Bitcoin is digital money on the internet. It is a way to transfer value. Transactions are stored on a public digital ledger called a blockchain.
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:
TIP: Coinbase is an all-in-one platform that lets you do all the above.
A Quick Technical Description of Bitcoin
In more complete terms:
- Bitcoin is a digital peer-to-peer decentralized cryptocurrency that uses encryption to create and transfer funds.
- Transactions are recorded in a public ledger called a blockchain 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 wallets can also let you send and receive Bitcoin.
- There are a number of different wallets you can use, exchanges you can trade on, and other cryptocurrencies you can buy with Bitcoin.
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.
UPDATES ON TRANSACTION FEES AND SPEEDS: Above we said Bitcoin was a cheaper and faster alternative to traditional electronic payment systems. However, that isn’t always true. Bitcoin’s transaction fees were rather low when we first wrote this article back in 2015, and likewise transaction speeds were rather quick. However, as time has moved on Bitcoin at times has suffered from high fees and slow transaction speeds at times when many users try to use the network at once. These issues have been being addressed by software updates like Segwit and the Lightening Network. It is important to remember that Bitcoin is software and can be updated.
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. NOTE: This has become less true over time, this article was written when Bitcoin was $225 and transaction volume was much lower.
For a more comprehensive look at why people choose bitcoin, be sure to visit our page on the Uses of Bitcoin.
How Blockchain Works
To really understand how Bitcoin transactions work you have to understand how Bitcoin’s blockchain works.
The Bitcoin blockchain is a ledger of all Bitcoin transactions.
Transactions are made between Bitcoin addresses.
Each address is associated with a set of cryptographic keys called a public and private key (a public key anyone can know, but a private key should be kept private).
To move balances around you must have knowledge of a private key associated with transactions made by a Bitcoin address on the blockchain. From that a balance can be derived.
Wallets are software that lets you store keys/addresses and calculate balances. Wallets also let you move around Bitcoins associated with a given key/address.
Thus, owning Bitcoin is really just owning private keys associated with transactions and a wallet is just software to help you tally balances, store keys, and make transactions.
All the technical details aside, in practice no one has to deal with any of that and can just use a custody service like Coinbase (Coinbase really is a user friendly all-in-one solution for everything Bitcoin).
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 and their matching private keys are created by and stored in bitcoin wallets.
NOTE: The technical details are only slightly more detailed than described above. If you really want to dive in, see a page on how blockchain works.
A Quick 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.
That peak was followed by a crash and then long bear market. Of course, by 2017, Bitcoin saw record growth as noted above.
Despite it’s infancy and early (and today often) 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
A Quick History of Bitcoin Prices
To add to the above story of Bitcoin’s ups and downs, here is a quick history of Bitcoin prices.
- Bitcoin was created by Satoshi Nakamoto (an anonymous group/person) in 2008 and was officially released in 2009.
- Bitcoin began trading in 2010.
- In the early days Bitcoin traded for as little as a penny, but was very hard to access.
- Between 2010 and 2015 there were many ups and downs (for example Bitcoin went from $0.70 to $30 to $2 in the span of a few months back in 2011). Typically there was a large price increase every time a new wave of people were able to access Bitcoin (for example as exchanges opened up or as publicity spread).
- In late 2013 Bitcoin reached a peak of over $1,200 as a wave of adoption took place. However, that excitement was short lived and the next two years saw steady declines.
- In June 2015, when we started this site, one Bitcoin was worth about $225 USD. By comparison the next most valued cryptocurrency at the time, Litecoin, had a value of about $1.50.
- From 2016 to 2017 the price of Bitcoin steadily rose.
- By June 2017 a single Bitcoin was worth $2,700 by August 1st, then by August 13th $4,300. Meanwhile, Litecoin was worth about $30.
- Fast forward again to November 2017 and we saw $8,000 Bitcoins and $70 Litecoins.
- Fast forward to the winter of 2017 – 2018 and we saw $19,000 Bitcoins and $400 Litecoins.
- Fast toward to 2018 and we have seen a bit of a correction back toward 2017 prices.
In other words, although Bitcoin prices tend to go up and down in cycles, over time Bitcoin has returned larger profits than most investments. In fact, Bitcoin had better returns than just about any investment in modern history in its short lifespan.
This impressive growth has been great for long term investors, but has posed challenges for those who entered the market at the wrong time (as true today as it was in 2010) or for those trying to use Bitcoin as a currency (as ideally we want our currencies to have a somewhat consistent value).
TIP: See how Bitcoin’s price as risen and fallen since its inception before investing in cryptocurrency. Bitcoin always works well as a payment system if you covert back to cash, but if you are going to store value in Bitcoin it is important to be aware of the historic price fluctuations.
How does Bitcoin Have Value?
A lot of people who are new to bitcoin are confused by how bitcoin has value at all. Here are a few ways you can look at the rationale behind Bitcoin’s value:
- 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 currency; 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.
- Bitcoin’s blockchain has value — Bitcoin’s system runs itself (computational power and user transaction aside). It is a secure digital ledger, it preforms the job of accountant and bank. That has value. In words, the underlying Bitcoin blockchain (a secure ledger of transactions) has value.
- Scarcity — like with Gold, there is a limited supply of the true Bitcoin. Sure, other cryptos can be created. And sure, Bitcoin can be forked to create a new coin. However, there is only one Bitcoin and it has a limited supply.
The Bottom Line on Bitcoin
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.