What is Bitcoin? A “for dummies” guide.

Ryan Allen
Oct 8, 2017 · 6 min read

If you’re reading this — you’ve likely heard of Bitcoin already. You might have even heard a few of the other “buzz words” like blockchain, crypto, or decentralization to name a handful.

You may not be sure what Bitcoin does aside from the fact that the media quotes the value and covers the nefarious black market closures. You know by now, for whatever reason, it holds some sort of value. You’re probably not sure how much a single bitcoin is worth, how many are “out there” or who controls Bitcoin.

Let’s put that aside for a moment and start with something simple: a basic definition of Bitcoin.

What Is Bitcoin?

Bitcoin is Digital Cash. Along with the other innovations that stem from its core— Bitcoin is the internet of money. It’s a way to exchange money and value without central banks or physical dollars. No one person controls it! (gasp). Stay with me.

Digital Cash? Internet of Money?

Simply put: Bitcoin allows any one person to buy and hold an electronic version of money.

Bitcoin is a system that allows people to convert their normal currency (sometimes referred to as fiat currency) into electronic cash. Bitcoin, exists in an electronic record (called the ledger) that is publicly held and spread out across millions of computers (the blockchain).

Anyone can see Bitcoin held in the ledger (it’s public) but they don’t have access to who actually owns each Bitcoin (personal details aren’t made public).

If you own Bitcoin, that digital money is only accessible by you, as you hold the only key to it.

Sort of like a safety deposit box that is so intricate that only 1 single key can open it. The safety deposit box cannot be broken into or damaged and only one unique key works for the lock.

Ok…but why go through the trouble? Why not just stick with physically tangible, straightforward dollars and cents?

Why would you trade real money for a virtual money? How is it even worth anything?

Completely valid questions and ones that I get often.

Imagine you’re feeling a little hungry one afternoon and head to the kitchen to make yourself a quick lunch. You look in your refrigerator and realize you don’t have anything to eat. Hate when that happens. Time to go to the store.

You arrive at the store and get a few things to eat and go to the register. You hand the cashier your $20 bill, she accepts it without question, and she gives you back your change.

You’ve probably never asked yourself — “why did she accept my money?”

Because the government at one point established that paper money is “legal tender for all debts, public & private”. Says so right on the bill. The government backed your money and said it has value. You place your faith in the government and they manage this system for you.

Other than that — cash is only as valuable as the effort it took to make it, distribute it and secure it.

Bitcoin operates in the same fashion. A network of people put some level of effort in to create, distribute and secure the currency. Individuals accept Bitcoin so that you can buy real goods (food, water, etc.) and have faith that the currency holds some value. That value is intrinsic as we all take place in it.

As far as the why is concerned, here are what I see as the 4 main benefits (mileage may vary):

  1. Bitcoin does not rely on a central authority to control or issue the currency. This works to eliminate corruption and waste.
  2. You have full control over your own money. No one entity has complete control over the increase or decrease in value of that money. They can not charge you interest to hold it (see negative interest rates). The government cannot print more as it sees fit without complete network agreement (consensus).
  3. Bitcoin transcends borders. It is a single, global currency. This is particularly useful for people having to pay remittance high fees to send money to poorer countries. It’s also beneficial to folks who don’t want to have to convert their native currency (and incur bank fees) when trying to pay for goods and services.
  4. Bitcoin is transparent and open. You can audit the ledger (mentioned above) and see which address sent money to which address. Full transparency for everyone.

How do you buy Bitcoin? How much is one Bitcoin worth?

Bitcoin can be purchased in a number of different ways. Currently, the easiest being through an currency exchange like Coinbase. You sign up for an account, add your bank details and then purchase the currency you’d like. It’s similar to a normal bank where you would hold an account and exchange your U.S. Dollars for a foreign currency.

(Note: This is an easy way to get started but you will eventually want to learn how to secure your coins on your own).

When you purchase Bitcoin through an exchange (currently at $4581 per Bitcoin), they host a virtual wallet for you. This wallet, somewhat like a normal wallet you’d hold in your pocket, will hold all of your Bitcoin(s). You can send, receive, buy, sell and check the prices directly through the platform.

If you’re buying Bitcoin, you can buy up to a 10 millionth (8 decimal places) of a Bitcoin. So yes — you could invest that shiny half dollar ($0.50) if you really wanted to!

The total supply of Bitcoin is also fixed at 21 million coins so there are plenty to go around.

How do I get my money out?

For someone just getting started, the best way to get money in and out would be through an exchange.

As I have found Coinbase to be the easiest: you simply login to their website and can sell your Bitcoin at any time. The exchange will charge a small fee to do so, but it will deposit the proceeds directly into your bank account.

If liquidity is an issue (you’re afraid you’ll get stuck and won’t be able to get out of the market) they do allow you to apply to take out as much money as you want out at a given time.

Can someone steal it?

The technology behind Bitcoin is known to be incredibly secure in the way that it transacts. The only real vulnerability, and where people get caught, is in securing your own Bitcoin.

If you allow the exchange to hold your wallet for you — it is generally secure. They have talented engineers watching their systems and securing everything they can.

However exchanges have been hacked before so it’s best not to go “all in” until you really understand the risks and how to properly store your Bitcoin. There are a few notable cases where this has happened and accounts have been emptied. It’s a risk that you take, for now, in order to be a part of the space.

Ok, I’m ready — what’s next?

I would start with creating an account at Coinbase. It will ask you for an ID and some other personal information but it’s the same as opening a normal bank account.

Exchanges in the U.S. have to comply with the Know Your Customer (KYC) laws and are still beholden to the SEC.

Questions?

As someone who sees the immense potential of this technology, sharing the knowledge and the lessons I’ve learned along the way is my way of helping to educate the community on something I believe will change the way we buy, sell, and invest for the better.

Feedback from the community is valuable when I want to be sure I relay these concepts in an easy-to-understand way. I welcome and encourage any and all questions about what I’ve have written in this article.

Please feel free to leave comments below.

Further Reading

One of the best resources I can point you to would be Andreas Antonopoulos. He has inspired some of what is written above.

His YouTube channel has an immense resource of information on Bitcoin and all of the questions around it: https://www.youtube.com/user/aantonop

Ryan Allen

Written by

Engineer / Crypto & Blockchain Enthusiast / Digital Strategist

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