What is Bitcoin and how does it work?


If you are suddenly interested in Bitcoin, it is probably due to the recent crypto crash.

Editor’s Note

Be careful with cryptocurrency. Bitcoin – and the crypto market as a whole – is highly volatile and we do not recommend any particular cryptocurrency.

While there are over 10,000 different types of cryptocurrency in circulation, Bitcoin was the first to be created and is by far the most widely used. Despite this, it’s still shrouded in a mountain of myths and confusion, the latter of which has likely been inflamed by recent price cuts.

In a 2021 survey (opens in a new tab), nearly half of American adults regretted not buying Bitcoin sooner. Despite the popular belief that Bitcoin will make you money, people in the US and beyond (opens in a new tab) say the main reason they didn’t buy it is a lack of knowledge.

In 2022, knowledge may be a barrier to entry, but not price. With as little as $1, almost anyone with internet access can start investing in Bitcoin. But that doesn’t mean you should.

What is bitcoin?

Bitcoin is a form of cryptocurrency. Like other types of crypto, it can be bought, sold, and used to conduct financial transactions online.

Every transaction you make with Bitcoin is recorded in the blockchain, or virtual ledger, which was invented for Bitcoin and later adopted by other cryptocurrencies.

Like all other cryptocurrencies, Bitcoin’s value can vary widely, depending on everything from investor demand to eye-catching tweets, but there are a few other things that make it unique:

  • Bitcoin’s market capitalization – or the total value of all Bitcoins in circulation – is more than double that of any other cryptocurrency.
  • Both El Salvador and the Central African Republic have adopted Bitcoin as their official currency.
  • In 2021, more than 2,300 American companies accepted Bitcoin as a method of payment.
  • Unlike some other cryptocurrencies, Bitcoin has a limited supply (21 million).

How to use bitcoin

As cryptocurrencies become more widely adopted, there are an increasing number of ways to use Bitcoin.

It was originally designed as a tool to perform digital transactions without involving a third party (like the government), but now Bitcoin can be exchanged for other cryptocurrencies or regular (fiat) currency.

You can also use it to make purchases from retailers that accept Bitcoin as payment. Options include:

  • Transfer Bitcoin to a payment platform that converts it into fiat currency (like PayPal)
  • Use a retailer’s approved third-party app to purchase an item using Bitcoin (Walmart and Home Depot both have this option)
  • Use an app that accepts Bitcoin in exchange for gift cards or prepaid debit cards (like Bitpay)

How to buy bitcoins

A single bitcoin can be worth five figures, but you can buy a fraction of it for as little as $1 to $10.

There are several ways to buy cryptocurrency, but here’s how it generally works:

  • Choose an exchange or broker: Choose either a crypto exchange (like Coinbase or Gemini) or a broker (like Robinhood or SoFi). Note that each lists different currencies and each has unique fees, features, and limitations.
  • Create an account. Follow the steps required to verify your identity, then provide your payment information.
  • Order. Select Bitcoin, or the currency you want to buy, and enter the amount of your purchase.

Should You Buy Bitcoin?

There is no harm in buying Bitcoin, but there is harm in buying too much.

Investors tend to buy when the cryptocurrency is doing well – when prices are at their highest – and sell when values ​​are falling. In other words, crypto investors tend to lose a lot of money.

In the recent crash, investors lost more than $700 billion in two months, and experts predict (opens in a new tab) they will lose more as prices fall before the end of the year.

Despite the large price swings, experts do not recommend avoiding crypto altogether. But they recommend limiting your investment to as little as 1% of your total portfolio or total assets.

If you are considering investing in crypto, you can make it even safer by diversifying. Bitcoin is a great option, but it should only be one of the types of coins you buy. Try to choose other parts based on past performance, safety ratings (opens in a new tab)and the indices to which they bind their value.


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