Bitcoinis a cryptocurrency, a type of digital, private money that operates without the involvement of a bank or government.
- Bitcoin trades on online exchanges, and since its price has mushroomed since its 2009 debut, it’s increasingly attracting investors’ interest.
- As an investment asset, bitcoin offers capital appreciation and an inflation hedge, but its volatile price swings make it a high-risk, long-term investment.
Scarcely a news cycle goes by without some mention of Bitcoin. But even by its own standards, the cryptocurrency was having an intense moment in the fall of 2020. First, its prices on trading exchanges tumbled around Thanksgiving – only to roar back and set an all-time high of $19,857 on November 30: a 177% year-to-date increase that put the S&P 500’s 14% rise to shame.
But while it has certainly attracted plenty of attention, not just of late but throughout its 11-year-old life, Bitcoin still remains a mystery to casual and experienced investors alike. This shouldn’t really 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 a cryptocurrency, an electronic version of money that verifies transactions using cryptography (the science of encoding and decoding information).
As Bitcoin educator, developer, and entrepreneur Jimmy Song explains, Bitcoin is “decentralized, digital, and scarce money”:
- It’s digital because it exists as a set of code that determines how it operates
- It’s decentralized because this code is run by thousands of computers (AKA ‘nodes’) spread across the globe
- It’s scarce because its code limits its overall number to only 21 million bitcoins
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” (i.e., people with computing hardware) 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 proof-of-work,” says Song.
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 middleman such as a bank. Because the technology is open source and entirely decentralized, it is protected from influence by external sources such as governments, who typically control fiscal policy and fiat currency circulation,” says Simon Peters, a market analyst at eToro.