Is it an actual coin? Did someone bite off a piece of a coin making it a “Bit”coin? Can it be only cashed out in coins? OK OK I promise that’s the end of the terrible Bitcoin jokes….though I personally did like the second one if I may say so 🙂 So what the heck is a Bitcoin?
I’m glad you asked young grasshopper. Bitcoin is the very first independent digital currency.
Now what the heck does that even mean!? What in the world is an independent currency?! It’s Skynet isn’t it?
Whoa there, lets take a breath….Skynet is still about 50 years in the future so lets not have a panic attack just yet.
Back to Bitcoin – Bitcoin was created in 2008 by a mystery entity who goes by the alias Satoshi Nakamoto. We do not know the true identity of Satoshi, as a matter of fact we don’t even know if Satoshi is a man or a woman or a group of people. (As of May 2016 Craig Wright, an Australian Tech Entrepreneur has stepped forward as being Satoshi. Until this is proved by him we will remain skeptical!) What we do know is that on Saturday, November 01 2008 Satoshi Nakamoto published his bitcoin white paper to a Cryptography Mailing list. You can take a look at that white paper here – Bitcoin White Paper
So what is Bitcoin? Bitcoin is a decentralized digital currency, what this means is that there are no banks or governments that manage the currency and its transactions.
When you think about currency, most people think about the currency they are used to using almost every day. This can be the Dollar, the Euro, the Pound, the Yen, the Peso and so on and so forth. These types of currencies that can come in the form of both coins and paper and can also be used digitally by the means of credit cards and or online transaction systems like PayPal, Venmo, etc. Bitcoin works similarly to the latter and there is no such thing as a physical Bitcoin.
Now these currencies are backed by their local governments – Dollar is backed by the U.S.A., Euro is backed by the European Union, etc. The Bitcoin is backed by no one…
That’s right, let me say it again, the Bitcoin is backed by no one person or government entity because it is backed by everyone! The value of the Bitcoin is determined by people like you and me, the more we use the Bitcoin the more in demand it will be in and the higher its value will be – the simple supply and demand model. But let’s not get into the valuation of Bitcoin just yet.
Now that we have established that the Bitcoin is a digital currency, let’s try and figure out what all we need for a transaction to occur. The image below gives a great representation of how transactions are handled by the bitcoin system.
Now that you have that bit of understanding, let’s say you are shopping online and you come across this amazing Donut that you must have immediately….I mean who doesn’t love donuts right (my apologies to all my gluten free friends! Let’s just say this donut is gluten free too.). So you have gone ahead and added your donut to the cart and are ready to check out, when you do so you realize that this bakery only accepts payments in Bitcoin.
The first thing you need would be a Bitcoin Wallet.