Bitcoin is a currency that is completely digital. This means that unlike paper money or gold bricks there is nothing tangible that is being handed off in a transaction. However, even without something physical, purchases can still be made, and the coin can still be traded for cash. This isn’t a unique concept. In fact, bitcoin is only one of the thousands of decentralized cryptocurrencies without ownership of a central authority like a government or a bank. However, bitcoin is not illegal. The majority of governments around the world still allow users to buy, sell, mine, and use their bitcoin in a variety of different financial transactions.
However, for bitcoin to work, it is really the technology underneath it that makes its use possible for such a broad audience. When explaining bitcoin, it is important you know the answer to the fundamental question of, “how does bitcoin work?” And more importantly, “what is blockchain?”
Beginning at blockchain.
If someone had a digital asset such as an art piece that they created on a computer, they could theoretically duplicate it as many times as they want. The art could then be sent as an “original” to numerous individuals. The seller is unlikely to be caught since there is no evidence of which copy is the original. This example may seem unrelated, but consider that this “double-spend” problem leads many to question how a digital currency is possible. This is where blockchain comes into play.
All bitcoin transactions are publicly recorded on a database known as the blockchain. The blockchain is a decentralized ledger with the history or occurrences of when bitcoin has exchanged hands. A bank will typically have a database of transactions on their computer, which can only be accessible by employees of a certain position. The blockchain solves a similar problem, except instead of one person or organization holding access to the data, every device that uses the blockchain can see it. Personal identities are hidden and disguised with a string of numbers to avoid any security concerns. That said, security is still the same since users can be identified by their wallet address.
The blockchain gets its name from the way data is stored, in that each transaction is stored in a block. When the block fills up with transactions, miners review and verify each one. This ensures that each bitcoin is only in one place and is not being “double spent.” Once this is proven true, the block can be added to the previous one to form a blockchain.
Where do bitcoins come from?
Bitcoins are created through a process known as mining. Miners can earn bitcoin by doing two things. First, they must verify a block’s worth of transactions. Next, their computer must correctly guess the answer to a complex mathematical algorithm. As more and more miners have begun competing for newly minted coins, more powerful computers are needed than ever before. This means that nobody can sit down on their computer and create a bitcoin. This can be likened to how a computer-owner couldn’t just sit down and create a gold block on their device.
Bitcoin is valuable.
Your parents might still be skeptical about bitcoin having value since they can’t see it. If this question comes up, you might choose to compare the assigning of bitcoin’s value to the value we place in fiat money. Technically, the paper that the money is printed on is worth very little, if anything, yet with a number printed on it, we believe it carries a certain amount of value because the government tells us that it does. Similarly, gold was once viewed as not valuable since it was simply something found in the earth. What makes anything valuable is the laws of supply and demand. Therefore, if enough people continue to believe that bitcoin is worth something and there is a finite amount of the asset, the price will only continue to increase.
Don’t worry if your parents still don’t understand bitcoin after you give them an initial explanation. The concept can be complicated for those who are unfamiliar. For reference, this article can provide the extra reading necessary to understand the nuances of the bitcoin world.