Mainstream adoption of Bitcoin and crypto currencies is taking place, yet many folks are unsure as to the true nature of these digital assets and the revolutionary blockchain technology that is behind them. In this article I will give you a simple explanation of what Bitcoin is, without going into the nuts and bolts of how everything works. You can read up on the techy stuff later but for now, this post will give you the basics.
Bitcoin is electronic money. It is not printed on paper notes like your old dollar bills, and there are no physical coins like the 50 cents piece rattling around in your car’s ashtray. No paper, no shiny metal coins – just numbers in an account. Think of bitcoins as being money in an online bank account.
Now, as with all online bank accounts, someone has to take care of looking after your Bitcoin balance in the same way that your bank uses its computers to look after your regular bank accounts. When you pay your bills using traditional online banking or EFTPOS, it is your bank that processes the transactions, and they usually charge you fees for doing it. Bitcoin works in the same way except the transactions are processed by a large network of computers spread all over the world. You still get charged a fee for doing a transaction, but that fee goes to the owner of the computer that actually processes your bitcoin transaction.
As with any normal banking transaction, there is a payer and a receiver. If you are paying your power bill online, you are the payer and the power company is the receiver, and you both have your own bank account numbers. In bitcoin transactions, it is the same. You have your own bitcoin account number, but it is called an “address”, and the receiver also has an “address”. When you pay a bill with bitcoins, the bitcoins are transferred from your address to the receiver’s address.
When you send bitcoins to someone in this way, which you can do using a simple app on your smartphone, a small amount of the bitcoins you send are sent to the owner of the computer that processes the transaction. That is the transaction fee, and it helps to pay the costs of their mining equipment and electricity usage plus a small profit. The person who owns that particular computer is called a bitcoin miner. And the processing of the transaction is called bitcoin mining.
Some people own a lot of computers that are used for this “bitcoin mining”, and as a result, they can earn a lot of money from processing lots and lots of transactions. Infact, there is so much money to be made from bitcoin mining that there are even companies who rent out computers so other people can run the bitcoin mining program on them.
All of these bitcoin mining computers are spread out around the world. A lot of people even do the “bitcoin mining” on their personal pc’s and laptops at home, and earn anywhere from a few cents to a few dollars per day depending on the speed of their computer. So Bitcoin gives normal people the opportunity to earn a small income by processing transactions (aka bitcoin mining) on their own pc.
Bitcoin runs on a decentralized network, as opposed to the centralized system used by traditional banks. Being decentralized means that the system is less prone to hackers and fraudsters, and there is very little chance of the network going offline.
The next thing I will mention is that Bitcoin is “open source”, meaning that anyone can see the actual computer code that runs the network. All transactions are permanently stored on the network, and can be easily viewed by anyone using a web browser. Note that the transactions are visible but none of your personal information is visible because you didn’t have to provide it when you first opened your bitcoin account address.
To get a bitcoin address you first need a bitcoin wallet, which is a small app on your pc or smartphone. The wallet app generates an address and that is where people can send you bitcoins. Every crypto currency needs a different address, but some wallets can be used to store a number of different crypto currencies, in the same way you can hold different paper currencies in your physical purse or wallet.
Ok, that is enough information for now. There is a lot to more to learn about Bitcoin: we haven’t even talked about the “blockchain” yet, but there is plenty of time for that later, or the huge community that supports the bitcoin network. You can find more information about all those things on this website once you have digested this introductory stuff.
So as a quick summary, here are the main points we have covered in this article:
- that Bitcoin is electronic money, otherwise known as a digital asset,
- that Bitcoin transactions are processed on a decentralized network,
- the processing of bitcoin transactions is referred to as “bitcoin mining”,
- the people who own the computers that process transactions are called “bitcoin miners”, and they get paid a small fee for doing it,
- Bitcoin and other crypto currencies are stored in small apps called wallets, and some wallets can store a number of different crypto currencies,
- your Bitcoin wallet generates an “address” that people can send bitcoins to when they need to pay you, or vice versa.
Hopefully this article has been helpful to you as you learn about Bitcoin. Please feel free to share it with anyone else you know who also wants to learn about this exciting new technology and currency. Bitcoin is the way of the future and you are doing well to educate yourself in these early stages. Go well – go crypto!