Bitcoin is a digital peer-to-peer decentralized cryptocurrency that uses encryption to create and transfer funds. Transactions are recorded in a public ledger through a process known as “mining“. Bitcoins are stored in digital wallets at “Bitcoin addresses” which are public strings of numbers with matching encrypted private keys used to verify ownership.
Bitcoin was created by Satoshi Nakamoto (an anonymous group/person) in 2008 and was officially released in 2009. Today Bitcoin is the most common cryptocurrency and also has the highest value with one Bitcoin being worth about $225 USD as of June 2015, by comparison the next most valued cryptocurrency Litecoin has a value of about $1.50 as of June 2015.
It’s a common misconception that bitcoin is too complicated for non-technical people to understand. While the subject can get complex, the basics are accessible to anyone who wants to learn about it.
For the average person, using Bitcoin is as simple as this:
What is a bitcoin address?: A bitcoin address is a public “key” (a string of 34 – 36 characters) that can receive Bitcoins. Each public key has a corresponding private key known only to it’s owner which proves ownership of coins. Both public keys (bitcoin addresses) and their matching private keys are created by and stored in bitcoin wallets.
Technical jargon and concepts aside, bitcoin is simply digital money. You can store it in a digital wallet and use it to purchase goods, services, or other currencies from anyone willing to accept it. For the average user, the learning curve for using and storing Bitcoin isn’t any more complicated than online banking, Paypal, or another familiar digital currency. The concepts surrounding Bitcoin are typically pretty simple to grasp, most of the difficulty comes from wrapping ones head around a number of new concepts at once.
A Short History of Bitcoin
Bitcoin was invented in 2008 by an unidentified programmer or group under the pseudonym Satoshi Nakamoto. The bitcoin system was first documented in Nakamoto’s paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. Bitcoin was then released for public use in 2009. The coin grew steadily in value until it attracted massive media attention in 2014. During it’s peak in 2014, Bitcoin was sold for more than $1,000 USD per coin. Despite it’s infancy and early volatility, the cryptocurrency has grown in popularity, usability, and profitability. Today, there are lots of people who can benefit from knowing about and using bitcoin and other cryptocurrencies. While the coin itself might not be around for the long haul, the fundamental principles behind Bitcoin are likely to be relevant and important for a long time.
You can see a visual history of Bitcoin at historyofbitcoin.org
What is Bitcoin For?
One way to understand bitcoin is to look at what it’s used for. While there are many uses of bitcoin, the most general use of bitcoin is as a decentralized electronic payment system. In that way, the bitcoin system is kind of like PayPal – you can digitally send or receive payments to someone else over the internet.
The big difference between bitcoin and other electronic payment systems (like PayPal or Credit Card Payments) is that bitcoin is decentralized. What this means is that there is no central agency facilitating every payment.
Instead, all of the bitcoin payments are entered into a giant public ledger (also called the Transaction Block Chain), which is available to and verified by everyone else on the network. This way, everyone can see who owns what bitcoins, and you can both prove that you are the owner of some amount of bitcoins and rightfully transfer that ownership to someone else in exchange for goods and services. Best of all, you don’t need a big credit card company or corporate third-party to verify this transaction for you – you’re cutting out the middle man.
How does Bitcoin Have Value?
A lot of people who are new to bitcoin are confused by how bitcoin has value at all. There are two ways you can look at this:
- Bitcoin has the value people give it — when merchants accept bitcoins in exchange for goods and services, they’re essentially expressing trust in the bitcoin system and assigning the worth of their services in terms of bitcoins. Further, when people buy and sell bitcoins on exchanges for more traditional currencies, they are giving bitcoin a “traditional value price.” In other words, bitcoin’s value isn’t derived from gold or a fiat currenct; the dollar value of bitcoin is ruled by the open market.
- Bitcoin derives its value from computational power — because the bitcoin mining process requires significant computational power, you could view the costs of mining as the source of bitcoin’s value. The more computational effort that goes into the system, the harder a miner has to try to gets new bitcoins from mining, and thus the more value those bitcoins have.
People have found that bitcoin has a variety of advantages over traditional electronic payment systems. Here we’ll mention at just a few:
- Privacy — Because the system uses public-private key cryptography, individuals can send and receive transactions without attachment to their real-world identities. Third-parties will be hard-pressed to tracking your purchases and payments. This is not the case with other Electronic Payment Systems. However, keep in mind that bitcoin is not completely anonymous. For more information, visit our page on anonymity on the bitcoin network.
- Accessible to Everyone — Anyone with internet access can use bitcoin. You are not required to pass a background check, have credit, live in any specific area, or pay expensive fees. Bitcoin is an equalizing system. Also, modern bitcoin client software makes the technical aspects of Bitcoin transparent to the user; contrary to popular belief, you don’t need any tech skills to use bitcoin.
- Low-Cost — Credit cards and third-party transaction companies like Paypal both have hefty transaction fees. Banks often charge exorbitant percentage fees on money transfers. Bitcoin transaction fees are set by you and are generally a fraction of what you’d pay for the same transfer through a different medium.
For a more comprehensive look at why people choose bitcoin, be sure to visit our page on the Uses of Bitcoin.