What is Bitcoin and how does it work?

Best cryptocurrency listed — Bitcoin, Ethereum, Litecoin, Dogecoin, Binance
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If you're taking a sudden interest in Bitcoin, it's probably due to the recent crypto crash.

Editor's note

Be careful with cryptocurrency. Bitcoin — and the entire crypto market — is highly volatile and we do not recommend any particular cryptocurrency.

While there are more than 10,000 different kinds of cryptocurrency in circulation, Bitcoin was the first to be created and is by far the most widely used. Despite that, it's still surrounded by a mountain of myth and confusion, the latter of which has likely been inflamed by recent price drops.

In a 2021 survey, nearly half of U.S. adults regretted not buying Bitcoin sooner. Despite the popular belief that Bitcoin will make you money, people in the U.S. and beyond say the top reason they haven't purchased it is a lack of knowledge.

In 2022, knowledge may be a barrier to entry, but price isn't. With as little as $1, nearly 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 make financial transactions online.

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

Like all other cryptocurrencies, Bitcoin's value can fluctuate greatly, based on everything from investor demand to attention-grabbing tweets, but there are a few other things that make it unique:

  • Bitcoin's market cap — or the total value of all Bitcoin in circulation — is more than twice that of any other cryptocurrency.
  • Both El Salvador and the Central African Republic have adopted Bitcoin as an official currency.
  • As of 2021, more than 2,300 US businesses accepted Bitcoin as a form of payment.
  • Unlike some other cryptocurrencies, Bitcoin has a limited supply (21 million).

How to use Bitcoin

As cryptocurrencies are more widely adopted, there are a growing number of ways to use Bitcoin.

It was initially conceived as a tool for making digital transactions without involving a third party (like the government), but now Bitcoin can be traded for other cryptocurrencies or regular (fiat) currency. 

You can also use it to make purchases from retailers accepting Bitcoin as a payment method. Options include:

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

How to buy Bitcoin

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

There are a few different ways to go about buying cryptocurrencies, but this is how it generally works:

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

Should you buy Bitcoin?

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

Investors tend to buy when cryptocurrency is performing well — when prices are at their highest — and sell when values drop. In other words, crypto investors tend to lose a lot of money. 

During the recent crash, investors lost more than $700 billion in the span of two months, and specialists predict they'll lose more as prices fall before the end of the year.

Despite major price swings, experts don't recommend avoiding crypto altogether. But they do recommend limiting your investment to as little as 1% of your total portfolio or your total assets. 

If you plan to invest in crypto, you can keep it even safer by diversifying. Bitcoin is a great option, but it should be just one of the coin types you buy. Try choosing other coins based on past performance, security ratings, and the indexes they tie their value to.

Sarah Brady
Personal finance writer

Sarah Brady is a personal finance writer and educator who's been helping individuals and entrepreneurs improve their financial wellness since 2013. Sarah's other publications include Forbes, TIME's Next Advisor, Investopedia and Experian, and her work has been syndicated by Yahoo! News and MSN. She is a former educator for the City of San Francisco’s affordable home buying programs, as well as a former Certified Credit Counselor (NFCC) and Housing Counselor (HUD).