Cryptocurrency 101: What Is a Bitcoin — and Should You Be Investing in It?

This video is unavailable because we were unable to load a message from our sponsors.

If you are using ad-blocking software, please disable it and reload the page.

Bitcoin — you've absolutely heard about it (it's ALL over the news), but do you know what it is?

Not so much? Don't stress — we didn't either!

That's why we invited our friend, financial guru Rachel Cruze, into the studio to explain the cryptic piece of cryptocurrency. (It's all in the name, eh? ?)

With a dollar bill in hand, Rachel explains, "When you think of currency, you think of this — a dollar bill. But cryptocurrency is a digital form of currency, and the one that people are most familiar with is bitcoin."

MORE: Ridiculously Easy Ways to Make Money From Home

And yes, it's all online. "It exists only in the digital world, where users have a code and a balance, which is recorded on a ledger," Rachel continues. "You buy the currency with actual money, but then your cryptocurrency value lives digitally on this ledger. A ledger is essentially a database where every user records transactions to keep track of every other user's balance."

Still a little stumped? Consider Rachel's analogy: "Think of like a poker game where no one has physical chips or money with them. So, you and your friends keep track of everyone’s balance by taking notes, and compare those notes at the end of the game to make sure you’re all on the same page. That's essentially how this database works, and how everyone is held accountable."

Now, here's where things get dicey — neither a bank nor the government regulates bitcoin, so we're working on a bit of an honor system.

MORE: How to Keep Your Money Safe at Home

And more importantly, it's still new! So there's no way to know what kind of an investment it's going to be in the long run.

"It is not proven," she says. "There has not been a long track record. And it's very volatile as well right now!"

In fact, she notes, it's 7 times more volatile than gold, and 16 more times volatile than the stock market!

MORE: Are You Making These 3 Common Money Mistakes?

So while, yes, there's a chance that in the long run, bitcoin can be a great investment, Rachel insists, "Realize the risk. Invest with long-term track records, always."

Long story short? If you have some spare change you're willing to part with, then yes, she says, have fun! But your life savings? Keep that right where it is, friends — at least for now.

You Might Like