Bitcoin: What it is and How it Works (in plain English)

Do you wanna know more about Bitcoin? Stupid me, of course you do! Why else would you be here?

You want to learn what the hell is this Bitcoin you’ve been hearing so much about these last years!

How it works, how it is created, (or more specifically, how it is produced), who made it, how can you get it…

… and so many more…

Lucky you! You’re in the right place!

In the following article I’ll analyze, in as plain English as possible, everything you need to know about Bitcoin!

You don’t need to have a technical or financial background to read this article, it’s newbe-friendly and it’s that simple.

So, let’s go!

What is Bitcoin, in a nutshell:

Bitcoin is the first decentralized digital currency in human history.

All Bitcoin transactions are registered on a common digital record (Ledger), called the Blockchain (which is something you’ve surely heard before if you’ve studied Bitcoin for more than a few minutes), which is freely accessible to anyone.

Bitcoin gives you complete control over your money, in contrast to traditional money that’s controlled and issued by central banks.

In time, with more publicity and “trust” gained by Bitcoin, more points, shops, and businesses will accept it as payment for their services or products.

If you are interested in learning more, continue reading for a more detailed version, where you’ll see why and how money was created, and how we reached cryptocurrencies!

Table of Contents: 

• What is money?
  • History of Money
  • Fiat Money
  • The transition to Digital Money
• What is Bitcoin?
• Why is Bitcoin important?
• How is Bitcoin different from Fiat Money?
• How does Bitcoin work?
• How are Bitcoins created?
• Who accepts Bitcoins?
• Where can I find Bitcoins?
• Important Milestones for Bitcoin

*Coinbase BONUS for MoneyMinority*
If you create your account via the following link, you’ll get a 9€ bonus when you buy 90€ worth of Bitcoin!  

Disclaimer:
I’m not a professional investment advisor and the following information is not an investment suggestion, only a guide to help you.
Always keep in mind that investment = risk!
Especially when we’re talking about cryptocurrencies, which are incredibly volatile! Only invest money you’re ok to lose!

What is money?

Before we start talking about Bitcoin, let’s examine something more fundamental.

What is money?

Money is a tangible representation of value.

If you call a plumber to fix your faucet, you give him money in return to the value he offered you.

He will then use the money to get value from someone else, and so on.

Value has taken many forms throughout history, and money has been represented in many materials, such as gold or even salt (yes, in ancient Ethiopia, they used salt as money).

But in order to use a material as a mean of transporting value, two things must be true:

People must believe that this material is precious and will continue to be precious so that they can safely know that they can redeem its value in the future.

History of Money

Until a few hundred years ago, we had placed our faith in a certain material which would represent its value as currency.

A few years ago, this model changed and instead of placing our faith on something, we placed it on someone!

Don’t worry, I’ll explain.

As you can understand, it wouldn’t be comfortable going out shopping on Sunday morning and carrying bars of gold* with you.

*Modern trappers & rappers excluded

And let’s say you find a way and you carry them…

What about change? In what form will you receive change?

Anyway, all jokes aside, you can clearly see that the reason we invented paper currency was the practicality it offered.

How did money use to work?

You took your gold to the bank, which was valued, for example, at 10,000€. You gave it to the bank for safekeeping, and it handed you a certificate for 10,000€.

These certificates were essentially the first paper currency!

Paper money solved the basic problem of using gold as a means of facilitating trade.

You could easily carry them with you, divide them as you liked, and get your change.

And if you wanted your gold back because you missed it, you could easily go to the bank, return the 10,000€ certificate, and get it back.

As time passed, and especially for macrofinancial reasons, this tight relationship between gold and money was severed.

It’s not essential to analyze any more what happened (and why) because we’ll go in a huge tangent, but in a nutshell, this change happened because governments told people that they would guarantee the value of money.

So, people kept using paper money for their transactions, with the change that now the value of that money didn’t necessarily represent value in gold.

The “guarantee” of the governments was enough!

And how did that function, and continues to function?

It’s simple!

With the governments and the central banks as guarantors, everyone has “agreed” that money has the value it has. So, it’s a social contract.

Now, money has been transformed to fiat money!

What is Fiat Money?

As we can read on Wikipedia, fiat money (or forced circulation money) is a method of payment which isn’t backed by a material (as was the case with gold) so it doesn’t have an intrinsic value.

The value it has is the value we assign to it through a social contract which has the government and the central banks as a guarantor, and is expressed through a unit of currency.

Fiat currency has two main disadvantages:

• It’s not decentralized
  There’s a central authority which is responsible for issuing and controlling it, usually a central bank or a government.
  
• Its quantity is not finite
  Each government or central bank can print as much money as it wants, raising the supply of money in circulation.
  It sounds like a panacea, but it’s not!
  If you print more money, then the purchasing power of each Euro or Dollar in circulation falls.

The transition to digital money

From the appearance of fiat money, the transition to digital money was just a matter of time.

Since there’s already a central authority responsible for money, why not transform it to digital?

The same authority would be responsible for issuing and circulating it.

And so it was done!

Right now, the amount of physical currency in circulation is much much smaller than the amount of digital currency used.

Even in Greece, (a not so fintech-savvy country) where plastic money became more popular after the implementation of capital controls (when everyone was forced to get a debit card), most transactions take place through bank cards and money orders.

Good, now since money is digital, what stops you from simply copying and pasting it, in order to have double the money you did before?

It sounds like (and is) a logical thought.

Banks deal with it by recording everything (balances and transactions) in a general ledger of their own.

You can imagine each bank having its own “notebook” writing down the deposits of each person, refreshing it daily depending on the transactions carried out.

How can we be sure this works?

We just trust the banks and the banks trust their systems!

So, it is a system that’s 100% centralized.

The negatives of the centralized model of money

As is logical, giving certain people complete control over money supply is quite risky.

Bad management

Quite often, the interests of the central authority that issues the money don’t match the interests of the people.

Such an example is printing more money for the “rescue” of a financial institution (such as a bank).

Printing much money has the result of raising the inflation which means that the purchasing power of the consumers is lessened.

Corruption

Power leads to corruption.

More power leads to more corruption!

When somebody has the ability to create money, which is the means through which we exchange value, they practically control the world.

Control

You essentially give complete control of your money to the bank and/or the state.

At any time, they can take your money or deny your access to it.

Hm… Does it ring a bell?

On June of 2015, Capital Controls were established in Greece to stop the Greek banking system from completely collapsing because of uncontrollable bank runs.

As a depositor, you were restricted to by a daily cash withdrawal limit of 60€ and you couldn’t send money to accounts abroad.

What is Bitcoin?

On October of 2008, a whitepaper was published, titled Bitcoin: A P2P Electronic Cash System by someone called Satoshi Nakamoto (we don’t know if it’s his real name or a pseudonym).

His very short report (just 9 pages long) was detailing the creation of a completely decentralized currency called Bitcoin.

Bitcoin’s system promised that it would solve the duplication problem of digital money (the fear of copy pasting that we mentioned above) without the need for a central authority overseeing it, remaining completely decentralized!

Essentially, Bitcoin is a general ledger (or a “notebook”) that’s transparent and open to everyone where anyone can see the balances and the transactions that take place at any moment.

Let’s compare it to a traditional bank:

Most forms of currency, as we’ve seen, are already digitalized.

This means that every bank is responsible for keeping its own ledger (notebook) with the balances and the transactions of its depositors.

But this type of ledger has no transparency.

It’s stored in the bank’s systems, and the bank is responsible for its control and correct function and no one else can access it.

In Bitcoin, it’s the exact opposite!

Anyone, at any time, can see all the balances and the transactions that take place in real time.

The only thing that someone can’t see is who is the one who holds the account and who takes part in each transaction.

Bitcoin then offers a form of anonymity—Pseudo-anonymity.

You can see all transactions and balances, but you can’t see the owners!

Bitcoin is decentralized—Decentralized.

The general ledger (blockchain) isn’t kept in a single computer. Instead, there’s a copy in the computer of every person that takes part in Bitcoin.

So, if you want to hack Bitcoin’s blockchain for any reason, you would need to hack every single computer that keeps a copy of that register.

Good luck with that!

Bitcoin is 100% digital—Digital Cryptocurrency.

It doesn’t exist in physical form, it’s 100% digital.

Why is Bitcoin important?

For the first time in history after the appearance of digital money, there’s an alternative to the traditional monetary system.

Bitcoin is a form of money that is not controlled by a higher authority (a central bank or government) and is instead, independent.

As I mentioned in the article “How (& where) to buy Bitcoin“, think of how you used to access information before the existence of the Internet.

The flow of information came only from specific sources like big newspapers, television channels, and libraries.

Today, because of the Internet, information flow is completely decentralised.

You can send and receive information from anyone, easily and quickly, with just a click.

Well, you can think of Bitcoin as something similar, but for money.

Just as the Internet is the decentralization of information, Bitcoin is the decentralization of money.

Anyone can send and receive payments by themselves, without the need for a middleman.

The founder of the Pirate Party of Sweden has foreseen the following:

“Bitcoin will be for banks what email was for the post office.”

Rick Falkvinge

John Mcafee, the founder of McAfee, has said the following:

“You can’t stop evolutions like Bitcoin! It will be everywhere, and the world must adjust.”

John McAfee

How is Bitcoin different from Fiat Money?

If we compare Bitcoin to traditional banks, then we’ll see that it’s different in the following ways:

Complete control over your own money

You and only you have access to your Bitcoins!

This means that no bank or government can freeze your accounts or deny you access (see Capital Controls).

There‘s no middleman

Most of the times, Bitcoin is a cheaper method to transfer money when compared to the classical method of the money order, where there are many bank fees.

Free for everyone forever

A large part of the planet can’t access internet commerce because there’s no banking system that can support them (usually because of the country they’re born in).

Bitcoin, with the only requirement being ownership of a mobile phone, can access the magical world of e-commerce.

How does Bitcoin work?

Bitcoin works through continuous updates of its general ledger (also known as Blockchain) with every transaction being made.

Bitcoin works through continuous updates of its central register (also known as Blockchain) with every transaction being made.

In short, every time a new Bitcoin transaction is “announced”, all users update their registers with that change, and end up the same!

How are Bitcoins created?

Bitcoins are created through the procedure of Bitcoin Mining (which you’ve surely heard, if you’ve ever read up on this “sport” before).

What is Bitcoin Mining?

Bitcoin Mining is the procedure of “updating” the Bitcoin transactions general ledger, the Blockchain.
This is done on powerful computers (i.e. ASICs), that try to “guess” a certain number which solves an equation randomly generated by the system.

To make the method through which Bitcoins are created more clear, you can imagine the following:

Every time your computer “guesses” correctly the number that solves the equation, then a “new page” is created in Bitcoin’s register (the Blockchain) and all the Bitcoins there become yours.

As is logical, the more powerful the computer you use for mining is, the more “guesses” it can make every second, and so, the more chances you have of getting the correct number to solve the equation!

The good old days when Bitcoin mining was profitable for casual users are irrevocably part of the past!

Today, in order to mine Bitcoins, you need a serious investment for the equipment (along with the right cooling and storage for it), since you wouldn’t be able to achieve anything if you tried it on a normal computer.

You can easily do the math to see if it’s worth it for you, using an online bitcoin mine calculator.

Who accepts Bitcoins?

More and more businesses accept Bitcoin as a method of payment.

But despite that, there’s still a long way to go until Bitcoin becomes a mainstream payment method for goods and services.

You can find here a detailed list of 20 Major Websites that accept Bitcoins.

Where can I find Bitcoins?

You can get Bitcoins through two methods:

By mining or buying it!

Regarding mining, as we saw in the previous paragraph, it’s no longer profitable if you’re a casual user.

The other way is to buy Bitcoins from some source, either another private individual or an online exchange.

If you’re interested in learning more about buying Bitcoins, you can read my more detailed article on how (and where) to buy Bitcoins.

*Coinbase BONUS for MoneyMinority*
If you create your account via the following link, you’ll get a 9€ bonus when you buy 90€ worth of Bitcoin!  

Important Milestones for Bitcoin

31.10.2008 The Bitcoin Whitepaper is published

12.01.2009 The first Bitcoin transaction takes place

06.11.2010 Bitcoin’s market cap reaches over $1 million

10.2011 The first Bitcoin Fork takes place and LiteCoin is created as a result

06.2012 The most famous cryptocurrency broker platform, CoinBase, is created

27.09.2012 Bitcoin Foundation is founded

07.02.2014 Mt. Gox, the biggest Bitcoin exchange of the time (managing over 70% of Bitcoin transactions) is hacked, with over 850,000 Bitcoins being lost

06.2015 BitLicense is created, one of the most important Bitcoin regulations

01.08.2017 Another fork of Bitcoin, which creates Bitcoin Cash

10.2017 China forbids Bitcoin exchanges

10.2018 Cryptocurrencies fall 80% from their previous peak

31.10.2018 Bitcoin’s 10 year anniversary

How much does a Bitcoin cost?

You can see Bitcoin’s price live here: