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What Is Bitcoin?

What is Bitcoin?

What is Bitcoin?

Bitcoin Basics

I've been hearing a lot about Bitcoin lately, so I decided I should read up on it. But as soon as I encountered words such as “cryptocurrency,” “hash rates,” and “hexadecimal,” my head began to explode.

If you are an economist or an IT nerd, these words might not be a problem for you. But for the rest of us, that’s just techno-babble. So I decided to do my own research, and see if I could come up with a way to explain it in simple terms.

First of all, contrary to its name, Bitcoin is not a literal coin. In fact, it does not exist in physical reality at all. You can’t hold a Bitcoin in your hand, as you might a dime or a quarter. It is a “virtual” asset. And just like virtual reality, it has no actual substance. Bitcoins are stored in digital “wallets” on your computer or mobile phone. One Bitcoin is known as a "BTC."

How Is Bitcoin Used?

The best way to understand Bitcoin is to understand how it’s used. Some use it as a type of currency (because you can spend it to buy goods and services). But you can also buy Bitcoin itself as a product, keep it for some time, and try to sell it at a profit as you might a stock. Finally, you can earn it, as you might earn a U.S. dollar, for performing a task or selling an item. Bitcoin might best be understood as a special type of asset, with properties of stock as well as currency.

One important difference that sets apart Bitcoin from traditional currency as we all know it, is that there is no government in control. Currently, there is no such thing as a “U.S. Bitcoin,” or “Japanese Bitcoin" (although that may change in the future). Also, no banks are involved. It’s international, in that Bitcoin recognizes no borders. You can also use it anonymously. This setup is the perfect recipe for illegal activities in my opinion, but there is nothing illegal about owning and using Bitcoin itself.

One more thing that makes Bitcoin different is that there is no “third party” between you and the other person with whom you are transacting. It’s strictly peer-to-peer. You would think that such an arrangement would require quite a bit of trust between the various people involved. Actually, the opposite is true. Its complex mathematical foundation makes it “computationally impractical” to hack the system.

How Do You Get Bitcoin?

You can buy Bitcoin on an exchange, using traditional currency. You can also “mine” Bitcoin, but that process is very, very technical, and requires sophisticated computing power. The easiest way to understand mining is to think of it as being paid a fee for doing accounting services on behalf of the network. Finally, you can receive Bitcoins from private individuals, in exchange for goods or services.

The process of “mining” Bitcoin is where most of the techno-babble comes in. Also, the process for spending Bitcoin involves a bit of high-level computing power, to verify the funds are legit. The bottom line is that ordinary users don’t need to understand these processes in order to use Bitcoin. That won’t stop your nerd friends from trying to explain it to you. Best of luck with that.

Why Was Bitcoin Created?

With all the other methods of making electronic transactions, what prompted the creation of yet one more way to spend money? Quite simply, a lack of trust in governments and financial institutions gave rise to Bitcoin. By introducing a mathematical model that allows users to exchange funds without the necessity of a third party (e.g., a bank) to coordinate and verify the transaction, funds can be exchanged with no middleman.

What's the Catch?

It all sounds fantastic, except for one little sentence:

“The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

I try to have faith in humanity, but when I read this my heart sank. If there is a will, there is a way. So for me, I’ll stick to old-fashioned U.S. dollars for now.

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.

© 2017 Carolyn Fields


Carolyn Fields (author) from South Dakota, USA on September 17, 2019:

Thanks for sharing the info on Onecoin, Zia. Good to know.

Zia Uddin from UK on September 17, 2019:

I really dont like the idea of cryptocurrencies, and for Bitcoin I have learned benefits a few people. There are however other cryptos out there you need to be wary of. They are scams only to benefit the few by robbing the majority of people. Trust me I lost around 180 dollars for joining a ponzy scheme called Onecoin.

Carolyn Fields (author) from South Dakota, USA on December 03, 2017:

Thanks Maurice! I'm glad you enjoyed it.

Maurice Glaude from Dallas on December 02, 2017:

I'm glad you decided to do this first since I don't think I could have explained it as well as you did. Good Job!