Still Confused About Bitcoin?

Americans still have a high degree of uncertainty about crypto, according to a recent survey by Consumer Reports

By Octavio Blanco

Everyone has heard about bitcoin by now, especially its recent meltdown. After hitting a record high of $67,000 in November of 2021, the currency has lost two-thirds of its value. Other currencies, like ripple and ethereum, have experienced similar awful results.

But bitcoin’s price has risen for the past two months consecutively—the first time that’s happened since its meteoric rise. Other cryptocurrencies have seen similar increases, too. This recent rise in price, as well as possible regulatory moves in the near future, have put the spotlight back onto the virtual currency.

But to many investors, bitcoin and other cryptocurrencies remain a mystery.

Only 20 percent have ever owned it, according to a nationally representative survey of 3,208 adults conducted by Consumer Reports from June to July 2022. At least 1 in 5 say they don’t know whether their friends or family own crypto, whether they’d use crypto in different ways, or how crypto firms should be regulated.

So what exactly is bitcoin, and is it something you should think about as an investment?

What Is Bitcoin?

Bitcoin is a virtual—or "crypto"—currency, which is to say it exists only in digital form.

It was created in 2009 by a coder or coders using the alias Satoshi Nakamoto. The idea was to create a peer-to-peer system of commerce independent of banks, governments, and other financial institutions, says Matt Mitchell, a tech security researcher who founded CryptoHarlem, a foundation that teaches digital security techniques to marginalized communities.

The founders of the currency capped the number of bitcoin that can be issued at 21 million, making it inflation-proof. More than that can’t be created arbitrarily.

While bitcoin may be the best-known virtual currency, it is just one of thousands. Others you may have heard of are litecoin, ethereum, zcash, ripple, and monero.

Why Would Anyone Use It?

One reason many early adopters liked using bitcoin was because they could buy and sell it anonymously. In its early days, the currency gained notoriety because it was often used for illicit purposes.

Bitcoin also allowed users to make payments online faster and more cheaply than they could through banks, a situation that has changed as banks have moved to faster peer-to-peer payment systems, like Zelle.

Some people like using bitcoin as a way to buy and sell stuff, but most bitcoin owners have it as investment rather than a currency to make purchases. Still, a number of retailers—including Expedia, Overstock.com, and Whole Foods—accept bitcoin as payment. But because of the volatility of its price, using bitcoin for day-to-day transactions is tricky, says Justin Brookman, director of consumer privacy and technology policy for Consumers Union, the policy and mobilization division of Consumer Reports.

How Do You Buy Bitcoin?

There are only a few methods that are practical for most people.

One is to pay cash money to someone who owns bitcoin and have that person transfer it to you. The process is similar to the way peer-to-peer cash payment systems such as Venmo operate. The seller accesses his bitcoin wallet—an app on his laptop or smartphone—which contains the currency. He then selects the number of bitcoin to transfer to you and hits the send button. You get a code representing the bitcoin, and you add it to your bitcoin wallet.

Another option is to go to an online cryptocurrency exchange such as Coindesk, GDax, or Kraken. You tell the exchange how much bitcoin you want to purchase, and it walks you through the process. Keep in mind that you don’t have to buy a whole bitcoin—you can buy a fractional share.

If you have a small business, you can also set up the wallet that works with bitcoin or other cryptocurrencies and advertise that you accept bitcoin as payment.

What's 'Mining' Bitcoin?

Mining is how new bitcoin are created. It generally requires special hardware and software, so it’s not practical for most people.

The idea is to join a network of computers that processes complex mathematical problems. The computers that solve the most problems first are the ones that usually earn the most bitcoin.

Mining bitcoin usually requires a large number of networked machines, and the process consumes a large quantity of energy. Because of the cost and technological requirements, bitcoin mining is generally done by wealthy organizations and not the average investor.

It All Sounds Very Risky

It is. That volatility was clearly evident in how the currency has traded in the last year: rising to a record-high of $67,000 in November of 2021 and then losing two-thirds of its value.

But there are other risks, too. Bitcoin doesn’t offer any consumer protections and isn’t overseen by a regulator equivalent to the Federal Deposit Insurance Corporation, which protects money in banks and savings institutions. There’s also no remedy from a third party in the event of fraudulent transactions. The Consumer Financial Protection Bureau has warned consumers about the risks of bitcoin transactions and investments.

While there are few regulations of bitcoin in place, some states are taking steps to regulate currency exchanges that sell bitcoin. New York, for example, has instituted a “BitLicense” that requires exchanges to hold a surety bond or trust account in United States dollars for the protection of their customers should they lose money. Coincenter, a cryptocurrency advocacy firm based in Washington, D.C., offers a rundown of states and their regulations. 

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