The quick answer
Bitcoin is online digital currency.
The slightly less quick answer
Bitcoin is a decentralized online digital currency that has a built in system for automatically verifying every transaction.
The reasons Bitcoin was started are varied, but one of the main ones was that most fiat currencies that exist today are managed, backed, and controlled by the government that implemented them. For example, the US dollar used to be gold-backed, meaning that it’s value was based on the value of the gold in the US reserves. When that system was thrown out, the value dollar was based on the imports, exports, and usage of the dollar by so many people around the world. Oh yeah, and the might of the US military saying that it has value. Then, we realized that we could change the value of the dollar by putting money in or taking money out of the system. Remember that whole Trillion Dollar Coin thing?
Then, you also have banks. Ones that are too big to fail and ones that can do whatever they want with your money, because once you put it into their system it’s technically not yours until you go to withdraw the money.
When you deposit your money in the bank, your money goes into a big pool of money along with everyone else’s, and your account is credited with the amount of your deposit. When you write checks or make withdrawals, that amount is deducted from your account balance. Source: ehow.com
Read into this a bit, “your account is credited with the amount of your deposit” means that the bank has a ledger and your money is represented by data in that ledger. It’s not money anymore, it’s pencil on paper or more properly, bits on a distributed storage device somewhere. Hopefully, that data is secure and hopefully you have proof of this deposit should you ever need to contact the FDIC to get your money back.
Bitcoin puts the onus of keeping track of your money on the consumer, aka the owner of the coins themselves. Each owner has their own wallet, which is just a program that accesses the centralized ledger called the blockchain.
Yeah, but what the hell is a blockchain?
The blockchain is just a ledger. Yes, this is similar to what the banks have, but instead of a centralized agency, company, or person owning and managing this ledger, with bitcoin the network and everyone involved in the network has a copy of the ledger. This allows the network to verify transactions and make sure that if you sent or received coins, that you actually sent or received those coins.
How does the network verify transactions?
A specialized piece of computer hardware, called a “miner”, hooks into the ledger, does some math, and verifies the transaction. Then it kicks back that verification to the network. Other miners do the same thing and at some predetermined number of verifications*, the transactions are written to the ledger and everyone on the network gets that update. This way, everyone knows where that coin went and when it went there.
The owners of the miners get a kickback of coins from the network for burning precious electrons and doing all that math. This kickback is a combination of newly generated coins and transaction fees that are paid to the network for transactions under a predetermined threshold.*
* These “predetermined” values are setup by the group or entity who initially created the coin. In the case of Bitcoin, there was a quorum of open source software developers who fought, argued, and worked together for quite a while to determine the proper fees and verifications that would allow Bitcoin to continue in perpetuity.
There is, of course, a ton of other information that could be said about Bitcoin, but this is the very basic information that you would need in order to understand what’s going on.
If you have questions about any of this information, if I missed something, or if I got something wrong – please let me know!
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