Bitcoin demystified in simple terms
Bitcoin is a digital money currency system. Whew, that sounds complicated. It allows people to send or receive money across the internet, even to someone they don’t know or don’t trust. Money can be exchanged without being linked to a real identity.
In less than 1000 words you’ll be understanding the basics of Bitcoin, the risks, and why its absolutely bonkers in general.
However, understanding bitcoin completely is a far more arduous task. At the end of this article, for those interested, I’ll provide links to more in depth reading sources.
At the time of this writing, Bitcoin is sitting around $33,400, starting from nothing just a few years ago and being purely math!
Does math exist? Can you get paid for writing 1+1? Well, maybe if you are a professor, but you know what I mean. Its intangible. That’s what bitcoins are.
Bitcoins exists as records of transactions between different addresses that are stored in a publicly distributed ledger called the “block chain”. In case a traditional centralized banking system, the bank holds the ledger of all the currencies it has issued. In case of Bitcoin, this digital ledger, is vastly distributed across all the nodes in the network that is participating in mining the Bitcoin. That ledger, is known as the block chain. You perform a transaction, it gets updated to every block chain that exists in the network. Hence, block chain is a technology that is decentralized. Anything that happens in the block chain is a function of the network as a whole.
In other words, everyone can see every transaction that has every happened in Bitcoin all the way to the beginning of its inception, and everyone will know about every transfer that happens. Wild, right?
And since you can’t actually hold or own math, a bitcoin exists soley on the digital bitcoin blockchain. You can’t take it out.
People refer to a wallet as where you keep your money. In bitcoin, a wallet is what lets you ACCESS your bitcoins on the bitcoin network. They aren’t actually in the wallet.
Imagine that Alice wants to send Bob a Bitcoin. She needs to have a wallet, which is a special software, where, it seems, she collects the keys required to access and transact Bitcoins in the network.
How do you get bitcoins?
You’ve probably heard of mining bitcoins. That mining bitcoins takes more power globally than some small nations. Its true! Mining means doing the complex mathematical computations needed to ‘find’ a bitcoin, but it does a bit more than just that.
New bitcoins are created by solving mathematical equations called “blocks,” which are created every time there is a bitcoin exchange online.
Mining is a distributed consensus system that is used to confirm pending transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all the subsequent blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively to the block chain. In this way, no group or individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.
As I mentioned before, the bitcoin rabbit hole is a deep one.
In the end, there are many risks associated with mining or even using bitcoin, including but not limited too:
- Young Technology
- Financial Loss
- Limited Use
Here’s a great video explaining it more detail.