What Is Bitcoin?

Still having trouble understanding bitcoin? Read this article for a basic guide.

What Is Bitcoin

Bitcoin has captured the public imagination over the last few years. It has made some people rich, been the target of cybercrime investigations, and revolutionized the way that people think about money. Many governments still don’t really know what to do about it. But what is it, exactly?

A Network Where No One Is In Control

Bitcoin is a new form of digital money with one big difference over the kinds of money that we’re used to: no one controls it.

Regular money is created by central banks, who decide that it exists, and then use it to buy government bonds. Payment networks and banks control how it’s moved around, and they charge you handsomely for the privilege. They’re the gatekeepers of the financial system.

Bitcoin changes all that. It’s a decentralized payment network, where no single person or company controls how money is created or moved around. Instead, everyone on the network controls their own money. Everyone is their own gatekeeper. And anyone can participate, by downloading the free bitcoin software and running it on their own computer.

What About Fraud?

There must be rules, though, or people would commit all kinds of fraud. People might send someone a bitcoin and then say that they hadn’t, so that they could spend it somewhere else. That’s a problem called ‘double spending’, and bitcoin is designed to stop it happening.

All the computers running the software are connected together via the Internet, and they all keep an eye on each other to ensure that everyone is playing by the rules.

This network of computers is the bitcoin payment network, and it’s a crucial part of the whole bitcoin phenomenon. Bitcoins wouldn’t exist in any meaningful form without the payment network.

The network keeps track of who is sending bitcoins to other people, and how many bitcoins everyone has. If anyone tried to say that they hadn't spent bitcoin when they really had, then the rest of the network would notice.

How Are Bitcoins Made?

The network is also responsible for making bitcoins in the first place. Bitcoins aren’t printed, or dreamed up by a central bank. Instead, people create bitcoins using software on their own computers, in a process called mining (learn more about mining here). The network has rules about many bitcoins are created, who gets to create them, and when.

Where Are Bitcoins Held?

Bitcoins aren’t physical currency, and you don’t store them in a bank. They only exist because the entire network agrees that they exist, and you only own them because the network agrees that you do. This record of ownership is held in a big ledger called the blockchain, which is seen and maintained by all the computers on the bitcoin network. Read more about the blockchain here.

This ledger keeps track of who owns all the bitcoins on the network, but it doesn’t use names, or bank accounts. Instead, it uses bitcoin addresses, which are long strings of random characters. There’s no easy way of knowing who owns a bitcoin address, which makes the system anonymous if used correctly.

Whenever anyone sends bitcoins to someone else, they tell the network to update the ledger so that the bitcoins are debited from their address, and credited to the other address.

Everyone sees that change.

What Do Bitcoins Look Like?

But if bitcoins aren't physical coins, how can you hold them? You don't. Instead, you hold a record of a public bitcoin address, which is a long string of numbers and letters. You also hold a secret key (think of it like a password) that lets you use that address to send bitcoins. You can hold that address in a software wallet, or it can even be printed on a piece of paper.

Remember, the network itself has the information about which addresses hold which bitcoins. All you're storing is the secret key that lets you access the bitcoins at a specific address. That's the sole thing giving you ownership of those bitcoins.

Bitcoin's Transparency

There's one final characteristic of the bitcoin story: transparency. Although only the holder of a private key can access the keys at a bitcoin address, anyone can see how many bitcoins are held at that address, which other addresses they came from, and how they have been spent.

In the banking world, your account is linked to your name, and it’s private. In the bitcoin world, you can track a bitcoin’s life from its initial creation through to the current day, seeing which addresses have spent and acquired it. Yet your name is never associated with it on the bitcoin network.

Bitcoin is a strange mix, then. It’s a currency that is also a payment network. It’s both anonymous (if used properly) and completely transparent. It’s decentralized, but with rules that are strictly enforced.

Find out more about how to get started with bitcoin here.