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What is Bitcoin? What problems does it solve?

Bitcoin in two sentences

Bitcoin is a digital currency that anyone in the world can use to send and receive money between each other. More importantly, Bitcoin is different from other monies as it is decentralized, open, and immutable.

In order to understand these features, let’s first talk about money.

What is money?

What is money exactly?

Money represents value.

We can use money to exchange for goods and services.

Throughout history, people have used many things as money.

Stones, Salt, shells and of course gold.

These items are used as money because they are easy to recognize, interchangeable, long lasting, and scarce.

Now The last property of scarcity is very important.

Money not only needs to be convenient to use, but also has to be limited in quantity so it holds value over time.

Out of all these items, gold has the best properties to be used as money.

It is practically indestructible and difficult to be mined from the earth.

By contrast, stones can be destroyed, and it is easily mined in large quantities.

Therefore, people trust that their gold will last for a long time, and will remain desirable.

So, they hold onto gold to represent their wealth.

Humans have used gold as a globally accepted money for thousands of years.

The downside to gold is that it is hard to carry and cannot be easily divided.

So people invented paper money.

These paper notes were much more convenient.

You can easily use paper money to trade.

And these paper notes can be used to redeem gold at the bank.

At this stage, because the paper still represents gold, people also trusted that their paper had value.

However, this started to create a problem. People also had to trust that the government and banks had enough gold for all the paper.

This government controlled system quickly became the norm.

Everyone was using paper money, and they stopped bothering to even redeem their gold.

Then one day, the government said, let’s forget about gold, and just trade paper instead.

By this point, people had forgotten that money needs to be scarce in order to have value.

And that’s how the government convinced everyone, that their promise alone is enough to give paper value.

Fiat money

This was the birth of fiat money. These include the dollar, euro, and most modern currencies.

Fiat money drawbacks

Although convenient, fiat currencies have two big problems.

First, they are controlled by a central authority.

The authority decides who can use the money, and how much fees one has to pay,

entirely based on their own discretion.

And users of the fiat money have no choice but to accept them.

Secondly, and this is the major problem: fiat money is not limited in quantity.

Because there is no commodity backing fiat money,

the government or central bank can create as much new paper money as they want.

This causes inflation, which is the effect of money decreasing in value, due to more money being created.

For example, in the 1960s, you can buy a McDonalds burger for 15 cents. The same burger costs 1 dollar today.

The burger has not increased in value.

Rather, it is the dollar that decreased in value, because there are much more paper dollars out there.

We have seen time after time that during times of crisis such as the 2008 financial crisis and the 2020 pandemic, central banks will choose to create extreme amounts of new paper money.

However, the majority of these newly created money are given to the banks and large corporations to solve their problems. While the public only receives a small portion of the new money. And this gain is shadowed by the the large depreciation of their savings.

Enter Bitcoin

Enter Bitcoin, a digital currency that solves these problems.

How does it work?

Bitcoin is decentralized

First, Bitcoin is not controlled by a central authority, it is decentralized.

All of Bitcoin’s decisions are made by its users.

A majority of Bitcoin’s users have to agree in order to make any changes to Bitcoin, such as to issue extra new Bitcoins.

Bitcoin is also powered entirely by its users, and anyone can participate in running Bitcoin.

When a user sends Bitcoin to someone else, all the computers on the network work together to secure this transaction.

They also crosscheck each other to make sure that nobody is lying about their transactions to benefit themselves.

This is the essence of Bitcoin mining and we will go in depth in a later video.

Bitcoin is open (permission-less, transparent)

Secondly, Bitcoin is open.

Anyone with an internet connection can use Bitcoin.

There are no requirements set by any authority.

All you need is to download the software which can run on any device.

Bitcoin is also completely transparent.

Unlike a bank, which only allows you to view your own account.

Bitcoin allows everyone to view everyone else’s accounts.

You can see exactly how much money everyone owns, and how much people are sending to each other.

This allows its users to verify that nobody is creating extra Bitcoins or spending Bitcoins that they do not have.

Bitcoin is immutable

Lastly, Bitcoin is immutable.

Just like how Gold is practically indestructible, Bitcoin is also indestructible.

All of Bitcoin’s data are duplicated in over 10 thousand computers around the world.

You can download the Bitcoin software, sync with the 10 thousand other computers, and be a part of keeping Bitcoin alive.

Moreover, Bitcoin transactions are practically impossible to change.

The mining process secures Bitcoin and makes any attempts to change previous transactions economically infeasible.

The attackers would end up losing much more money than they can gain.

This is a simplified explanation of what Bitcoin is, and the problems that it solves. To learn more, browse VirtualBacon’s resources and join the discord community.



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