What Is Bitcoin? Here’s the Bitcoin Primer You Need

5 minute read
| Deep Dive

Bitcoin’s massive leaps and volatile swings have brought a lot of new people to the technology. We’ll explain what Bitcoin is, how Bitcoin works, how Bitcoin wallets work, and throw a mention in for getting free Bitcoins through faucets.

Bitcoin in the abstract

Bitcoin – in the Abstract

What Is Bitcoin?

In 2013, Bryan penned his first Bitcoin primer, but these are the things we’ve found most people new to Bitcoin want to know today:

  • Bitcoin is a cryptocurrency, meaning a digital currency that uses cryptography—essentially complex math equations—to ensure each transaction happens only once.
  • Bitcoin’s value is predicated primarily on three things:
    • Bitcoin’s transparency means trust isn’t required for the system to work.
    • There is a finite, known quantity of Bitcoins that will be created—21 million of them—making it a lot like a commodity.
    • Speculation on how Bitcoin will be used for commercial transactions in the future.
  • Bitcoins are stored in digital wallets.
  • Bitcoin is decentralized, meaning no single party owns or controls Bitcoin.
  • Everyone can see every transaction ever made on the Bitcoin network.
  • Bitcoin is not backed by tangible assets, nor is it backed (or controlled) by a government.

Yeah, But What Is Bitcoin?

Think of Bitcoin as a digital commodity. It’s sort of like gold or diamonds that can be traded for things of value, like dollars. That’s not technically correct, but it’s close enough that it gets us in the right ballpark so we can have a conversation.

The principles behind Bitcoin are transactional in nature. This technology allows anyone to send Bitcoins to anyone else over the internet—with no bank or wire service required. You don’t even need a service like PayPal’s VenMo or Apple Pay Cash, both of which rely on centralized systems controlled by a third party (PayPal and Apple, in this case). All you need is Bitcoins in a wallet and the address of your recipient, and you can send your Bitcoins to another person, or to a business that accepts Bitcoin.

That’s why Bitcoin was developed, but the craziness of Bitcoin’s huge leaps in recent weeks are more speculative in nature. It’s that speculation that has dramatically increased interest in Bitcoin, and that means you getting your hands on some.

Like gold, Bitcoin can be mined and “found.” To be frank, Bitcoin mining isn’t viable for mere mortals these days. Instead, if you’re wanting to get into Bitcoins, you’ll likely buy it from a friend or on an exchange. From a speculative stance, the idea is to acquire it at a cost that is less than that for which you eventually sell it.

This Is Not Investment Advice

Let us stop right there: we’re not advising you to buy Bitcoin. As we write this article, Bitcoin is trading on Coinbase’s GDAX at $15,800, US$17,125, $16,800, $16,500, $17,600. And that’s just in the time it took us to write this piece. In the last 24 hours, it’s bounced around from something like $15,000 to $20,000 and back again.

That’s insane volatility. And worse, it might have peaked or it might be at the bottom of a huge climb to the moon. It could crash at any time. Or not. In 5 years, it could be worth $100,000 or zero. Or anywhere in between. Bitcoin’s past is no guarantee of its future.

GDAX Bitcoin chart on December 7th, 2017

A few hours or Bitcoin trades on GDAX on December 7th, 2017

We’re going to write a separate piece about what’s been happening to Bitcoin’s price. Our point with this article is to explain how Bitcoin works, not advise you to invest or not. And while we are loathe to offer investment advice to anyone, an investing/gambling foundation is never risk more than you’re comfortable losing.

How Bitcoin Works

Like gold in ages past, Bitcoin can be traded or used to purchase things. The big difference is that while gold is something you can hold in your hand, Bitcoin only exists in the digital realm. Bitcoin is a type of cryptocurrency. It uses cryptography to secure each and every transaction, ensuring that you can only spend each of your Bitcoins once.

Let’s look at it like another kind of digital asset, an MP3 of a song. We could sent that MP3 file to everyone reading this article and you would all have that same file. That’s fine for songs, but that’s not so great with Bitcoins. If we could send everyone the same Bitcoin, it would have no value.

To solve that, every time a Bitcoin is exchanged, the transaction needs to be confirmed by other computers. In fact, it needs to be confirmed up to 100 times using pools of dedicated hardware “mining” devices that are essentially specialized, dedicated computers. Once enough of those unrelated computers agree that the transaction is correct, then it’s considered confirmed and that Bitcoin we had is no longer ours, it’s yours.

And these computers are all owned by different people. You could even own one if you wanted (though it’s difficult to turn a profit mining these days). There’s no government involved, no one entity that controls everything, it’s all distributed in a peer-to-peer style like bittorrent.

For the record, no, we’re not giving you a Bitcoin just for reading this. We appreciate you, dear reader, but there are limits to even our love.

Next: Bitcoin Is a Commodity, Bitcoin Wallets, and Bitcoin Faucets

4 Comments Add a comment

  1. geoduck

    People keep trying to call Bitcoin a currency. It is not. Currencies have a country, an economy, a Central Bank backing it up. Somebody is minding the store. Somebody cares what the value of the Pound or Dollar, or Euro, or Yen is. Bitcoin has NO ONE backing it up. Its value is set by whatever people are willing to pay for it.

    People keep trying to say Bitcoin is like a commodity. It is not. When you buy a commodity, you have SOMETHING, gold, diamonds, iron, oil, wheat, some physical thing that can be sold again. You may make a profit, you may lose money, but you have a physical asset that is worth something. Bitcoin has NOTHING to back it up. It has no physical asset it represents. It’s value is literally whatever the market is willing to pay for NOTHING.

    What IS Bitcoiun most like? The derivatives that were popular in the ’80s and ’90’s. The ones that set the value of a share on some mathematical formula based on some index. They had no one minding the store either. They in reality had nothing backing them up either. When the derivative bubble popped most who had invested in them lost everything. That is what I expect to happen to Bitcoin.

    Bitcoin looks most like a classic textbook case of a speculative bubble. This kind of volatility, this kind of crazy bidding, people buying in regardless of the price is exactly what you get before a bubble pops. It’s what happened in the latter stages of the derivative bubble. It is exactly what happened in the latter stages of the Dot-Com bubble. It’s what the stock markets looked like just before the crash of ’29 and ’87. It is gonna blow, and like most bubbles, the people who got in early, who set it up and got out as the bubble inflated, make something. Everyone else loses their shirt.

    What I tell people who have asked me about Bitcoin is this: It looks good but most get rich quick schemes do. It will collapse. Someone will cash out and and the buying frenzy will become a selling frenzy. Either that or there will be some international shock, a war, a run on some other market, a major company reporting a bad year that triggers a flight to quality. Bitcoin has none. Either way if you are left holding the bag when everyone sells you will have what you have now, nothing. I tell people if you aren’t in, don’t. If you are in, cash out before you lose everything. This won’t end will for most holders of Bitcoin.

    Sorry to rain on your parade, I know you’ve been a fan of Bitcoins and cryptocurrancy since day one. But I never liked or trusted the concept of a cryptocurrency. It smells to much like a Ponzi scheme for me.

    • Creigh Gordon

      One small quible: Bitcoin is a commodity, but a virtual one. Maybe more like virtual tulip bulbs than virtual gold, but you get the idea. No usefulness IRL. And not really like a derivative either, which is a promise backed by some agent (though it could be very difficult to determine who that agent is) that might or might not be kept. With Bitcoin, there is no agent making a promise, just a hope of a bigger fool.

      • geoduck

        Exactly right. Fools bought an imaginary bag of nothing and are hoping someone else will pay them more for it

  2. jackadoodle

    I really keep searching, and searching for one main question (which breaks into 2 or 3 smaller ones):

    Things like coinbase seem like “middle men” that could go away or trap my funds. How can I truly own my bitcoins without danger of funds being frozen etc?
    Another version of the above: what is the truly, best, safest, realest “middle man” if I do decide or need to go with one?

    Perspective: I don’t trust companies just because they are well known. Coinbase shmoinbase. A few people in an office somewhere, and yes they could go away, could be compromised, attacked, whatever. I know today it would be rare to mine your own bitcoin, but suppose I did. I’d own it. Without needing Coinbase or other exchanges. I understand I might need to go through one to make a transaction. But this is the big question for me. The middle men. The reliability. A Google search reveals frozen funds and big fees trying to withdraw funds. On a mega-wide scale. I want to get into bitcoin, but need to overcome this.

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