What Is Bitcoin? – Newsweek Vault (2024)

What is Bitcoin, and how does Bitcoin work? These are questions many people have asked at one point or another, especially when the value of this digital currency starts to surge.

This guide will provide an overview of Bitcoin for beginners with the goal of answering all your burning questions. Also, learn where to invest in Bitcoin when you’re ready and how to securely store your crypto for the long run.

Vault’s Viewpoint on Bitcoin: BTC Meaning

• Originally founded by an anonymous developer named Satoshi Nakamoto in 2009, Bitcoin (BTC) is the most widely used and popular cryptocurrency in circulation today.
• New Bitcoins are still being created through a complex mining process, but only until the predetermined maximum of 21 million Bitcoin has been reached.
• Bitcoin transactions are recorded on a ledger or “blockchain,” which keeps track of ownership as peer-to-peer transactions are made.
• You can invest in Bitcoin through a number of crypto exchanges, but you’ll want to set up a safe place to store your crypto for the long haul.

How Does Bitcoin Work?

Bitcoin (BTC) is the most prominent and widely used digital currency available today, alongside other popular cryptocurrencies like Ethereum (ETH), Tether (USDT) and XRP (XRP). This virtual currency was created for the purpose of peer-to-peer money transfers that are decentralized, meaning central banks and other authorities are not involved in the process.

Since BTC is an open-source project, bitcoins are brought to fruition, or “mined,” through a complex mining process that anyone can participate in. All Bitcoins created are recorded on a blockchain, which serves as a ledger and also records transactions made with the currency. There are currently around 19 million BTC created and in circulation, and a finite supply of 21 million BTC is the predetermined limit on this currency.

The value of Bitcoin can increase or decrease based on supply and demand similar to other investments. This means investors can drive up the price of Bitcoin by investing in coins at higher and higher prices, but that prices can drop just as quickly when demand falls. This is ultimately why the price of a single Bitcoin surged to a high of around $68,000 in November of 2021, only to drop below $17,000 just a year later. BTC price has been climbing ever since then, however, and a single coin is currently worth over $40,000.

While individual investors can purchase an entire Bitcoin at a time, you can also invest in fractions of Bitcoin in nearly any dollar amount. Most people buy BTC and other cryptocurrencies on a crypto exchange like Coinbase or Kraken, then move their digital assets to a crypto wallet for long-term security.

Bitcoin Pros and Cons

Bitcoin may be a confusing concept for some, but it can help to think of Bitcoin and other crypto as a new kind of money that isn’t managed by the government or a central bank.

There are many advantages and disadvantages that come with buying and holding BTC, however, and you should know about them before you get started investing in crypto.

Bitcoin Pros

• Potential to build wealth through regular investment: Early Bitcoin investors who have stood their ground and held onto this asset are likely glad they did. Even now, today’s price for a single Bitcoin is down almost a third from the all-time high in November 2021.
• Separation from government authority: Bitcoin and other cryptocurrencies are decentralized, meaning no single person, group or government has control. This can be seen as an advantage for people who are leery of central bank and governmental monetary policy.
• Eventual scarcity: Bitcoin was created to have a finite supply of just 21 million. This means that, eventually, all available Bitcoin will be mined.
• Accessibility and liquidity: Bitcoin can be easily purchased, traded and liquidated through an exchange in most cases.
• Cost-efficient way to send and receive money: Bitcoin transactions take out the middleman (traditional banks) and are often less expensive as a result. This is especially true for international payments that might otherwise incur foreign exchange fees or wire transfer fees.
• Privacy: While all Bitcoin transactions are stored and publicly available on the blockchain, stored information is limited to Bitcoin addresses. This means Bitcoin transactions may not be able to be traced back to a person’s real name or other personal information.

Bitcoin Cons

• Highly volatile as an investment: The price of Bitcoin has been all over the place over the last decade, and no one knows what the future holds. This means you’ll want to be careful about investing and never buy more Bitcoin than you can afford to lose.
• Lack of government oversight: Lack of government regulation also means lack of government oversight and protections. With crypto scams becoming fairly common, according to the Federal Bureau of Investigation (FBI), this is another consideration to keep in mind.
• Not widely used for payments (yet): You can use crypto to send money to others, but you can only use it to make purchases in very rare instances. Have you seen a store that accepts BTC as payment for goods or services yet? Probably not.
• Environmental concerns: Bitcoin mining relies heavily on fossil fuels, so there are considerable concerns when it comes to the environment. A United Nations study found that Bitcoin mining may have a long-lasting negative impact on water and land.
• Potential for fraud: Most people heard about the incredible fraud perpetrated by FTX founder Sam Bankman-Fried, who was convicted of fleecing crypto investors of up to $10 billion in assets last year. The U.S. Department of Justice (DOJ) also reports that, since 2019, the agency has overseen crypto fraud cases worth more than $2 billion.
• Not protected by government insurance products: Where money kept in a bank account is typically protected FDIC insurance or NCUA insurance, crypto doesn’t have these government protections. Bitcoin and other digital currencies also come without Securities Investor Protection Corporation (SIPC) insurance that protects money invested in traditional investment accounts (up to limits of $500,000, including a $250,000 limit for cash).

How to Invest in Bitcoin

Investing in Bitcoin is easy, but you’ll have to figure out where you want to invest before you get started. These steps can help you start building a crypto portfolio with BTC and other digital currencies:

• Step 1: Choose a crypto exchange. Compare all the best crypto exchanges today and keep in mind that not all of them support Bitcoin. Look for an exchange that has an easy-to-use interface, enhanced security features and low starting balance requirements if you’re a beginning investor. Some popular crypto exchanges to consider include Coinbase, Kraken and Crypto.com.
• Step 2: Create an account. Once you pick an exchange, you can open an account by creating a username and password and providing all the personal information the company asks for.
• Step 3: Fund your account. You’ll also need to connect a bank account to your new crypto exchange account. This is how you’ll transfer the money for your initial purchase of BTC.
• Step 4: Place an order and buy Bitcoin. Finally, take the steps outlined in your exchange to purchase BTC in any amount. Remember that you can buy fractions of Bitcoin at one time based on your goals.

Where to Store Bitcoin

Once you buy Bitcoin, you’ll want to look for a place to keep it for long-term storage. After all, crypto exchanges are custodial, meaning they maintain control over your private keys. By moving your BTC to a crypto wallet, you can take power of your private keys and enjoy enhanced security for your digital assets.

As you look for the best crypto wallet, keep in mind that most cryptocurrency wallets fall into one of two categories:

• Hot wallets: Hot wallets are crypto wallets that are connected to the internet and accessed digitally. You can use most hot wallets through a desktop, mobile application or web browser, although some hot wallets are only available through one or two of these means.
• Cold wallets: You can also purchase a physical device that stores your Bitcoin and other crypto entirely offline. The lack of connectivity cold wallets have to the internet means many experts consider them to be the safest.