What is Bitcoin? A Simple (but thorough) Explanation

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

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consulting
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consulting

hello there ! thank you for the intro..i’m looking forward for what’s next.

Peter
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Peter

Great video! Thank you.

Ondřej
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Ondřej

So if i understand it well, the miners are kind of a servers who computes the transactions etc, because it consume a lot of computing power to encrypt and decrypt the transactions of bitcoins…Right?

Zsofia Elek
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Zsofia Elek

Hi Ondrej, yes that’s right, you can read more about Bitcoin mining in this article: https://99bitcoins.com/bitcoin-mining-profitable-beginners-explanation/

Jen
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Jen

Thank you Ariel!

Holly
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Holly

Thank you Ariel for breaking it down so that the average person can understand the concept of ‘cryptocurrency’. I feel more confident in my endeavors having read your article and understanding the reason that it was created in the first place.

Pamela smith
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Pamela smith

Hi What does the the US government think of bitcoin and are they involved in running or controlling any part of bitcoin? As bicoin get more known and popular will it have any effect on our economy!

Dan Hall
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Dan Hall
Hi, Pamela. 1. No, the government is not involved in running Bitcoin. See the part about being “decentralized”. 2. They would VERY MUCH like to control Bitcoin but can’t since it is decentralized and worldwide and borderless. There have been attempts by the SEC, IRS, etc. to “regulate” cryptocurrencies but it is like trying to regulate the flight of pigeons. They go where they want to. And so will the wealth of people through the use of these cryptocurrencies. Currency controls or wealth reduction through taxation becomes impotent. 3. The effect is HUGE– The monopoly on freedom/wealth creation by the… Read more »
Elsa
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Elsa

Good afternoon – Thank you for the insightful explanation of what a Bitcoin is – I have been researching information on cryptocurrencies for several weeks and have found your site to be the most user-friendly. I wanted to know what your thoughts were regarding the changes China is looking to make regarding Bitcoin. If they truly discontinue the use of Bitcoin (cryptocurrencies) what does that do the profitability? Your insight would be greatly appreciated. Thanks!

Howard Bishop
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Howard Bishop

Liked your post

ahmad
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ahmad

36

Frank
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Frank

Thank you for the lecture. I liked it, it was simple enough for me to grasp. I am looking forward to the next lecture.

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