What is Bitcoin?
By: Chris Douthit
Tags: Finance, Cryptocurrency, Blockchain, Life Lessons, Bitcoin

What if there was a coin that was worth lots of money, but it wasn’t made of gold, platinum, or any precious metals? What if this coin was something that you couldn’t put in your piggy bank, or hold in your hand, but was just as real as any of those things that you can hold? Digital currency is money that exists only electronically, which means that you can access this money virtually anywhere that has an internet connection or the ability to process these types of transactions.

The most popular of all the digital currency that exists today is the one called Bitcoin, and it is unique in that it isn’t attached to any country, or central issuing authority. That means that there is no central authority deciding on how many coins to make, or when to make them, or keeping track of where they are or investigating the movement of the coins from one person to another.

Cryptography is what makes the whole thing work, which is why they call Bitcoin the world’s first “cryptocurrency.” These electronic coins can be traded on a worldwide network that allows communication and trading from peer to peer. If you are unfamiliar with peer to peer trading, think about the networks that allow people to share certain kinds of files like music, books, and other media types.

https://www.youtube.com/watch?v=v0jQF54AxAI

You ask yourself, what is to stop me from making fake Bitcoins and becoming rich? Well, Bitcoin isn’t the kind of electronic information that can be duplicated. It is rather an entry of a giant global ledger system called a blockchain, and this ledger records every Bitcoin transaction that has ever happened. Currently, there is more than 100 GB of Bitcoin transaction data recorded on this ledger.

When you send the Bitcoins it isn’t like you are sending then a file from your computer, but rather you are writing down the transaction, electronically of course, into this big ledger. There is no one group of people who update the ledger, and like the internet itself the keeping of the ledger is diffused among the many. Anyone can volunteer to help keep the ledger up to date, and a ton of people do donate their time to do this work. Since many people are keeping track of the same thing, it ensures that the information is kept accurate.

It would be kind of like playing a game of poker with your buddies, only no one has chips or money on them to keep track of the winning and losing. In this scenario, a few of you might get out some paper and start writing down the bets, and with more than one of you writing it down the accuracy of the betting can be accurate. Since no one completely trusts the others the ledgers are kept separate, and at the end of every hand those keeping the ledgers compare what they have written down to ensure an accurate record. If anyone makes a mistake, or tries to cheat, it will be caught by the others and that is a great way to self-police the Bitcoin transactions.

Pretty soon, if the game lasts a while, you will have several pages of information about the movement of the money from player to player. Each page can be thought of like a block of transactions, and eventually you will have pages and pages of information, and that is comparable to a blockchain. One might ask how the ledges are all kept in sync since there are thousands of people keeping their own ledgers and uploading the information at different times.

In keeping with the poker analogy we are going to think of the Bitcoin community as a giant poker table filled with people writing down the bets and movement of money from person to person, millions of them. When you want to send or receive money you have to shout that out to the rest of the people sitting at the table so they know you have something coming, and can use the information to update their ledgers. So, for all your Bitcoin transactions you need to give a couple pieces of information to the Bitcoin network. Your account number, and the account number of the person you are sending Bitcoins to, and how many or your bitcoins you want to send. That way all of the users keeping track will update their ledgers to the current block of information.