mining also pays less than it used to, making it even harder to recoup the rising computational and electrical costs. “In 2009, when this technology first came out, every time you got a stamp, you got a much larger amount of Bitcoin than you do today,” says Flori Marquez, co-founder of BlockFi, a crypto wealth management company. “There are more and more transactions [now, so] the amount you get paid for each stamp is less and less.” By 2140, it’s estimated all Bitcoins will have entered circulation, meaning mining will release no new coins, and miners may instead have to rely on transaction fees.
In the U.S. people generally use Bitcoin as an alternative investment, helping diversify a portfolio apart from stocks and bonds. You can also use Bitcoin to make purchases, but the number of vendors that accept the cryptocurrency is still limited. Big companies that accept Bitcoin include Overstock, AT&T and Twitch. You may also find that some small local retailers or certain websites take Bitcoin, but you’ll have to do some digging. That said, PayPal has announced that it will enable cryptocurrency as a funding source for purchases this year, financing purchases by automatically converting crypto holdings to fiat currency for users. “They have 346 million users and they’re connected to 26 million merchants,” says Spencer Montgomery, founder of Uinta Crypto Consulting. “It’s huge.” You can also use a service that allows you to connect a debit card to your crypto account, meaning you can use Bitcoin the same way you’d use a credit card. This also generally involves a financial provider instantly converting your Bitcoin into dollars. “Crypto.com and CoinZoom are two services that have regulation in the U.S.,” Montgomery says.
In other countries—particularly those with less stable currencies—people sometimes use cryptocurrency instead of their own currency. “Bitcoin provides an opportunity for people to store value without relying on a currency that is backed by a government,” Montgomery says. “It gives people an option to hedge for a worst-case scenario. You’re already seeing people in countries like Venezuela, Argentina, Zimbabwe—in countries heavily in debt, Bitcoin is getting tremendous traction.” That said, when you use Bitcoin as a currency, not an investment, in the U.S., you do have to be aware of certain tax implications. How to Buy Bitcoin Most people buy Bitcoin via exchanges, such as Coinbase. Exchanges allow you to buy, sell and hold cryptocurrency, and setting up an account is similar to opening a brokerage account—you’ll need to verify your identity and provide some kind of funding source, such as a bank account or debit card. Major exchanges include Coinbase, Kraken, and Gemini. You can also buy Bitcoin at a broker like Robinhood.
Regardless of where you buy your Bitcoin, you’ll need a digital wallet in which to store it. This might be what’s called a hot wallet or a cold wallet. A hot wallet (also called an online wallet) is stored by an exchange or a provider in the cloud. Providers of online wallets include Exodus, Electrum and Mycelium. A cold wallet (or mobile wallet) is an offline device used to store Bitcoin and is not connected to the Internet. Some mobile wallet options include Trezor and Ledger.