Lecture 4: What Is Bitcoin?

LECTURE 4: What Is Bitcoin?

Lecture 4: In this lecture, I want to answer the question, "What is Bitcoin"?...

Remember, in the previous lesson, we went over how currency has evolved over time.  And what you should have learned is that Bitcoin did not just pop up overnight out of nothing… it is the result of the evolution of currency. 

Bitcoin is the next logical step.

So, let's start defining Bitcoin…

First, Bitcoin is a Cryptocurrency. 

A Cryptocurrency is a digital currency that uses cryptography, a method of storing and transmitting data in an encrypted manner so that only people for which the data is intended can read and process the information. 

Cryptography is used to secure transactions and the creation of additional amounts of the currency.

A Cryptocurrency does not have any physical good, commodity, paper money or real coin associated with it.  You can not redeem a certain amount of Bitcoin you have stored electronically for the same amount of physical Bitcoin in the real world… because a physical Bitcoin does not exist.

But just like the other forms of currency we have discussed, Bitcoin can be exchanged for goods and services of like value, as long as an exchange value can be agreed upon.  Bitcoin, even as a digital currency has value, and can be exchanged for goods and services of like value.

As we discussed in the previous lesson, fiat currency in the modern, Internet age is more about numbers in a computer than it is about paper money.  Your bank keeps a LEDGER of your transactions and it is this ledger that determines how much money you have.

Much in the same way, Bitcoin is simply a distributed ledger system.  Bitcoin transactions are all recorded on a ledger.  And this ledger system is public, shared and maintained by the public.

This brings me to my second, point…

Bitcoin is a decentralized digital currency.  As a matter of fact, it is the first decentralized digital currency.  (Even though you might not have heard of them, and it is not really the focus of this course, there are hundreds of other digital currencies out there).

The transactions that happen with a fiat currency is an example of a CENTRALIZED system.  Your bank keeps a ledger of all your transactions on their computer.  This ledger keeps track of how much money goes into your account and how much money goes out of it.  Basically, your banks computers keep track of who owns what.

You trust your bank to keep  correct records of your account and your banks trusts their computer to keep the correct records.  Since this record keeping is done in a centralized location, your bank, it is a centralized system.

Bitcoin is decentralized because the ledger is not kept in one central location which is owned by any one person or institution.  The Bitcoin ledger is actually held over thousands of different locations, called the Blockchain.  Since identical blocks of information are stored in multiple locations across its network… the Blockchain cannot be controlled by any one person or institution and has no single point of failure.

This means the Blockchain is very secure and transparent.  The information stored on the Blockchain cannot be manipulated or corrupted by any one entity.  And there is no single point of failure, for example a bank computer, that could cause the entire network to be lost or shut down.

I know this is kind of hard to wrap your head around, but you are using a decentralized system right now.  The Internet is decentralized.  It exists, we have access to it, we can use it in various ways and it grows… but there is not one person or institution that OWNS the Internet.

OK, so Bitcoin is the first decentralized digital currency that uses cryptography to encrypt transactions that are stored on a ledger held over thousands of locations called the Blockchain.

Wow, that is a mouthful.

It was not my intention to make the discussion about Bitcoin overly complicated and technical.  But you should have a good idea about what Bitcoin is.  But before we get into more practical aspects of Bitcoin, like where to get it, where to store it and how to invest in it… I want to go over a few more things that are good to know about Bitcoin in the next lecture.

Go to Lecture 5: More Bitcoin Questions Answered