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!

Ariel Horwitz

Ariel Horwitz is a Bitcoin activist, educator, and consultant. He has been involved with the Israeli Bitcoin Association, The Bitcoin Embassy in Tel Aviv, and has founded AlefBit - the first Bitcoin education website in Hebrew.

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

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Navin Israni
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Navin Israni

Hi Ariel,

I am a trainer and I teach technical topics. I can definitely say this is BY FAR the best technical explanation I have ever seen! Kudos for that

And I have a question too: Satoshi Nakamoto created Bitcoin in a limited number and as per his scheme – the total number of Bitcoins generated is getting halved every 4 years. At this speed, the total 21 Million bitcoins will end sometime in 2100s. Why 21 Million and how will it affect Bitcoin price when Bitcoins stop getting generated?

Steven Hay
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Member
Steven Hay
Hey Navin, The 21 million limit is arbitrary. Satoshi could have made it any number he liked but he had to pick something. I’ve seen various theories proposed for why he chose 21. One theory is that it’s because all the gold in the world would form a cube with each side being around 21 meters. Another theory is mathematical: “6 blocks per hour * 24 hours per day * 365 days per year * 4 years per cycle = 210,240 ~= 210,000 Sum all the block reward sizes: 50 + 25 + 12.5 + 6.25 + 3.125 + …… Read more »
Kevin
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Kevin

I can’t get Coinbase to let me complete my info. It wont let me fund my wallet or buy anything. It says my limit is “00.00”

Steven Hay
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Steven Hay

Hi Kevin,

I’d need more info to be able to help you. Possibly you’re in a location which Coinbase doesn’t support or they have some other kind of restriction in place – age perhaps? I suggest that you contact Coinbase support and ask for an explanation.

Sasan
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Sasan

Hi, my account is more than a month that has been disabled at Bittrex.
If anyone can help me, thank you

Steven Hay
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Member
Steven Hay

Hey Sasan,

Check out the comments in our Bittrex review:

https://99bitcoins.com/bittrex-review/

tony
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tony

how do you buy bit coins in the uk and how do we invest them to make money ?

Zsofia Elek
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Zsofia Elek

Hi Tony, you can sign up for our Bitcoin Crash Course which should answer your question about how to buy Bitcoins. You can sign up here: https://99bitcoins.com/subscribe-to-newsletter/. Regarding your question about investments, please check out our article here: https://99bitcoins.com/should-i-invest-in-bitcoin-heres-what-you-need-to-know/

Ryan Salisbury
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Ryan Salisbury

Hi, I found a link to get registered with bitcoins. However the site ask me to register with a different site with my email address and to pay a deposit of £250 to start trading? Is this correct?

Steven Hay
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Member
Steven Hay

Hi Ryan,

Without knowing exactly which site it is and what you’re trying to achieve, it’s pretty hard to give a definitive answer…

However, it sounds very fishy. I don’t like this trading deposit request at all. No cryptocurrency exchange I’ve ever traded on has requested such a deposit. My gut instinct is that it’s a scam site.

To find a reliable, honest Bitcoin exchange for trading, please check out our guide here and the linked reviews here:

https://99bitcoins.com/best-bitcoin-exchanges-comparison-review/

Maryann Lush
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Maryann Lush

I have not long found out about the existence of Bitcoin and am very excited about all things pertaining to it. I have set it as my goal to learn as much as I can about this type of money and so I am happy to have found someone who is teaching people about it and how useful it is going to be in our future economical world. Thank you for reaching out to just the common people in order to educate them.

dramird
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dramird

how to make bitcoin,if you can

Zsofia Elek
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Zsofia Elek

Hi, you can check out this article how to earn Bitcoin online: https://99bitcoins.com/how-to-earn-bitcoins-fast-and-free-in-2016/

filip
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filip

i doo not know how to set up a hardware wallet. any help

Steven Hay
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Member
Steven Hay
Hey Filip, To help you properly, I’ll need to know which type of hardware wallet you have. I’m assuming that it’s either a Trezor or a Ledger, as these are the most popular kinds of hardware wallets. However, it could be something else, like a KeepKey… What I suggest is looking through the hardware wallet’s packaging for the instructions. If these don’t tell you how to set it up, they’ll certainly refer you to the wallet’s official website where you’ll find the instructions you need. Here are the instructions for the 3 major types of hardware wallet: Trezor – http://doc.satoshilabs.com/trezor-user/settingup.html… Read more »
Janine
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Janine

Hi does it matter what currency I buy bitcoin with i.e. bought in ZAR and if so what is the best currency to use – and what impact does the devaluation of ZAR currency affect my bitcoin portfolio

Steven Hay
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Member
Steven Hay

Hi Janine,

Nice to meet a fellow Saffa.

ZAR devaluation raises the value of your Bitcoin portfolio. Devaluation means the Rand is weakening against other currencies, Bitcoin included. It’s a great hedge against Zumafication.

There is a downside to purchasing Bitcoin with the Rand however, in that Bitcoin is sold at a premium on local SA exchanges. If you’re able to buy BTC using USD, EUR or some other major currency, you’ll probably get it at a better price. Currently buying BTC on Luno with Rands will cost about 6% more than buying it on Coinbase with Dollars, for example.

Nomsa
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Nomsa

I have unconfirmed bitcoins since on 20 October its Tuesday now nothing still says its pending what can I do I never experience this https://www.luno.com/explore/XBT/search?q=a6586dcc40e7321bfd3fe8aba0f808f16788581d4bd38eef099ad1a01b841df7 this is a hash number plz I need assistance what can I do to solve this issue and it may take how long

Zsofia Elek
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Member
Zsofia Elek

Hi Nomsa, this transaction is pending because of the very low fee. Eventually, it is possible that it will go through, but it will take some miner. You can also use ViaBTC accelerator service which will speed up the transaction for an extra fee.

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