Bitcoin for Dummies: What is Bitcoin?

New to Bitcoin? In Bitcoin for Dummies, we’ll answer the most common questions about the virtual currency.

What is a Bitcoin?

Bitcoin is a form of currency which is similar to the former US “Gold Standard” currency, but it’s directly tied to the Internet and is the world’s first free market, decentralized global currency. Bitcoins can be exchanged for other currencies, goods or services.

Where do Bitcoins come from?

Bitcoins are created out of thin-air through an open-source computer mining system similar to a lottery, yielding a commodity like gold.

I’ll now try to explain the key words here “lottery” and “gold” as they relate to Bitcoin mining.

“Lottery” meaning that your computer is basically trying to decipher a 64-byte number before anyone else on the mining network does. Each time your computer gets the 64-byte string correct before anyone else, a new block is created and 25 BTC (currently) is awarded to the miner or pool (group of miners). But this isn’t a normal lottery. This lottery is millions of times more difficult than a normal lottery, thus why miners spend a lot capital on new hardware for mining. Therefore, the faster your system can mine the higher probability you will be rewarded.

“Gold” meaning only 21,000,000 Bitcoins will ever be created just as only X amount of gold will ever be discovered on Earth. Thus, this form of payment tends to see an opposite affect of that which you are used to. Bitcoins become worth more as time goes on (finite supply) vs. traditional currencies today which lose more value as time goes on (infinite supply; central banks can print money at their discretion, and they do).

So for all you smart kids out there, would it make more sense to invest in a currency that is finite like Bitcoin, or infinite like the US dollar?

How do Bitcoins have a real world value?

As Bitcoins continue to be mined they begin to create more value since more and more people begin to own them. You can kind of think of them as trading cards or beanie babies. The longer you hold onto these things the more value they tend to take on as more and more people begin collecting them. The biggest difference is you can’t take your Babe Ruth rookie card to the car dealership and trade it for a car because it’s not a universal means of exchange like Bitcoins or a credit card. You have to go through the painstaking process of finding a buyer and turning that card into money. Bitcoin itself has consolidated that process.

People worked hard for months or years to mine these things, investing time, hardware, and energy in the process. This is where the initial value of the currency is born, since time and money was used to create them.

Put yourself in the shoes of a miner: you invest time, money and brainpower into mining these coins against thousands of other people around the planet. You’re not just going to give them all away for free. Everyone wants to get their money back from an investment, so people started exchanging Bitcoin for different things including currencies like the US dollar and the Euro. In return this allowed new people outside of the mining ring to collect and exchange Bitcoin, thus the currency began to grow which started to create a networking effect.

Now normal everyday people are exchanging cash for Bitcoins, wondering what the hell can I do with these things?

Why are people investing so much money into Bitcoin?

Bitcoin gold coin logoBecause it’s like gold, or more accurately, the gold of the Internet. As long as people trust that this currency has value, people will continue to invest in Bitcoin. Bitcoin is open-source software, so it has no central control with corrupt bankers and politicians, just really smart people working for free to keeping it running.

Given all the problems we see in world economies, people are rapidly beginning to lose faith in conventional legal tender like the EUR and USD. Governments have demonstrated that they can seize your bank-accessible assets if necessary. With Bitcoin, this is not possible as they have no access to your funds. Your Bitcoin wallet is essentially your own bank. It’s similar to the idea of people stuffing cash into their mattresses, except this is a lot more profitable and accessible. People will perhaps one day refer to this era as the gold rush of the 21st century.

Conclusion

Bitcoin or cryptocurrencies are not an easy thing to wrap your head around. Imagine trying to explain the internet to someone who lived in the 70′s, they might think they get it, but without actually experiencing it, they’d never truly understand. So dive in because I honestly don’t think cryptocurrencies like Bitcoin and Litecoin are going anywhere. It’s been four years and there still haven’t been any major issues, just massive growth spurts and typical market corrections. I’m having a hard time wrapping my head around what the world may be like 5-10 years from now if cryptocurrencies really do take off, but I’m excited for the possibilities.

Whomever Satoshi Nakamoto is, they’re a freaking genius. Hopefully he/she come forward one day. For a more technical explanation, see the official PDF on the logic of Bitcoin. I hope you enjoyed our beginner’s guide to Bitcoin, “Bitcoin for Dummies”. If you liked the tutorial, please share it!

Photo of Matt deCourcelle

Matt deCourcelle is an engineer, web designer, and entrepreneur. He is the founder of several hardware and software startups and is also the co-inventor of three utility patents pending. He a cryptocurrency analyst specializing in Bitcoin.

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  • http://www.http//trader74@sky.com trader74

    My head hurts

  • Bigshow79

    How does this site, which I visited for the first time ever right now, know that I am Bigshow79??

    • Kaverin

      Disqus.

      • cerealspiller

        Vee half vays!

  • Kaverin

    Actually, it’s quite easy for people over a certain IQ and some knowledge of economics / business to see it clearly for what it is. A pyramid scheme at heart, with really no real-world value to the currency. The time, electricity and hardware invested into “mining” does not equate to any value, it is just lost resources. Bitcoin is different from hard currency because it is an imaginary currency created by the founder to fill his own pockets, and he is a genius only because he achieved this goal. His pockets have already been filled. What is really sad is that most people lack the intelligence to see this clearly without being tricked by all the fake techno-babble / jargon. Get it through your thick skulls, silly people.

    • Uncle Arty

      as opposed to the Rothschild’s central bank ponzi scheme that’s deflated all the value in the dollar, and controls your every decision and drags us into unjustified foreign wars, then steals your property right from under your nose. this guy may have made money off this but he isn’t foreclosing houses, deflating the currency and taxing you to cover any loses. Only a sycophantic douche would even try to defend defend centralized fractional banking.

      • Kaverin

        Nice conspiracy theory. Today, even hard currency issued by governments are no longer gold standard, but there was a time when currency was backed by gold, and while this has changed, many nations still keep gold reserves, as well as reserves of foreign currency. Furthermore, the currency issued by nations/governments are backed by the governments (although not by physical assets such as gold), and that gives an amount of credibility and reality to the currency that is absent from Bitcoins. The dollar will certainly lose value as all currencies do, but it will not be worthless until the USA becomes financially defunct, which is not impossible but is not likely to happen anytime soon, whereas Bitcoin is so volatile that its value goes up and down drastically even in these past few months. Why so volatile? It’s because there is no substance or backing to it of any kind, no real-world value. It’s much worse than buying volatile stock, at least stock is backed by some company’s value, however worthless it may be.

        • Uncle Arty

          do you even know what the word conspiracy means? Fractional banking is no conspiracy, Neither is privatized central banks. do you even know what value of the dollar is based on? it’s based on the existing currency in circulation, and the more money they print the more the dollar is devalued, that’s called inflation, and printing money out of thin air with no value behind it is called fiat money. and you are dead wrong about the dollar not becoming defunct, once the rest of the world stops using the dollar and starts buying their oil with gold or another currency the dollar will be done, and when that happens the banks will simply take all their money back, and you’ll be broke and looking stupid while the bitcoin is still going strong

          • Kaverin

            You make me smile, Arty. Bitcoin is fiat money of the worst kind. The kind that has no national backing and no real-world value. That is far worse than most national currencies, and the difference is so large that it is like comparing the value of a speck of dirt with a sizeable mountain. Hard currency may be valued at multiple times the value of the “mountain” and constantly inflating, but at least it has a base value equating to the mountain, there is real-world value to it. As for Bitcoin, a speck of dirt is about all it is actually worth.

          • Uncle Arty

            yes it is fiat money, it’s all fiat money, unless it’s gold silver or other precious metals. But it is hardly of the worst kind, that distinction goes to the currency in your fucking wallet. We won’t go to war over bitcoins, we wont invade other countries and steal their natural resources over it. you wont lose you home if it’s devalued. You seriously don’t have the first fucking clue of what hard currency is or how fractional banking works, if you did you would never have made the claim the dollar is hard currency or that it’s value is multiple times the “mountain’ it derives from. for every single dollar they print, the the dollars already in circulation lose value, right now it’s not worth the paper it’s printed on, and once the rest of the world shucks the dollar as the world currency it won’t be worth the speck of dust the bitcoin is worth.

          • Joshua Lee

            you two crack me up..Uncle Arty what happens when they start paying US Army troops in Bitcoins while they “go to war”?

          • Uncle Arty

            well first I have to make a retraction, the bitcoin is not fiat money as kaverin claimed it to be, Josh when the government starts paying it’s bills with Bitcoin then and only then will become fiat currency.

    • Matt deCourcelle

      It’s funny when you consider the very same principles in which your currency are derived are the same as Bitcoin and other cryptocurrencies. However, traditional fiat currencies do not have the ability to do what Bitcoin can do. Bitcoin is essentially value stored in the cloud, cloud money. We all know what happens with things like this, the better technology wins. And yes, we finally did it, someone figured out how to replace paper with numbers. Wether or not Bitcoin exists forever doesn’t matter, the idea which it was drawn from has captivated people and we will see a paradigm shift in economics because of this. Not being able to grasp your head around Bitcoin in the beginning and its potential is like trying to grasp your head around the internets potential in the 1990′s. The idea of cryptographic currencies is not going away any time soon.

  • 1burst2

    Where do you buy them if you don’t want to mine them?
    Where can you trade them for merchandise/services?

    • Matt deCourcelle

      Coinbase is the easiest way to buy bitcoin, it’s the only service offering ACH bank connection I know of that is reliable. More and more merchants offline and online are beginning to accept it. Coinbase alone has over 19,000 vendors accepting. Also, check out Zynga and Overstock. You can also use a service like Gyft to purchase giftcards to stores of over 200 big name merchants.

  • Gav Greenwood

    no major issues lol, wake up and smell the shit sunny

    • Guest

      I wrote this almost a year ago.