A Simple Explanation of Bitcoin
This is a non-technical introduction to Bitcoin (a “Bitcoin for Dummies” if you will). I'm attempting to describe how to use Bitcoin and what its good for, but without drowning you in technical detail.
(updated )
Bitcoin is a digital currency. In order to make it secure, the underlying architecture is quite complex. I’ll here try to cover what you need to know to use Bitcoin, rather than try to explain it all. (There are plenty of other resources, if you want to know more about the nitty gritty.)
The symbols Ƀ and ฿ are used, as well as the symbol to
the right. Bitcoin also have its own currency
abbreviation: BTC. In practice
however, a single Bitcoin is so
expensive that the term
milli-Bitcoin Bitcoin is more similar cash (i.e. bills and coins) than any
other electronic money system. You can transfer Bitcoin to (and
receive Bitcoin from) anyone you want, no one can stop you, and you
can transfer money anonymously. Once you’ve transferred an amount to
someone else – it’s gone. (You can ask the recipient to transfer the
money back to you, but it is not possible to stop the transaction.)
There are also no limits on how little, or how much, you’re
allowed to transfer.
Your Bitcoins are stored in a wallet (on your computer, or on
one of the eWallet providers). Anyone who can read your
wallet, can also access your money. (Yes, your wallet can be stolen –
but you can also encrypt your wallet so that the thief is unable to
access its content.) If you lose your wallet, you lose your money
(just like with the wallet in your pocket). But you can make any
number of backups of your wallet.
Bitcoin is unlike cash in that it can be sent over the
Internet.
Some people would try to convince you that Bitcoin is good for
various ideologial reasons (e.g. because it's free, anonymous or
non-centralized), and while some of us humans still have ideologies
that we hold dear, people tend to adopt technologies that makes life
easier rather than more just.
So how do you benefit from using Bitcoin?
It's cheap. Each transaction costs a little something, but
the charge I really small (compared to what the banks charge for
transfers using their credit or debit cards).
Also the money you pay go to the people maintaining the Bitcoin
computer network (and if you want to join them you can set up your
own server and receive money for handling other people's
transactions).
Anyone can send and receive Bitcoin. – Sure, you can
pay for your coffee, buy a new bed, or pay your rent with Bitcoin
(assuming your local coffeeshop, furniture store and housing company
take the currency) but You can send money anywhere. Transferring money to the
other side of the world is no harder then sending it to someone you
meet face to face. In fact, the procedure (and the transaction
charge) is exactly the same. If normal money transfers are cheap by
Visa/MasterCard standards, international money transfers as
fantastically cheap compared to the usual fees. In fact, if you often
transfer money abroad you might find Bitcoin worth looking into *only
because of this.*
Instead of scanning a barcode off a screen (as you'd do when paying
someone just in front of you) you'll probably send the Bitcoin
address by email.
Picture it like this: There exist a special kind of transparent
magic piggy bank – it is special kind of piggy bank because it is
unbreakable, unpickable, and it also magically appears whenever
anyone calls out its name. There is no way to take money out of it
unless you have the key, but anyone can call for it, see what’s
inside, and put more money into it.
And – as if that was not enough – there are millions upon
millions of these magic piggy banks, and anyone can create
new ones. In the piggy-creation-process a key to the piggy is created as
well (the creator always gets a key). But after that, the key can be
copied, given away, or even stolen, lost or destroyed.
Each piggie bank is a Bitcoin address, and in your wallet you have the
keys which open your piggies – if you lose or delete your wallet then the
money’s still out there, but no one (including yourself) can use them any
more. If someone manages to steal your wallet, then they can also take
your money. If you make many copies of your wallet, you don’t get more
money, but you lessen the risk of you accidentally losing all your
wallets.
Note: If you have an eWallet provider you’re then
entrusting them with your keys. If the provider get hacked, someone may
grab your keys, then your money. (This has happened in the past, google
“mybitcoin.com” for a horrific example.)
With Bitcoin there is no one central bank, instead there is a huge
network of computers working together. People who participate in this
network are rewarded (in Bitcoin, of course) and anyone can join (and
leave) at any time without disrupting the network. There is no one
central authority that takes care of all the Bitcoins, instead, when you
do a transaction, you help doing a little bit of the work.
And then there is Bitcoin mining, but it’s a whole other thing
that we won’t go into here (it’s not relevant for just sending and
receiving Bitcoin).
Sorta. All transactions to and from an address are fully
traceable, back until the beginning of time (this in needed for the
system to stay secure). However the system does not store any personal
information about the owners of the addresses, and anyone can have an
unlimited number of addresses making it impossible to trace
transactions.
Note: Bear that in mind if you publish an
address (e.g. on the Internet) together with your name or other personal
details then the fact that you own that address will be out, and anyone
can see how much money you have there (though they will still not know if
you have money in other addresses). The way the system is buildt, anyone
can look up the current (and any past) balance of any account.
It’s very easy to create new addresses, and people often do that to
increase anonymity, or just to easier spot where the money come from. If
I, for example, rent out stuff I could give each customer their own
payment address, so I can easily keep track of who paid what. Or I can
have one address for donations to my web page, and one for my ice cream
business. (All Bitcoin wallet programs allow you to attach a note to
every address so you don’t have remember everything in your head.)
Speed is the thing that differ most between different Bitcoin
programs. Since your money exists only as a paper trail on the Bitcoin
network’s servers, that paper trail will have to be downloaded before you
can do any transactions. In some programs this is horribly,
horribly slow (taking days, and downloading tens of gigabytes of
data). Address or account (above also described as “special
magic piggy bank”) Your “account number” (34 character long mixture
of letters and digits), you need someone’s address in order to send them
money. Any person can have an unlimited number of accounts.
Wallet – A file containing private keys, one for each
Bitcoin address. Contrary to its name, a Bitcoin wallet does not contain
any actual money (all money is publicly stored in the Bitcoin
server network), instead a wallet only contains a list of private keys,
each allowing you to move Bitcoin from from one associated address
(whomever have a private key for an address can spend the money there).
Make many copies of your wallet (if you lose them all, you lose the
ability to spend those Bitcoin) The wallet does not explicitly contain Bitcoin addresses, as these are
automatically calculated from the private key.
Below are links to several not-quite-so-simple explanations of what
Bitcoin is, and how it works.
This was written after a couple of days reading up on, and playing with,
Bitcoin. Even after intense googling I could not find any text that
described Bitcoin in simple terms, from a user’s perspective, without
going into loads of technical details about the underlying
cryptography. If you have ideas about what could be explained better (e.g. worded in
an even simpler way) or if you want to point out something crucial that
I’ve missed, please do so by sending an email to me
at zrajm@zrajm.org.
If you liked this page,
feel
free to donate a couple of Millibits as a way to say thanks. I’d
suggest 25 mBTC (the price of a cup of coffee) but anything
is appreciated.
What Are Bitcoins Like?
Why Bitcoin?
Where Are My Bitcoins?
What Makes It Different From a Bank?
I Hear It’s Anonymous, Is That True?
Choosing Software
Some Terms Used
References
bitcoin-qt, which needs to
download tens of gigabites of data About This Text