What Is Bitcoin? A Remarkably Easy to Understand Introduction to Cryptocurrency

What Is Bitcoin? A Remarkably Easy to Understand Introduction to Cryptocurrency

DISCLAIMER: None of the following is intended to be investment advice. Also, full disclosure, some of my links may be referrals which I profit from. Remember: Always do your own research. This is not financial advice, so do not make any purchases or sales based on the opinions written on this website.

You’ve heard of Bitcoin. Maybe it was because you saw it on the news, or perhaps a friend let you in on the secret.

Maybe you heard that Bitcoin can make you rich and you don’t want to miss out.

Maybe you heard that Bitcoin is a scam and you want to learn about the controversy.

Maybe you heard Bitcoin is going to change the world and you’d rather not be left behind.

Maybe you heard any or all of these things, and you’re simply curious about what the big deal is.

Regardless of what you’ve heard, one thing is for sure. Like many others, you’ve been asking yourself one simple question: “What is Bitcoin?” So, you looked online and found this article. Lucky for you, you’ve come to the right place. My name is Malcolm Rose, and I’m here to help.

Welcome to the only primer you’ll ever need to get a basic understanding of the revolutionary technology known as Bitcoin. If you’ve tried to look into this before and immediately been swamped with buzzwords and technobabble, have no fear - my main purpose in writing is to trim away all the confusion and allow people like you to understand this exciting, cutting-edge technology instantly - and the best part is that you can do this without having to spend several years getting a Computer Science degree first!

So, really - what IS Bitcoin?

My favorite “one sentence” definition of Bitcoin goes like this:

Bitcoin is a worldwide virtual currency (“cryptocurrency”) you can send for little to no fees which is not controlled by any government, corporation or individual.

Bitcoin and other cryptocurrencies can also be thought of as something similar to a stock or - to a small degree - a company. Like stocks, they have “tickers” - Bitcoin is “BTC,” Bitcoin Cash is “BCH,” Ethereum is “ETH,” and so on and so forth. Like stocks, people trade them on the open market and this helps to determine their price. Of course, cryptocurrency is also very different from stocks, and I’m going to tell you how.

Before I get into specifics, let me say this: in case it’s not obvious by now, this is not a technical overview. I’m not going to talk to you about the details of “protocols” or “distributed networks” or anything like that. Instead, I’m going to keep it to the practicalities - in this article we will be focusing on the following:

1. What can Bitcoin do that regular money can’t?
2. Why is Bitcoin valuable?
3. How does one “buy” Bitcoin?
4. How does one safely “hold” or “own” Bitcoin?

These are the practical things that you are probably most interested in knowing about this technology. Let’s get right to it; just keep reading and you will soon understand the answers to all these questions and more!

What can Bitcoin do?

It would be a disservice to Bitcoin if I said that it is “like PayPal,” but this is the easiest, simplest way to describe its most basic function. Bitcoin, however, is not just a means of sending money - it is money. Bitcoin is sort of like the US Dollar if each US Dollar had a button on it which you could press to instantly send it anywhere in the world. Sound crazy? I assure you, it is not! Without clobbering you with too much technobabble, here is what Bitcoin can do:

Send money worldwide quickly

With Bitcoin, I could send money from New Zealand to Spain - these countries are almost exactly on the opposite sides of the planet, mind you - and I could do it in minutes. By way of comparison, Western Union takes days if you want the money in your bank account.

Send money worldwide cheaply

When it comes to cryptocurrency, “transaction fees” are meant to be as low as possible. Depending on network congestion, this fee could be as low as a few pennies - and the fee doesn’t scale up with the more money you send. That means I could send a hundred trillion dollars for the exact same low price that I could send five dollars. (Note: With regards to Bitcoin, there have been short periods of time when transaction fees have risen to non-negligible levels. As an emergent technology, there are still "kinks" being worked out.)

Send money worldwide uncensorably

Now, I know what you’re thinking - “is uncensorably a word?” You caught me, it’s not. However, there is a crucial concept in Bitcoin - and cryptocurrency as a whole - known as “censorship resistance.” It’s easiest to describe this concept with a comparison to existing systems. Right now, if you want to send money from point A to point B in any fashion - either as a merchant receiving payments for services, an immigrant sending money back to his family, or anything else you can imagine - you are at the mercy of a series of middlemen. Each of these middlemen has the capability of stopping your money in its tracks for any reason or no reason at all. Who am I talking about, exactly? These guys:

1. Payment processors. Ever had a PayPal, Stripe, or Venmo account? Horror stories abound of payment processors freezing people’s hard-earned money for months - often for completely absurd reasons. If you’re trying to run your own business, these problems multiply; you’d be surprised what kinds of payment processing problems you can run into in the simplest of enterprises - and if your account is shut down, how are going to keep running your business?
2. Banks. You might not think of a bank as a middleman until they have a problem with you or something you’re doing. Banks have been known to mistakenly close people’s accounts for no reason at all, or because they frivolously deem your account to be “high risk.” This sort of thing happens to business owners all the time for a variety of reasons - and no, I’m not just talking about the guys running marijuana dispensaries. And by the way, your bank also likes to surprise you with unexpected fees for a variety of asinine things - Bitcoin cannot and will not do that.
3. Governments. Now, I know what you’re thinking - “I’m not a criminal, why do I care if the government can freeze my money?” Well, that’s all well and good if you’re living under a benevolent government. But what if you are living in a banana republic like Venezuela? If it wasn’t for Bitcoin, a lot more people would probably be starving down there right now - after all, their own national currency is worthless, and their dictator has made importing foreign currencies mostly illegal. Bitcoin has quite literally saved lives there.

These are just a few examples of the actors that have the ability to stop you from sending your money wherever you wish. With Bitcoin, there is no middleman. You are able to send this cryptocurrency directly from one person to another and, without getting into the technology behind it, no one can stop you.

As you can see, Bitcoin has a lot of capabilities. But is there a good reason why the cost has continued to rise? Is it really “digital gold” like everyone is saying?

Why is Bitcoin valuable?

When faced with this question, Bitcoin enthusiasts often reply flippantly with something like:

Oh yeah?! What makes the US Dollar valuable? It’s just a piece of paper and some ink!

It’s a fair point —after all, the American dollar used to be backed by gold, and now it’s backed by faerie dust, unicorn dreams, and - let’s not forget - whatever the guys at the Federal Reserve feel like on a given day.

With that said, I don’t think this is a very good way to persuade people to be interested in Bitcoin. It’s actually an example of “tu quoque” - a logical fallacy where someone accuses you of something and you simply point the finger back at them in response. It’s not enough for the country-based currencies like the US Dollar to have dubious valuations; Bitcoin needs to be better than them.

So, let’s be frank: why should anyone take Bitcoin seriously? Why should it have ever been worth around twenty thousand dollars per coin? Was that old dinosaur Charlie Munger right when he childishly compared Bitcoin to “trading turds”? Well, first of all: ew. Secondly: there are very good reasons why people are valuing Bitcoin so highly, and there are even better reasons why its value could rise orders of magnitude higher in the future.

First of all, everything I wrote about “what Bitcoin can do” also functions as a great argument for why Bitcoin has value. The true, tangible value of a thing is what you can do with it: precious metals can be used to make semiconductors, gas can run vehicles, and paper money doesn’t really do anything. With Bitcoin, the value partially comes from what it can do - the fact that it can be transferred from person to person with so few hurdles, unlike money in a bank account.

When it comes to the value, however, the most important thing about Bitcoin is the fact that it is deflationary. By comparison, almost every single traditional currency - including the green pieces of paper in your pocket - is inflationary. What does this mean? Well, there’s a reason why your great grandparents might talk about being able to buy a loaf of bread for a dime - our money used to be worth more. A lot more. As governments print more and more money, the prices of pretty much everything rise or “inflate” to compensate - hence the term inflation.

By way of comparison, you can’t print more Bitcoin. Sure, you may have heard of “Bitcoin mining” - a process by which “new” coins do enter circulation - but because of the way the system is set up, there will only ever be 21 million bitcoins ever made. This has led to Bitcoin being referred to as “digital gold” - after all, you can mine more gold, but you can’t create more of it out of thin air. Our planet only has so much.

“Assets” like gold have often been used as “stores of value” - a place to put your money which is not affected by traditional currency problems like inflation. Think this is something only rich people need to care about? Think again. People lost their homes and livelihoods in 2008 because of a broken financial system. People lost far more during the great depression. This sort of thing affects everyone. Speaking of being rich: don’t think that you have to have a lot of money to invest in cryptocurrency. Bitcoins are divisible, just like dollars and cents - you can own 0.0005 bitcoin (or about 45 dollars at the time of this writing) if you’d like.

While there’s some debate as to whether Bitcoin should be more of a currency or more of a store of value - and I’ll talk about that a bit more later - one thing is for sure: this is an emerging technology that is going to change the world. The best part is that even now we are on the bleeding edge. If you invest Bitcoin or any other cryptocurrency today, you will be on the bleeding edge of progress - you will be an “early adopter.” Don’t believe me? Imagine if Bitcoin was valued similarly to gold. The current market capitalization of gold is over seventeen trillion dollars. Bitcoin’s current market capitalization? About a tenth of that.

What this means is that if people started valuing Bitcoin the same as they do gold, you’d be seeing a price of Bitcoin hovering around $900,000. Still think you can’t be an early adopter? Think again.

All that’s left is to learn how to buy this stuff. Before we get to that, though, there are a couple of important issues to discuss.

A Quick Note About “Bitcoin Cash”

Bitcoin Cash (“BCH”) is a cryptocurrency which “forked” off of Bitcoin in August of 2017. This “fork” occurred over both ideological differences and a difference of opinion over the best technical ways to handle “scaling up” the coin’s ability to handle its increasing popularity.

To hear the BCH supporters tell it, Bitcoin Cash is actually “the real Bitcoin.” This is a matter of opinion and at the time of this writing, I personally have not weighed in on this “scaling debate” in any substantial way. What I will say right now is that both sides make interesting points, and it will be exciting to see which coin survives and thrives on its own merits in the long term - and it could very well be both! This is not a frivolous debate, mind you - the problem of “scaling” affects things like how quickly the networks send transactions and what sort of fees you pay to do so. I encourage you to research the difference for yourself; just be advised that there are rabid supporters on both sides of this argument and their tempers often flare quite hotly.

Here’s the bottom line: if you’re looking for the “Bitcoin” that comes up when you Google search for “Bitcoin”, or the “Bitcoin” you heard about on the news, you’re probably not looking for Bitcoin Cash. BCH supporters may crucify me for saying so, but that is certainly the case - at least for now. With that said, you would not be remiss if you also looked into getting some BCH for yourself (and BTC supporters may crucify me for saying that). In any event, the good news is that getting BCH is as easy as getting Bitcoin - you can get it directly from many exchanges!

Going Beyond: Other Cryptocurrencies

While Bitcoin was the first cryptocurrency, it is not the only one. There are thousands. Some could change the world in a variety of ways - most are either throwaway projects or scams. It's important to be able to tell the difference, and there's no substitute for spending time researching. These “altcoins” are largely outside of the scope of this article. If you've read this far, you're probably here to learn about Bitcoin. So, how do you go about getting some?

How to Buy and Safely “Hold” Bitcoins: Instantly Understanding the Basics

If you’re looking for the simplest path to buying Bitcoin, my current preferred exchange is Kraken. Regardless of which exchange you choose, it's important to pick a trustworthy and well-established one in order to avoid scams.

Once you've selected an exchange, creating an account is a straightforward process. Security is incredibly important here - remember, in cryptocurrencies you are your own bank and so it is absolutely crucial that you follow good security practices. This means your password should be strong - and it should be a password you aren’t using anywhere else (including other exchanges). Google has a pretty good guide with some tips on choosing strong passwords. Keeping security in mind, it would also behoove you to turn on two-factor authentication once your account is created.

Previously, when this article was first written, there was a pretty extensive guide as to how to actually purchase coins once you have an exchange account. Times have changed, and exchanges have made things much simpler. As a result, I will leave it to you.

I Placed My Order! Am I Done?

If you want to be done now, you can be - but there are more steps if you want to be security-conscious. Leaving your coins in an exchange is a lot like leaving your money in PayPal. Will you randomly lose it or get hacked? Probably not - especially if you are following best security practices. But for many people who are interested in cryptocurrencies, they want to have full, total control of their money. If that's the case, there is no substitute for moving the coins from the exchange to a private "wallet" that you control.

For beginners and dabblers, there is not much reason to do this. Many people these days do keep their coins on centralized exchanges. However, in the crypto world, we often say "not your keys, not your coins" - because if you are the only one with control of your private keys, it is impossible for someone to move your coins from one wallet to another. If this idea appeals to you, then you should do more research into private wallets. However, they are mostly outside of the scope of this article.

Before you go…

Be advised that the information here only scratches the surface on Bitcoin and cryptocurrencies in general. I recommend you read as much as possible. Cryptocurrencies are the future, and if you’re reading this guide you are already lightyears ahead of the curve.

Come back soon because more content like this is always coming! If my work helped you or gave you something to think about, share it with others:

Sharing helps more people find my articles, and I’d love to be able to assist as many people as possible with cryptocurrencies. Also, if you have any ideas for future articles or specific questions, I’d love to hear them. One last thing: if you’d like to chat with me in real time, check out my public Discord for the discussion of my projects and cryptocurrency!

Best of luck, and happy trading!
Malcolm Rose