Bitcoin in Layman's Terms

Updated on April 16, 2019
Tommy Limpitlaw profile image

I have been researching cryptocurrencies for over 2 years, and I would love everyone to know the possibilities this emerging tech brings us.

A Peer to Peer, Censorship Resistant, Decentralised Currency
A Peer to Peer, Censorship Resistant, Decentralised Currency | Source

What is Bitcoin?

Bitcoin, like most other software technologies, can seem daunting when you attempt to understand it. However, it doesn’t need to be this way. In fact, you don’t even really need to understand its technicalities. You probably don’t understand exactly how the World Wide Web works, but you can navigate your way around that and do whatever you need to do without thinking too much about it. Well, the same can be said for Bitcoin, but if you do want to know how it works without fighting your way through all the technical terminology, read on.

In short, Bitcoin is an open-source, decentralised, independent of any central authority, peer-to-peer, trustless, immutable, cryptographically secure payment network and ledger. Each bitcoin 1.00000000 is divisible by one hundred million, and each of these units 0.00000001 is known as a satoshi. A lot to digest? Let me explain.

Satoshi Nakamoto's Creation

Bitcoin is a relatively new software technology that is known as blockchain. It was created by a pseudonymous software engineer going by the name of Satoshi Nakamoto who launched it on 3rd January 2009, and the Bitcoin Blockchain has never stopped producing blocks ever since. The blockchain is an open source distributed public ledger, which has recorded every single transaction since Bitcoin’s inception. Once each transaction has been entered onto the blockchain it cannot be reversed, and as long as the user sends it to the correct address, the bitcoin cannot go astray. But how does it work?

A Mining Farm
A Mining Farm | Source

The fundamental infrastructure of Bitcoin is thousands of distributed nodes and even more miners. A node is a storage device that has the Bitcoin Protocol installed. Every node has the complete blockchain running on it and they all work together in agreement. Miners can be anyone from a single person, a mining company (mining farm), or a group of thousands of people mining together (a mining pool) all using their powerful computing power to validate the transactions. The nodes and the miners constantly work together to process everything that goes onto the blockchain.

How Does Bitcoin Work?

Without getting too technical, here’s how it works: When somebody sends a bitcoin, or a fraction of, to somebody else a transaction has been made on the ledger. It is then picked up by the network of nodes who send it on to the miners. Once a miner has picked up the transaction it cryptographically processes the data and adds it to its other recent transactions

Every ten minutes or so, using the most secure hashing algorithm SHA_256, the miner shrinks the group of transactions into a hash of 256 bits. The cryptographic hash becomes what is known as a block. The block is then sent back to the network of nodes that need to agree that all transactions in the block are legitimate and that the hash agrees with the previous block on the chain. This is known as Proof of Work. Once consensus is agreed between the nodes, the block is added to the chain and 12.5 new bitcoins are minted and sent to the miners as reward. The miners are also rewarded with the transaction costs.

How Secure is Bitcoin?

Can a rogue transaction or block be added to the chain by a fraudulent miner or node? I hear you say. Well, the answer is that it is technically possible, but highly unlikely. Remember all the thousands of nodes have the Bitcoin protocol installed and they will automatically refuse any rogue block. If somebody tries to manually corrupt the transactions their node’s version of the blockchain will not align with the public version and be refused part of the public chain.

What’s more, it would take a conglomerate of miners (or billions of dollars worth of computing power) to seize control of 51% of the blockchain to have any chance of trying to manipulate the blockchain. Then they would have to get around the nodes’ consensus to have any chance.

However, the incentives for any miner to try and manipulate the system are obliterated by the effect it would have on the price of Bitcoin, because if news came out that it had been hacked the value of all bitcoins, including theirs, would disintegrate rapidly. Hackers have been trying to hack it every day since it was launched, and they will keep trying, but the decentralised nature of it makes it probably the most secure system ever built.

Bitcoin is the Crypto Gold Standard
Bitcoin is the Crypto Gold Standard | Source

Where to Keep Bitcoin

The owner of any bitcoin has an address with a public and private key. The public key is as it states: public, and a user will give this to the person who wants to send them some coins. There is no third party involved; it is trustless. The sender will send an amount of bitcoin to the receiver and the miners, nodes and Bitcoin protocol will do the rest. The transaction cannot not go to the address the sender sent it to.

The bitcoins will always remain on the blockchain, however, and proof of ownership is having what is known as the private key. A private key, like the public key, is a group of letters and numbers, but private means private. Do not let anyone know your private key or they will also have claim to your bitcoins.

Although the coins never actually leave the blockchain, you can store the public and private keys in a software or hardware wallet which is an interface showing you how much you have, thus making it much more user friendly. You can also write your private key on a piece of paper or store it in your memory if you prefer. These are arguably the safest ways to store Bitcoin, and probably a good idea if you’re storing long term. Once you decided to spend the ‘paper bitcoin’, you would just type the private key into a Bitcoin wallet and your value of Bitcoin would appear in your wallet.

Programmable Money

Bitcoin is programmable money, which basically means that you can add code to the bitcoins. This opens up so many options for the possibility of spending money on the Internet, but without going too deep, I will give a couple of examples. Firstly, the transaction sent can be programmed to contain clauses that must be met, like it can only be spent in a certain place or time, or even if a certain task is completed. Think fraudulent charities and you have only one idea that can be sorted.

Keep Your Private Keys Somewhere Safe
Keep Your Private Keys Somewhere Safe | Source

Other things can be built on top of Bitcoin and because the currency is digitally native, the ease at which transactions sent becomes frictionless, which is not possible with Fiat money, even though most of that is in digital form. For example, lets say Uber built their new decentralised version on Bitcoin. It’s not possible right now, but it will be. Anyway, the contract between the taxi driver and passenger would automatically execute itself and the money (represented in Bitcoin) would, without fail move from the passenger’s wallet to the driver’s wallet.

The trustless nature of Bitcoin means that no middleman is needed to verify any transaction. With Fiat money, we need somebody, like a banker or a lawyer to verify that the money has been sent. However, with Bitcoin, everything is on the ledger and anybody can see the ledger at any time, so there is no need to have to trust anybody. This will cut so many costs for companies it’s hard to quantify, but once the big companies start moving their data onto Bitcoin, the rest will follow.

Scarcity of Bitcoin

There can only ever be 21 million Bitcoin and at time of writing, there are just over 17.5 million in circulation. For now there are 12.5 Bitcoin minted every 10 minutes, but the Bitcoin protocol is designed to halve the reward every four years. The next ‘halving’ is due by about May 2020, when the reward will become 6.25 every 10 minutes, and then four years after that the reward will be cut in two yet again, and that will continue until the last piece of Bitcoin is created in or around 2140. Therefore, we know how many bitcoins there will be at any given time. Something we cannot say for Central Banks’ issued FIAT currencies like the dollar, euro or pound.

Bitcoin is not a company or owned by any central entity. It’s a network and it’s owned by whoever wants to partake in it. It doesn’t have a marketing team promoting it, it promotes itself. It is 10 years old, but it is still in its infancy. The possibilities it brings to society are endless, which is something I will leave for many more blogs. If you don’t know much about Bitcoin, or you have maybe heard the negative press and even thought of it as an annoyance that will eventually go away, I recommend that you start to take notice of it. Bitcoin is here to stay and disrupt, and it could quite easily become the most transformational technology in history.

Recommended Reading

The Bitcoin Standard: The Decentralized Alternative to Central Banking
The Bitcoin Standard: The Decentralized Alternative to Central Banking

If you are interested in learning more about Bitcoin and its possibilities, I highly recommend reading this book. It's a little technical, but I've read it twice and learned so much from it.


Safely Store Your Cryptocurrencies

Trezor Model T - Cryptocurrency Hardware Wallet. Next Generation Universal Vault for Digital Assets. Store & Encrypt Cryptocurrencies, Passwords with Total Security
Trezor Model T - Cryptocurrency Hardware Wallet. Next Generation Universal Vault for Digital Assets. Store & Encrypt Cryptocurrencies, Passwords with Total Security

Keeping your private keys private is vital, and the best way to store them is on a hardware wallet. I recommend the Trezor Wallet. It encrypts your keys and never actually connects with the Internet. Barring writing them down on a piece of paper, it's the safest way to store your Bitcoin.


This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

Questions & Answers

    © 2019 Tommy Limpitlaw


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      • Tommy Limpitlaw profile imageAUTHOR

        Tommy Limpitlaw 

        7 months ago from Leeds, England (Now residing in Thailand)

        The banks will refrain from using it for as long as they can because it will disrupt their profitable monopoly. However, they will have to start using it because when people demand things, they get it. It might take a while, but countries like Venezuela, Argentina, Turkey, whose economies are hyperinflating are turning away from their govt controlled currencies. Once that happens on a bigger scale: Italy, Spain etc it will snowball.

        The irony is that whichever banks integrate it, will profit massively from it anyway, because the price will keep appreciating (in a volatile way) and the system is much better, faster and trusting than their swift system now.

        As for mining. It probably isn’t profitable for now, but if it’s a long term gain, don’t worry about that. If you’d rather wait, then mine when the price is up and the profits are bigger but there’s more of the cake to share among the inevitable more miners.

      • profile image

        Joseph Kempton 

        7 months ago

        I understand your point but we don’t buy groceries or gasoline with Gandhi’s, Suffereigns or Kings. Cant really argue about Bitcoin worth because it is very valuable today. But where will it be tomorrow? If banks start exchanging Bitcoin like I’ve heard they were going to do that would lend more credibility to the value longevity and at that point I’m going to really kick myself in the ass for not mining this stuff.

      • Tommy Limpitlaw profile imageAUTHOR

        Tommy Limpitlaw 

        7 months ago from Leeds, England (Now residing in Thailand)

        How many aircraft carriers did the Suffragettes have? How many did Gandhi or Martin Luther King have?

        People are more powerful than any guns. Sure, weapons will kill but when people really want something they get it.

        Besides, it’s faith and not weapons that drives the US Dollar, but that’s slowly changing.

      • profile image

        Joseph Kempton 

        7 months ago

        I know a Bitcoin miner who advised me to get in on the mining action but he didn't explain it well.

        My question then is still what my question is now. What gives a currency its value? I know faith has a lot to do with it. People are putting a lot of faith into these block chains. What supports this faith? Despite a whopping national debt I believe 12 US aircraft carriers instills a great deal of faith in the US dollar. When push comes to shove how many aircraft carriers does Bitcoin have?

      • Tommy Limpitlaw profile imageAUTHOR

        Tommy Limpitlaw 

        8 months ago from Leeds, England (Now residing in Thailand)

        Thanks. To be honest, it took me a long time to understand Bitcoin. That's why I wrote it, for people who aren't techy like myself. It is a really difficult thing to understand but it's such an important tech that I think people should look into it.

      • CWanamaker profile image

        Christopher Wanamaker 

        8 months ago from Arizona

        This was a great article. I learned a few things about Bitcoin that I did not know. I like how you explained things in simple terms.

      • Tommy Limpitlaw profile imageAUTHOR

        Tommy Limpitlaw 

        9 months ago from Leeds, England (Now residing in Thailand)

        Yeah, I heard of the apparent death pf the guy. There is definitely a 'Wild West' culture in crypto, but that's normal for all new asset classes. Insurance and custodianship is coming in imminently.

      • bhattuc profile image

        Umesh Chandra Bhatt 

        9 months ago from Kharghar, Navi Mumbai, India

        I am only having some academic interest. In fact, after the recent incident of death of a Bitcoin company CEO cum owner creating lock up of Bitcoin wallets, there is some fear in the minds of people.

        As this investment arena is neither protected by any Govt nor by any reputed international agency a fear factor is always there.

      • Tommy Limpitlaw profile imageAUTHOR

        Tommy Limpitlaw 

        9 months ago from Leeds, England (Now residing in Thailand)

        hanks, Umesh. Are you interested in Bitcoin? I hear the Indian government are trying their best to stop Indians buying it.

      • bhattuc profile image

        Umesh Chandra Bhatt 

        9 months ago from Kharghar, Navi Mumbai, India

        Very well explained.

      • Tommy Limpitlaw profile imageAUTHOR

        Tommy Limpitlaw 

        9 months ago from Leeds, England (Now residing in Thailand)

        Thanks Jan. I agree totally, and I believe it will start to gain traction in the next 12-24 months.

      • Jan Michael Ong profile image

        Jan Michael Ong 

        9 months ago from Metro Manila, Philippines

        Very good research. If Bitcoin would gain more traction as an actual means of exchange, it would be better.


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