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What Is Bitcoin? An Ultra Simple Explanation Of Bitcoin

What Is Bitcoin? An Ultra Simple Explanation Of Bitcoin

This article exists to help you understand what Bitcoin is. Every single website I look at, even the official Bitcoin websites and Wikipedia are unable to explain what Bitcoin is to my satisfaction. All of the articles I have read seem to assume that the reader knows the difference between Bitcoin and a hole in the wall. This article assumes you know nothing at all about Bitcoin. In this article, I explore what Bitcoin is. I get under its skin and root around a little. So, what is Bitcoin?

Is Bitcoin Another Type Of Currency?

If I visit a currency-converting website right now, I can convert my US dollar into different currencies such as British Pounds, Japanese Yen, Euros, and so forth. If you go to the right type of website, you may also convert your dollar into Bitcoin and use Bitcoin as a currency.

Bitcoin is super confusing for anybody who is not used to cryptocurrency and/or people who have not been exposed to cryptocurrency yet. This article goes over it slowly and repeatedly. If you consider yourself an intermediate, and/or you feel that you know a little bit about cryptocurrency, then you may find this article a little repetitive.

They Call Bitcoin A Cryptocurrency

Bitcoin is a form of digital currency. It doesn’t operate with the use of a central bank like the dollar does. Instead, an encryption technique is used to regulate the generation of units of currency.

Even though the US dollar isn’t tied to gold these days, it used to be tied to gold. Somebody handed over a bag of gold in return for paper dollar notes. Think of dollars as a currency born in the real world. Bitcoin is a currency born in the digital world.

Lets ignore the “encryption” side of the equation for now. When you see the word “Cryptocurrency,” think “Digital currency” instead.

What Is Bitcoin?

Bitcoin uses a ledger system. The ledger system is part of what makes Bitcoin a digital currency.

Let’s say that Jack buys five Bitcoin currency units. Imagine a ledger and imagine Jack’s name and his five units of currency on that ledger.

Jack On A Ledger

Now, image millions of people on the same ledger. They each have a number next to their name, and that number represents how many Bitcoin currency units that person has.

Peoples name on a ledger

The ledger is a digital file. That ledger is present on every computer in the Bitcoin network. When people trade and use Bitcoin, all they are doing is moving numbers around the ledger.

 ledger with moved numbers

Imagine that the ledger shows how many dollars that Jack, Will, Karen, Grace and Rosario have. If Grace gave 2 dollars to Karen, then Karen would have 5 dollars and Grace would have 8 dollars. Just replace the word “Dollars” for “Bitcoin digital currency” and that is what Bitcoin is all about.

Do Bitcoin Units Have Value?

Take a look at the image below. It is an image of the ledger from earlier. The image shows a bunch of different numbers next to a bunch of different names. It show how many Bitcoin units each person has.

Peoples name on a ledger

These numbers only have value because we give them a value. People are prepared to trade goods and services for Bitcoins. It is similar to trading dollars for goods and services.

Dollars have value because people place value in them. They also have value because they are governed by laws, and because people from other countries will also trade goods and services for dollars.

Bitcoins also have value because people place value in them. They also have value in them because people trust them. People trust that the Bitcoins they trade have been purchased with real money, and people trust that they will receive real money if they wish to convert them.

Value Because People Trust Them, That Sounds Dangerous!

There is a chance that Cryptocurrencies such as Bitcoin will fail. The same is true of many things in the financial world, and it is all based on trust. Here are three similar examples.

[1] If students find a way to skip out on their student loan repayments while still being able to remain employed, then the student loan bubble will burst.
[2] People trusted investments into websites until the net bubble burst when people realized that websites were not yet as profitable as people projected.
[3] Even the dollar currency would fail if inflation grew too quickly, or if money forging techniques were created and used on a large scale.*

* In Britain, a group of forgers were able to turn £5 notes into £20 notes. The notes and the paper were all legitimate, so they all passed forgery tests. The UK government stopped this by making all their notes different sizes so that a £5 was significantly smaller than a £20 note. That easy solution stopped the UK GBP from failing.

If it is one day possible to generate digital Bitcoin forgeries, then the entire Bitcoin network and all the money invested in it will dissolve into nothing. In addition, if governments start trying to regulate and monitor it, then a large chunk of its value will disappear.

How Is Bitcoin Currency Sent?

You send out a broadcast saying that an amount from your Bitcoin balance should go down, while your recipient’s balance should go up. In the image below. Grace sent out a broadcast saying that two Bitcoin should be removed from her account, and that Karen’s balance should have two added.

 ledger with moved numbers

Grace sends out the broadcast, and her balance goes from 10 to 8. At the same time, Karen’s balance goes up by two from 3 to 5.

What Happens After Money Is Sent?

Remember how I said that the Bitcoin network is made up of ledgers. Each computer in the Bitcoin network has its own ledger. This ledger contains the balance information of every single person with a Bitcoin balance.

Ledgers shown on Bitcoin network around the globe

After each transaction, the Bitcoin ledgers involved are updated. In our example with Karen and Grace, one of the ledgers would be updated to show the transaction had taken place. In the image below, you can see how the ledgers looked at first.

Ledgers shown on Bitcoin network with numbers on

Now, let’s assume that Grace broadcasts that her balance goes down by two and Karen’s goes up by two. In essence, Grace is sending two Bitcoin from her balance and she is sending them to Karen. In the image below, you can see the transaction occur and you can see how two ledgers are updated. You can see how Grace now has 8 Bitcoin instead of 10, and Karen has 5 Bitcoin instead of 3.

Ledgers shown on Bitcoin network with one updated ledger

Only one ledger has been updated in the image above. After the update, a bot (program) will visit every other ledger and update each one as it goes until all the ledgers say the same thing. After the transaction (the Bitcoin transfer from one account to another), and after the bot has visited each ledger, then all the ledgers are updated and they all look the same (as in the image below).

How Does Bitcoin Differ From A Bank Or PayPal?

When you keep money in a bank or in an online wallet such as PayPal, then only you are able to see your balance or your transactions. However, with Bitcoin, everybody is able to see what everybody else has. It is possible for one person on the network to see the balance of every other person on the network.

Another difference is that banks and online wallets such as PayPal are centralized. When you put money in a bank, you are trusting the bank and the bank only. If something goes wrong, then you sue the bank because it is the banks responsibility to keep your money safe. When you put money into Bitcoin, then you are putting it into a network, which means you have to trust the network. If something goes wrong, you cannot sue the network because it is made up of thousands upon thousands of people.

In other words, when you put your money into a bank account or into PayPal, then you have to trust that one entity. When you put your money into Bitcoin, then you have to trust a network that is ran by thousands upon thousands of anonymous strangers.

Trusting Anonymous Strangers Sounds Like A Terrible Idea

As I mentioned, if you put your money into a bank, then you are trusting that bank and you are able to sue the bank if something goes wrong. If you put your money into Bitcoin, then you are trusting a network and are therefore trusting thousands of anonymous strangers.

Luckily, the Bitcoin system doesn’t require trust. There are African and Middle Eastern countries where you may put your money into one of their banks, and then go back the next day to find your balance empty and there is nothing you can do about it. You have to trust your bank, and in those countries there are untrustworthy banks. With banks you need trust. The Bitcoin system doesn’t need trust. In fact, the Bitcoin system gets along quite well without any form of trust.

Mathematical encryptions protect every part of the Bitcoin system. What’s more, you are able to look at the source code that powers the Bitcoin system so that you may see if there are any holes in it where cybercriminals may exploit it.

Is This Truly How Bitcoin Works?

No, what you have read in this article is an oversimplified explanation of how Bitcoin works, so why I have oversimplified in this way?

The part I oversimplified was the ledger system. Even though a person on the Bitcoin network is able to find out what balance you have, there are no numbers next to names in the way I showed you earlier on the images.

I oversimplified the ledger system because there is no need for you to know how it works in order to grasp what it is. You do not need to know the intimate details of how Bitcoin works in order to use it. I offered an explanation that shows you all that you need to know in order to start using Bitcoin.

For example, when you are learning to drive, you don’t need to know how the internal combustion engine works in order to use a car and drive a car. All you need to know is the basics such as how gas goes in one end and hot air comes out of the exhaust.

When I simplified Bitcoin in this article, I simply did what I did in the previous paragraph where I oversimplified cars. I gave you all you need to know, but I didn’t go into detail as to how the internal workings of Bitcoin operates.

To Recap What We Have Learned

Think of Bitcoin like a digital currency. Though it is not competently accurate, try to think about how the Dollar is from the USA, the Pound is from Great Britain, and the Bitcoin is from the Internet. It isn’t strictly true, but it works as a good explanation.

Just like how you may turn your US dollar into a Japanese Yen, or a British Pound, you may also turn your US dollar into a Bitcoin. At the time of writing, a US dollar buys you:

[+] 0.76 Great British Pounds
[+] 09.20 Japanese Yen
[+] 0.00026 Bitcoin

If we convert it the other way:

[+] One Great British Pound costs you $1.29
[+] One Japanese Yen costs you $0.0092
[+] One Bitcoin costs you $3799.98

Think of Bitcoin as being just another currency. As you can see by the lists above, it is a very valuable currency. If you have just one Bitcoin, then people will pay you thousands of dollars for it.

Conclusion – What Is Bitcoin?

I have tried my best to explain what Bitcoin is. I have put it in very simple terms. If you take anything away from this article, then take away the fact that it is another type of currency.

The way this type of currency works is a little different to the way that other currencies work. I have explained how there are ledgers and how they allow people to track how many Bitcoin that they and others have.

About The Author

Ash The Great

After a varied career in different industries from the hospitality industry to the financial consultancy industry, Ash now spends his days working as a professional writer.

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