What is Bitcoin? A Simple (but thorough) Explanation

Last updated on September 21st, 2017 at 09:38 am

Hello guys and gals, I’m Ariel from 99Bitcoins and welcome to your very first lesson about Bitcoin!

In today’s video we’ll be asking the most popular question – the #4 most searched query on Google in 2014 – “What is Bitcoin?


This sounds like a simple question but it tends to get some complicated answers. In this video we’ll make sure to cover all the bases but also to keep it simple. If you find anything interesting that I didn’t talk about enough, there’s lots more to read about it if you search for it – I urge you.

So what is Bitcoin?

The correct answer is “The first decentralized digital currency”, but that’s quite a mouthful. So before we begin to understand this, lets start with a more basic question that most people usually don’t ask themselves: “what is money?”

Money, ultimately, is simply the tool that we use to exchange value. Throughout history we’ve used lots of things as money, from seashells, to precious metals, to salt… The most popular money, historically, has been gold. There’s good reason for this: gold works really well as money. It’s rare – so it’s not worthless, and it’s tangible so if you’re holding it in your hand it’s probably yours. Pretty simple. And this worked for thousands of years, no matter what social institutions exist around you, no matter who the king or government is at that particular time. Gold just worked.

Ener Paper Money

Then came along a new invention: paper money. When you think about it, for someone who uses gold their whole life, paper money is a hard sell. Trust paper instead of metal? Well, paper money actually started out as just a representation of gold. For e.g. the US Dollar was originally just a “gold certificate” which is a piece of paper saying you own some gold that’s sitting in a vault at the treasury. In other words, people never trusted paper money, they trusted the government to hold the gold for them.

Time passed and the US has since abandoned the so-called “gold standard” during the 70’s and today the US Dollar is actually a “fiat” money. “Fiat” is a Latin word for “it shall be” which is another way of saying “forget about gold, let’s all just agree that this paper is worth something, ok?” And that apparently works, because we’re all using fiat money these days and we don’t have to have “hard currency” or “tangible money”. Paper money has some advantages and disadvantages. The biggest disadvantage is that paper is easy to counterfeit, something that’s practically impossible with gold. Almost anyone can simply print paper at home. But there must be advantages that make it worth this trouble, right? Fiat money is actually a form of digitization – that is, we’re dealing with numbers, not metals. This makes money much easier to count, manage and move. In fact, the vast majority of money these days are actually just numbers in computers, believe it or not.

The age of digital money

Wait a minute, so if money today is digital, how does that even work? I mean, if I have a file that represents a dollar, what’s to stop me from copying it a million times and having a million dollars? This is called the “double spend problem”. The solution that banks use today is a “centralized” solution – they keep a ledger on their computer which keeps track of who owns what. Everyone has an account and this ledger keeps a tally for each account. We all trust the bank and the bank trusts their computer, and so the solution is centralized on this ledger in this computer. Computer scientists though, weren’t pleased.

Bitcoin in invented

Decades later in 2008, an anonymous researcher publishes a paper describing how to solve this problem without a centralized solution – that is, without a bank. He called it “Bitcoin” and went on to describe how you can make a ledger that doesn’t rely on a single particular bank – this is, a decentralized solution. This may sound confusing, or at best like science fiction. How does something work if it’s decentralized? You actually already know the answer to this, you’re using a decentralized solution right now to watch this video: the internet.

Think about it: nobody owns the internet. It’s the most vast and powerful network that humans have ever created – but there is no “Internet, inc.” – so it’s decentralized. Lots of individuals and private companies all build the infrastructure of the internet, across companies and border and even ideologies, and it works – much thanks to profit motives and economic interests. So if the internet decentralizes information technology, how does Bitcoin decentralize money?

Bitcoin is just a distributed ledger system

At this point many videos would start getting technical and complicated, but we want to keep it simple. In Bitcoin, the coins (or rather the transactions) are all recorded in a ledger. So far, nothing new. The big deal with Bitcoin is that this ledger is public and shared. Not only, it’s also maintained by the public. Thousands of people have a copy of this ledger around the world, and anyone can download and verify this ledger. In Bitcoin, instead of accounts, money is moved between addresses – kind of like email.

Usually people get concerned when they hear about this ledger being public. Isn’t this a privacy problem? Like most privacy issues, it’s complicated. Whatever you may have heard about Bitcoin – it’s not really inherently anonymous or identifiable. We will touch on this in a later video.

OK, maybe it’s not anonymous or something, but isn’t this a security problem? Well, if you think about it, it’s not a security problem. If you think that this public ledger is easy to hack, try to imagine hacking the English language – you can probably hack into Oxford Dictionary computers and change some definitions, but that wouldn’t be a big problem. There are lots of copies of dictionaries all over the world – you can’t fool everyone by hacking only some of the copies. In Bitcoin, the dictionary that helps everyone stay on the same page is the ledger, and this ledger is called the “Blockchain”.

So now that we understand how Bitcoin is digital, and how Bitcoin is decentralized, we can answer the question “What is Bitcoin?” It’s the first decentralized digital currency.

What does Bitcoin mean for the world?

But what does this all matter? Is Bitcoin going to change the world? That’s a question we’d all like to know, eh? Well, let’s start by considering that Bitcoin is non-geographic. If economies fall or governments change, Bitcoin won’t be affected like fiat currencies. It is also much more internet friendly, which means online commerce can improve. But the biggest winners here are probably the billions of people across Asia and Africa and other places that have an internet connection but have horrible banks.

I mean, with my bank I can shop online and send money across the world even though it’s really slow and quite expensive.  But in Kenya, they use cell phone minutes as money, they buy groceries with air time. In Argentina people are exchanging money in the black market because of inflation that makes it impossible to save money for a rainy day or for retirement. Non-geographic, global money is exactly what these people need – it works even if your government or banks don’t work.

Of course, Bitcoin isn’t only offering an economic alternative, but also a technological alternative. After all, Dollars today are numbers on a computer which represent numbers on a paper which used to represent hard metals, according to laws written hundreds of years ago. Bitcoin was born in the 21st century, which is why it is able to do lots of things that make people call it “smart-money”. For the same reason phones today are called “smartphones”, because they have more features than cellphones from a decade ago. We won’t get into details, but Bitcoin has some advanced features that you don’t get with the old money that we have today (things like colored coins, smart contracts and multisig).

Who accepts Bitcoin?

Of course, businesses have started accepting it all around the world, some big names include Microsoft and TigerDirect and a whole bunch of airlines. There are websites to help you find Bitcoin-accepting businesses. In fact, I got my paycheck in Bitcoin for over a year – and there are lots of people offering professional services in exchange for Bitcoin.

The implications for Bitcoin are obviously hard to measure. In reality there is a whole industry, fields of research, and grassroots movements growing – much like there was when executives from AOL and young students were all trying to explain to people what is this “internet thing” back in the ‘90s.

So I hope you’ve enjoyed our very first edition of BWBT and I can’t wait to see you in our next video. If you still have any questions or comments on the video feel free to leave them in the comment section below. Bye for now!

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440 Comments on "What is Bitcoin? A Simple (but thorough) Explanation"

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Bill Wilson
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Bill Wilson
Hi Steven, Forgive me but I think I just screwed up here and I don’t know who else to ask. I need your help, I think I am making a total mess here: After much hassle I figured out how to buy XRP on Binance, by transfering BTC from Coinbase. No problem. Then I transfered all my LIT from Coinbase to GDAX, to save on the fee. It showed up on GDAX. No problem. Then I wanted to get that LIT from GDAX to Binance, so I “WITHDREW” No address box appeared for Binance and the funds for LIT disappeared!… Read more »
Steven Hay
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Steven Hay
Hey Bill, OK, first thing, do you mean to say LTC instead of LIT? As in Litecoin. Coinbase only supports the following cryptos: https://support.coinbase.com/customer/portal/articles/2630943-supported-digital-currencies So you went to withdraw Litecoin and the UI never gave you the correct prompts for entering an amount and address? It sounds like something has gone wrong on the Coinbase side and you should contact them by opening a support ticket. If they are slow to respond, as is often the case, you should repeat your query on their social media channels. It is fairly normal for withdrawals to enter a pending state for a… Read more »
Bill Wilson
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Bill Wilson

Hi Steven, and thanks so much for responding. FIrst, yes, I meant LTC. On the GDAX my plan was to send it to Binance to trade it. So I hit “Sell” (should have been “Withdraw?”), then it just lit up “SOLD.” But sold where and to whom? It isn’t in my GDAX, Coinbase, Binance or bank account. And now it has been two days, way past the time you said it might take. What could have happened? Where could it have gone? I submitted two tickets already. No response.

jaime Robles
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jaime Robles

How do you get access to ICOs? are those offered on exchange sites?

Leanne
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Leanne

Hi, So I’ve got my Coinbase account, bought 4 lots of currency (Bitcoin, Bitcoin cash, Ethereum and Litecoin. Now what? Do I just leave it there like a share on the market? And if I want to buy in on ICO’s how do I do that?

Steven Hay
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Member
Steven Hay
Hey Leanne, We advise against leaving coins in an exchange wallet, unless you plan to trade them actively on that exchange (in which case, Coinbase’s GDAX site is a better way to do so). The problem is that if the exchange goes offline, gets hacked or turns evil, you can’t get your coins back. It’s a lot safer to store the coins yourself in a personal wallet. The most secure type of personal wallet is a hardware wallet, and it’s pretty convenient to use too. Check out our Wallet Reviews on hardware wallets for more: Here are the Winners for… Read more »
Heather Woodborne
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Heather Woodborne

Hi I have just opened a wallet with Luno. When do I get the key?

Steven Hay
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Steven Hay

Hi Heather,

Luno will not give you the private key to your Luno wallet, ever. If you want to control your own coins, you will need to withdraw them from Luno into a personal wallet. This personal wallet will give you access to the private keys which allow you to spend your coins. Luno just uses their private key to send out your coins upon request.

Helen Ardiente
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Helen Ardiente

It’s helpful to learn Bitcoin…Great!

Bill Wilson
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Bill Wilson

Does one have to get a different wallet for each type of currency or can you keep all you have in one wallet? I’d hate to think I’d need a separate one for each of my holdings!

Steven Hay
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Steven Hay
Hey Bill, You can get multiwallets which hold several different coins. The best type of multiwallet is a hardware wallet, as these offer the best balance between security and convenience. Trezor stores about 9 different coins and Ledger Nano S about 13. As for software multiwallets, there are several available, such as Coinomi and Exodus. These stores quite a number of coins but I’m rather hesistant to recommend them. Their security and features are not as good as dedicated wallets. As far as I know, all software multiwallets contain proprietary elements which require you to trust the devs’ honesty /… Read more »
Sid
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Sid
I read through the editorial, twice, then went back and read it again. I still have NO IDEA what a Bitcoin is, what it looks like, what it feels and smells like. I have an adage: if I can’t see it, smell it, touch it, lick it, chase it, paint it, hear it or fuck it, then it doesn’t exist. Therefore it appears that this Bitcoin is a nonsense and I’ll use that old fashioned stuff called MONEY. No credit or debit cards, no smart phones, just MONEY – real honest-to-goodness MONEY. MONEY is accepted everywhere and you can do… Read more »
starboy
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starboy

hahahaha. i totally understand your point but did you actually read the part thst says that internet is not for anybody which means everybody is on it. have you seen internet before? the answer is no. That is exactly how Bitcoin works.

Bill Wilson
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Bill Wilson

I get most of it but not the wallet concept. My bitcoins, ether, etc. are in Coinbase and Binance. What do I need a “wallet” for?

Steven Hay
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Steven Hay
Hey Bill, There’s a saying in Bitcoin, “not your private keys, not your Bitcoin.” The funds on exchanges are under the control of exchanges. Sure, almost always they’ll move the funds when you request them but “almost always” isn’t the same thing as “always.” Sometimes exchanges go down, then it’s impossible to access your funds. Sometimes exchanges get hacked or steal, then your funds are gone forever. Holding coins in your personal wallet is far better security, and the way Bitcoin was intended to be used. You must take responsibility for your own security (hardware wallets are the easiest way… Read more »
jaime Robles
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jaime Robles

But you just mentioned in your video that because we have all these ledgers all over the place the whole cryptocurrency is safe because someone can hacked in one place but ledger is in many places…in that sense is contradictory that now we need to have wallets to protect our bitcoins isnt?..I know they are necessary but then what’s the point?

Steven Hay
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Member
Steven Hay

Hi Jaime,

OK, so there’s the blockchain which contains everyone’s addresses. The blockchain is shared among all participants. So everyone’s coins are held in the blockchain in addresses. The only way to send coins from these addresses is if you control the private key associated with the address. This is what your wallet contains – the private key which lets you spend from your address.

Hope this helps to explain things!

Bill Wilson
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Bill Wilson

Thanks so much, Steven, for your time and help. If I may – First, what is a “fork?” The other issue regarding wallets is that I get it – I understand the idea of having control over my own currency. But how do I put them from the exchanges into my wallet (esp. a hard one) first, and then vice-versa – How do I trade? Many thanks in advance.

Bill Willson
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Bill Willson
Thanks for the good Advice, Steven, – Sounds important. So assuming I get my own wallet, which based on what you said I will, doesn’t that add yet another step to what for me is an already complicated process? Do I need to have everything go through my wallet now every time when switching between Binance and Coinbase? Or is it a matter of leaving what I plan on trading on the exchanges and just keeping what I want to save in my wallet? Finally – You speak of an ETH wallet – Do I need different wallets for all… Read more »
Steven Hay
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Steven Hay
Hey Bill, You’re welcome, hope it helps. Yes, using a wallet does add another step to what is (at first) a complex process. It also adds transaction fees, as you must send from the exchange to your wallet and that costs a little money and time. See our section on setting the proper transaction fee to avoid frustration: Unconfirmed Bitcoin Transaction? Here’s how to Shorten Bitcoin’s Transaction Time All that said, a little extra time, cost and hassle to store your own Bitcoin safely is way better than losing them if something goes wrong with your exchange. As for sending… Read more »
Steven Hay
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Member
Steven Hay
Hi Bill, My pleasure, glad to help. OK, so a fork is when one project splits off from another. So you have the original Bitcoin project, including its code and blockchain (transactional history)… This is then copied by a forkcoin, which might make some minor changes to the code but the transaction record remains the same. What this means is that if you had 10 bitcoins, then after the fork you have 10 bitcoins plus 10 forkcoins on their blockchain. Sometimes these forks can be worth quite a bit of “free money,” you might also decide to keep them if… Read more »
Bill Wilson
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Bill Wilson

Thanks so much, Steven, – You are making what for me is an extremely complicated process a whole lot easier!

bob miers
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bob miers

thanks for info, I was turned off by an invisable “wallet”….still am, have a few ethereum with coinbase and if they go dark, I have nothing….thanks for any help

Steven Hay
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Member
Steven Hay

Hello Bob,

I don’t quite understand what you mean by an invisible wallet, could you please elaborate? What was the wallet’s name or was it a wallet on an exchange? What happened to your coins with this wallet?

If you’re worried about leaving your coins in Coinbase, then I would suggest that you use a personal wallet for Ethereum. I usually recommend the combination of MyEtherWallet with the private key generated by and held in a hardware wallet. The HW offers great security and MEW allows you to get all the ERC-20 tokens you might want.

silverfox
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silverfox

Hi.

Could you elaborate on how bitcoin is safe even though it’s a public ledger? You gave the analogy with the English language, and changing definitions in the dictionary, but wouldn’t that still mean hackers can alter the ledger and people can loose bitcoins?

Steven Hay
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Member
Steven Hay
Hi silverfox, OK, so public ledger means that every Bitcoin address which contains value can be *seen* by anyone. The safety arises from the fact that value in any address may only be *moved* by whoever holds the private key which is linked to that specific address. It’s a bit like if there was a public webcam inside a gold vault. Anyone could see which randomly-numbered locker in the vault held how much gold, but only the guards (representing the Bitcoin protocol) are capable of actually transferring gold from one locker to another. Getting back to the private key –… Read more »