What is Bitcoin? (Massively Simplified)
What is Bitcoin you ask? 1 Bitcoin is valued at $3200 AUD as I write this. Probably much higher as you read it. Two weeks ago it was $3000 AUD. Two months ago it was $1500 AUD.
Some people are speculating that the value could hit $500,000 USD by 2030, while others are preparing for the Bitcoin bubble to burst altogether.
The point is that this new digital currency is highly volatile, because nobody knows what its real value is and we have nothing from the past to compare it to. What’s more is that very few people actually understand what Bitcoin is, how it works and what all the fuss is about… but they’re buying it anyway.
Before I continue I’d like to point out that you probably don’t know how the cash in your bank account works either, on a fundamental level. Most people don’t know how money is created in the first place. But none of that matters as long as we can spend it, right?
So with that in mind I’m going to keep the technical details of Bitcoin out of this explanation. You can find that stuff all over the internet, and you’ll probably spend a day or two scratching your head as you try to make sense of it. Instead I’m going to explain what Bitcoin means to you on a human level.
So what is Bitcoin? Well it’s three things:
- A digital currency that you can buy, sell and spend, just like the dollars in your bank account.
- A new internet technology that allows you to quickly, securely and cheaply transfer money to anyone in the world without a middleman (like a bank, or VISA, or PayPal).
- A risky, yet potentially promising investment vehicle.
- A digital currency that you can buy, sell and spend, just like the dollars in your bank account
- A new internet technology that allows you to quickly, securely and cheaply transfer money to anyone in the world without a middleman (like a bank, or VISA, or PayPal).
- A risky, yet potentially promising investment
While you can already buy some things with your Bitcoins, both online and offline, it’s very early days for the currency. Merchants are far from adopting it en mass and the technology still needs some tweaks before Joe Blow can feasibly use it to buy his regular morning coffee… but the wheels are in motion.
Right now most people are holding their Bitcoins as an investment. Waiting to see what happens.
How Bitcoin Works
You can set up your Bitcoin wallet (like an account) in seconds and accept payments from anyone. No account fees. No ID. No questions asked. Then once you’ve bought some Bitcoins with your dollars you can pay anyone in the world within minutes directly to their Bitcoin wallet.
The reason this is possible is because Bitcoin is completely separate from governments and banks. There’s no central power, or person, or organization controlling it. It’s a distributed peer-to-peer network.
That means that when you make a transaction, instead of getting sent to one trusted bank, the details of the transaction get sent out to thousands of users (like you and I) who voluntarily keep track of every Bitcoin transaction ever made — or rather their computers keep track.
It’s a small chunk of users, currently in the thousands, who volunteer to uphold the record. Not something you need to worry about.
So the fact that you sent 5 Bitcoins to your mate Bob gets recorded thousands of times in different locations, making it irreversible, and that’s how the entire network remembers that your Bitcoin wallet now holds 5 coins less, while Bob’s holds 5 coins more. Because all transactions in the blockchain are public, every transaction is easily verified to prevent fake transactions. This duplicated record of transactions is known as the blockchain.
Whenever you make a Bitcoin transaction it gets signed with your Private Key, which is like your password. Your Private Key is generated using complex mathematics when you set up a Bitcoin wallet, and it’s complex enough that it would take a supercomputer thousands of years to crack it. This makes sure that it’s actually YOU sending your money.
The verification process gets really complicated when you get into the details, because you’re entering cryptography territory, but all you need to know is that the Bitcoin blockchain is ridiculously difficult to hack. Every Bitcoin “hack” you’ve heard of was actually:
- Scammers tricking people into sending them Bitcoins
- Thieves stealing people’s Private Keys
- Bitcoin exchange platforms or insecure online wallets being hacked. To be safe, don’t store your Bitcoins on these online platforms. Keep the bulk of them offline (as per this guide)
If you DO happen to lose your Bitcoins in any of the above manners, those losses are unfortunately irreversible. But this is no different from the cash in your wallet.
Taking a step back now. The fact that Bitcoin transactions are public may have raised an eyebrow, but this is nothing to be concerned about. It’s true that anyone who has the address of your Bitcoin wallet can see your Bitcoin balance, but there’s nothing actually linking your Bitcoin wallet with your identity.
You can very easily create multiple Bitcoin wallets and distribute your coins across those wallets. This not only gives you more privacy but also makes your Bitcoins more secure — not keeping all your eggs in one basket and what not.
What All The Fuss Is About
There are currently over 750 different cryptocurrencies available. Bitcoin was simply the first and is still the largest (though potentially not for much longer).
Nobody knows what the economy of the future will look like… whether we’ll all use 100s of different cryptocurrencies for different purposes, whether one cryptocurrency becomes ubiquitous (Bitcoin or otherwise), or whether cryptocurrencies disappear altogether. However as it stands today their massive potential cannot be denied.
If I wanted to send $5000 AUD to someone in the UK through a bank right now I’d be looking at a $20 fee, PLUS I’d lose 5-10% on the crappy exchange rate for wire transfers (St. George’s exchange rate is currently 9.4% lower than the market rate, for example). So it would cost me upwards of $270 AUD in total fees to make that transfer, and it would take several days for the funds to arrive.
True, there are services like TransferWise whose rates are much lower than banks (currently $35 in fees for the same transfer), but it would still take 2-3 days for the funds to arrive. And even a company as great as TransferWise would charge me $122 in fees if I wanted to transfer my $5000 AUD to a more obscure currency, like Colombian Pesos.
With Bitcoin I can make any of these transfers in minutes for less than $10, without a bank.
And I can spend my Bitcoins in any country, with no need to exchange them.
So if some day Joe Blow can feasibly buy his daily morning coffee with Bitcoin (or any cryptocurrency) we will no longer need banks to help us move our money, or to hold it for us. Our money will no longer be subject to today’s government interference and manipulation, which will have huge implications for the finance industry and the economy as a whole.
So that’s what all the fuss is about, and it’s why some people are referring to cryptocurrencies as Money 2.0.