This is how I explained Bitcoins to a 7 year-old-kid — Part 2

Day 4: Bitcoins? The name is catchy. How does it work?

Remember the last time we went for a vacation? What did we do to our home? We locked it well. We had two separate locks for the front door, each one with its own key. After locking the door we kept the keys securely with us. This ensured our house was safe while we were away. Do you know how do we achieve security in computers? We use encryption. We can create some very strong locks and some very complicated keys using software encryption. Can you guess what would have happened if somebody took or duplicated our keys? Quite simple, he would have opened the lock and gained access to our house. Pretty impressive — I encouraged him again.

Encryption is at the heart of Bitcoins — we also call it a Crypto Currency, because it is encrypted using strong cryptographic keys. This ensures that only one person in the whole world is in the possession of a unit of Bitcoin.

The Bitcoin software uniquely identifies you and associates a unit with you. All the transactions you perform e.g. receive a Bitcoin or exchange Bitcoins for a toy is added to your chain of transactions. Each such transaction is a block that is verified and validated by hundreds of validators before its added to your chain of transactions. We call this distributed and decentralized technology as Blockchain. Bitcoins are just one implementation of this amazing Blockchain technology — a public ledger that has all the transactions recorded sequentially by timestamp.

Bitcoins are a Trustless technology. It’s totally decentralized and distributed all over the world with interested individuals called Miners. Each miner has a complete copy of the public ledger which makes it hack proof as mutilating one copy of the ledger will not bring other miners to consensus which in turn will reject the malicious changes to the ledger.

Things you need to start using Bitcoins

  • a Bitcoin wallet: a place where you securely store your Blockchain. There are a lot of companies providing a Bitcoin wallet service like
  • Bitcoins: actual units of transaction, later we’ll see how to make those
  • a buyer that pays you: this part of economics doesn’t change, you need a buyer that pays for the goods that you sell. This can be your friend from whom you want to get Bitcoins
  • a seller that accepts Bitcoins from you: again, this could be a seller from which you buy stuff and pay using Bitcoins, or a friend to whom you transfer or send Bitcoins

Concepts you need to understand:

  • Bitcoin Transactions:
How a Bitcoin transaction works

The infographic above is self explanatory. The important thing to note here is that the transaction doesn’t involve any Bank or 3rd party financial institution. It involves a virtual seal of approval from several competing miners.

  • Bitcoin Mining:
How Bitcoin mining works

Mining is a decentralized and a distributed process. Anyone with some hardware computing power to contribute can download the public Blockchain and become a miner. This openness ensures transparency, and security of the blockchain. Nobody owns the Bitcoin or the Blockchain technology or it’s network. It’s completely a democratic process. Miners compete for solving a cryptographic problem that requires specialized hardware with computing power. Whoever solves the problem first gets an opportunity to add the block of transaction in question to the Blockchain, and then send out a broadcast to the entire network to update their copy of the Blockchain.

Day 5: How will I make Bitcoins? What can I do with it?

There are multiple ways to earn Bitcoins. The following is the list I can think of right now:

  • Become a Bitcoin Miner: requires some significant investments to purchase capable, specialized hardware to solve cryptographic problems created as part of a new Bitcoin transaction
  • Sell products for Bitcoins: become an online seller or a consultant, be open to receive Bitcoins as payment or remuneration for your work
  • Buy Bitcoins from an exchange: Coindesk offers the latest BTC to $ rates
  • Receive salary in Bitcoins: Yes! that day may not be far when your employer will offer your salary in Bitcoins.


This post is created to help individuals understand the basic concepts of Bitcoins using existing and historical economic constructs. After discussing Bitcoins with a lot of technology generalists and Bitcoin enthusiasts I noticed that they find it a bit difficult to comprehend this concept.

There are a lot of open questions about the future of Bitcoins right now. Some Bitcoin exchanges have failed which caused much anguish and doubts about the legitimacy of this technology. Although financial institutions like large banks seem reluctant about Bitcoins, Blockchain as a technology has become very popular with them. There is no doubt in my mind that this is a a ground breaking technology, a lot of people are engaged and evangelizing it, and it will bring about the change it is intended to. The degree of that change is open for discussion.

In my upcoming posts, I will dive deeper into the nuances of Blockchain technology. For now, I leave you with the following video that will make things clear about Bitcoins even further.

Read the following to know more about Blockchain Consensus Mechanisms


Disclaimer: All the content and views of this blog post belongs to me. This in no way reflects the opinion or views of my employer.