The Money Question You're Too Embarrassed To Ask: What Is Bitcoin?

People who still have no idea what Bitcoin and other cryptocurrencies are can generally be sure of one thing: someone out there is telling them to invest in it.

Interest in digital currency has ballooned in the last few years, with industry insiders encouraging Black consumers and women of all backgrounds to get in the game. Only 3%-7% of women hold some form of crypto, estimates suggest, increasing fears that groups already underrepresented in finance will be shut out of a growing economic sphere.

Even though there's a number of women who invest and work on crypto, there is certainly a type of person associated with crypto — often dubbed a "blockchain bro." Nonetheless, many women are wetting their toes. Research from the London Block Exchange found that interest in crypto investments is growing among millennial women, with one in five female millennials considering it.

A recent Money Diarist and their partner discussed the "Libertarian ideology of Bitcoin," while another from earlier this year discussed putting some money into it with her boyfriend. "Fingers crossed?" she wrote; crossing them is probably a good idea. It is great for people to have at least a rudimentary understanding of what cryptocurrencies are, but it would be wise not to make a bet you don't understand. Here's a beginner's breakdown.

The funny thing about cryptocurrency is that it is supposed to make capital accessible to everyone, yet seems to be in the purview of finance and tech people in the know. Don't let anyone make you feel dumb for not intuiting it. As John Oliver joked, cryptocurrency is "everything you don't understand about money combined with everything you don't understand about computers." Understanding how to get and use money that doesn't exchange hands in the usual way feels a bit abstract, especially when the average person has no idea what it is.

Tavonia Evans, the founder and chief information officer of $Guap (a company focused on building and circulating wealth within Black communities in the U.S.), breaks it down. Cryptocurrency is a form of currency exchanged on a digital, peer-to-peer system, and it is transferred without traditional "middlemen" — banks, the government, and other lenders.

"When you're doing a transaction online and you're using a credit card, for example, it goes through a centralized server or a central provider. But when you're using cryptocurrency, there is no central provider; there is no one server or one authority over it," Evans explains.

When it comes to crypto, the term you've probably heard tossed around most often is Bitcoin. There's a good reason for that: Bitcoin is the most popular form of cryptocurrency at the moment, and Ethereum is a close second.

"Bitcoin is kind of like the U.S. dollar," Evans explains. "The U.S. dollar is the global standard for money and Bitcoin is like the global standard for cryptocurrency right now."

Some people "mine" for currency, a highly technical option that — at its most simplified — requires specialized computers with a ton of power, and downloading software to obtain a specific coin. To get the coins, miners must solve a series of computational puzzles on a public network — the blockchain. Solve the puzzle first, and the rewards are the coins. Mining isn't cheap: Not just because it requires a lot of computing power and there are others competing to solve the puzzle, but it's a lottery system so the rewards are randomly distributed.

If this sounds intensive, it is — but there are a variety of other ways to obtain currencies. "You can purchase cryptocurrency. You can trade. You can join various exchanges," Evans says. Also, you do not have to purchase a whole coin; you can buy a denomination of Bitcoin, for example, and then transfer it to a digital wallet. (Cryptocurrency is not integrated with ApplePay, though Square is running beta tests.)

"From there," Evans explains, "you'll be able to either spend it or trade it for other coins, and you need to have at least a Bitcoin or an Ethereum in order to obtain most other coins."

You don't need to be filthy rich to buy these currencies either. Evans suggests buying a minimum of $100 worth of Bitcoin or Ethereum to start — $50 at the absolute least — as the fees to purchase those popular gateway options can be high. Many people purchase these on Coinbase, one of the most popular digital currency exchanges.

Individuals are given a digital address (think of it like a bank account) and a private key (essentially a password) that enables them, and no one else, to access their crypto funds. It's important to remember that this money is an investment — or more like a gamble — and one that still involves a lot of risk and speculation. The value of Bitcoin changes constantly and sometimes by huge magnitudes: Bitcoin values tanked in February, again in April, and recently dipped in May. So if you bought a Bitcoin while the price was high (the record was $19,783 in December 2017), then sold low (yesterday, one Bitcoin was valued at $6,758), you could lose a lot of money. Most advisors say it's not worth the risk, nor does it function like a traditional investment.

So, if you do decide to invest in cryptocurrency, make sure your overall financial picture is solid. Have a fully-funded emergency account first, invest in your company 401(k) or similar retirement plans, especially if there's a match (or an IRA if you are self-employed), have your debt repayments under control — and only invest an amount you feel comfortable losing.

If you want to get cold, hard cash back, you can do so, though "a lot of people are very perplexed about that," Evans says. "You have to set up the infrastructure first: You can go through the exchanges — like Coinbase — and get it deposited into your account, but there are also Visa-backed cards and Mastercard-backed cards that you can sign up for to exchange your Bitcoin for what is called 'fiat,' which is regular dollars."

For instance, Evans says she has a BitPay card that can receive Bitcoin deposits that can later be changed into spendable money or withdrawn for cash from an ATM.