Investing Fundamentals

How To Invest In Bitcoin

how to invest in bitcoin

How does a currency just materialize, seemingly from thin air? Are they only for people who like buying drugs on the internet?  What is a Bitcoin? Want to know how to invest in Bitcoin? We’ll break down the mystery for you.

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What is Bitcoin?

If you find the concept of cryptocurrency confusing and, well, cryptic – you are certainly not alone. In the last few months, people have been foaming at the mouth over Bitcoin raising its value to never seen before prices. I’m sure every day you hear someone talking about it, but many of us still don’t really understand what it is exactly.

Bitcoin is the first decentralized digital cryptocurrency. It’s like a digital token that is made of a hash- a random string of numbers and characters. It has no physical backing and can be sent electronically from one user to another, anywhere in the world. Because there are a finite number of the coins, there is scarcity so the value constantly fluctuates.

Bitcoin is not run by a single company or person- it’s run by a decentralized network of computers around the world (owned by regular people) that verify all transactions. Similar to how Wikipedia is maintained by a decentralized network of writers.

How to invest in Bitcoin

So, how can you get your hands on some of these? The easiest way to buy or sell digital currency is through an online platform like Coinbase, which is the most popular cryptocurrency platform in the world right now. With its super simple interface, it is very easy for first-time buyers to buy Bitcoins.

It’s just like using any other online investment marketplace. First, you create an account or “digital currency wallet” where you can safely store your money. It’s not safe to store your cryptocurrency on an exchange wallet since you don’t have an access to your private key. But it’s convenient if you are trading every day.

Next, connect your bank account so that you can exchange local currency into a digital currency. Boom, you’re done. You can start buying and selling currencies. Coinbase currently allows its customers to purchase and sell three of the most popular cryptocurrencies – Bitcoin, Litecoin, and Ethereum.

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How to use Bitcoins to buy things

If you acquired some digital currency you might want to spend it at some point but where can you use it? Who accepts this imaginary currency as payment? What makes it worth anything?

Same thing that makes a dollar worth anything.  A bunch of people got together and agreed that it had value. Without that, it’s just a piece of paper.  If you and I agree they have value, I can buy your TV for some magic beans.

Silk Road was an anonymous online marketplace for illegal drugs.  They accepted Bitcoins because they are so hard to track and that’s one of the things that helped the currency gain traction.

However today more business are accepting Bitcoin as a form of currency. You can buy and sandwich at Subway, sign up for Ok Cupid or buy a new couch on Overstock with Bitcoin but don’t try and buy bananas at your corner deli. Here is a list of other companies that accept Bitcoin as payment.

Mining for Bitcoins

In 2009 when the Bitcoin algorithm was created by Satoshi Nakamoto (pseudonym), a finite number of bitcoins that will ever exist was set: 21 million. As of today, more than 16 million are in circulation and that number is rising daily. This means there are plenty of bitcoins waiting to be discovered.

There are three ways to obtain bitcoins- buying them exchange, accepting them as payment, or mining new ones. Mining simply means the discovery of new bitcoins and the verification of bitcoin transactions.

How do you find Bitcoin? You mine it. Here’s how it works.

Here’s a first-hand experience from one of our listener about how he started mining for Bitcoins.

“I tried doing some mining a few months ago, but like you said “it’s so nerdy” and like Andrew said, “it’s so not worth it”. When bitcoins initially came out, the mining was easily done using spare clock cycles on your video card.

The difficulty of mining goes up by a factor of about 14% every 30 days. So more and more powerful and expensive equipment is required for it. That’s why the value of bitcoins has increased to what it is at. 

Now they devices called ASICs (Application Specific Integrated Circuits) which are specifically designed to perform billions of hashes per second to mine new bitcoins. The most efficient ones cost about $6K each and you would need an array of several in order to mine a few bitcoins per month.”

“When you’re mining bitcoins, you aren’t technically creating new bitcoins. What you’re actually doing is processing bitcoin transactions that have taken place elsewhere on interwebs. The reward for processing these transactions is the release of a block of bitcoins (25 bitcoins in a block).

In order to be the first one to complete a task of processing (hashing) bitcoin transactions, you would really need to join a bitcoin mining pool so that you’re part of a team that mine’s to achieve a common goal first. Then you get a share of the block rewarded relative to the amount of processing your machine did.

Clear as mud? You’re right, super nerdy stuff.”

Show Notes

Domino’s Pizza Accepts Bitcoins
Turns out that there are legitimate businesses that are starting to accept this form of digital currency. There are not many, but this is a big one.

Bitcoin Exchange CEO Charged with Laundering $1 Million Through Silk Road Andrew pointed out that there’s been some controversy around Bitcoin and the drug market. This is the article he was referring to.

Nerd Alert: Bitcoin Mining
This is how you create Bitcoins (seemingly out of thin air) — you “mine” for them.

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