Geez!!!... How many Blogs and FAQ pages have you seen that start with that question??. Well it seems that everyone has a novel definition. So now here' s mine.

In short , Bitcoin is a new digital form of currency.

Bitcoins essentially only exist as code or software messages on the Internet. In “cyber space”.
In a manner of speaking, they are “stored” on a participant user's computer( more on this later) via a specialized software application referred to as a “wallet” .

They can also be "stored" in a type of bank account with a 3rd party , but for the sake of this discussion, we'll keep things simple
These “codes” can then be used to represent any amount of Bitcoin , the ownership of which can be transferred to any other participant user, through the internet using the wallet software, which also provides for interconnection to all other users over a type of peer to peer network. A little like a torrent network.

A basic representation of the Bitcoin network


Like most forms of money, Bitcoin is deemed to have value only because people decide it does and the amount of value that it holds is governed by the most basic of economic principals , supply and demand . The more people that want to posses it, the higher its value becomes .

In categorizing Bitcoin , It's probably reasonable to say that it belongs to the family of "representative"currencies but then also has properties not unlike a commodity currency. In fact, when trying to understand Bitcoin it helps to draw a comparison to a commodity currency like Gold .

The “rules of economics” tell us that in order to qualify as a viable currency a commodity should posses 5 basic properties

1. Scarcity
-Gold has value because it is relatively hard to find.
-Bitcoins are hard to produce and there is a finite supply. Only 21 million will ever come into existence.

2. Fungiblity
(Definition: all versions of a substance are interchangeable ..i.e. 100 cents is recognised as being the same value as 1 dollar)
-Gold retains the same value irrespective of how much its broken down
-Bitcoin ( BTC) can be broken down into satoshi's. 1 satoshi = 1x10-8 BTC and 100000000 satoshi's = 1 BTC

3. Transferability
-Gold is not that easy to cart around in some of its forms but it's ownership is easily transferred.
-Bitcoin can be stored in all sorts of transportable digital storage devices and carried from place to place. Bitcoin can also be sent electronically from one place to another in fractions of a second.

4. Divisibility
-Gold can be divided into smaller chunks to make it more convenient for transactions of varying sizes.
-Bitcoins are currently divisible down to 8 decimal places referred to as Satoshis ( named after the apparent creator of the bitcoin system )

5. Durability
-Gold is very durable and can last for a long time.
-Bitcoins will last as long as the system on which they are stored can last . However, in the event of system failure as long as the wallet software has been backed up the coins can be recovered. Having said that , it is possible for them to be lost forever, but then all forms of currency can fall victim to destruction or loss...even gold ( check the bottom of any ocean some time !)

Ironically, Gold and Bitcoins are also both discovered through a process referred to as mining, although the mining methods are of course vastly different.

Given this weight of evidence, surely you would have to agree that Bitcoin is just as viable a form of currency, as Gold .


So far we've compared bitcoin to Gold in order to confirm its validity as a modern currency. However, we can't ignore the “elephant in the room'. The fundamental distinction between the two commodities is one of physicality, a property that bitcoin is devoid of and the issue which is frequently the source of most concern to the un-initiated. Whereas Gold is a physical tangible substance that can be touched and held, Bitcoin ( for the most part) cannot.

Because of its physical nature Gold, and for that matter, all forms of cash monies, can be made secure from theft by simply locking them up in a vault or a safe well away from the wanton desires of wrong doers. ….but how the hell do you secure a piece of code ???Fortunately , this is not a new problem and software Cryptography provides part of the solution .

To keep everything secure in the bitcoin network, specialized sets of digital signatures ,or keys, are applied to each user interaction or “transaction “ by the wallet software. These keys are very large 32byte/256bit numbers. They are very secure because they are extremely hard to Guess or crack even using the most powerful of computers .

In fact, it has been calculated, that given current computing power, it would take approximately 1 billion billion years for the most powerful computer on earth to crack just one private key address. Even when we consider that computing power tends to double every 1 or 2 years , it would still be 60 to 100 years before we even see a computer capable of such a feat .You'd have to ask if it would it really be worth the trouble?

Strictly speaking, apart form providing access to the Bitcoin network nodes, this is all the wallet software really does. It generates and stores the secure keys for each transaction. Sure ... It shows you your bitcoin account balance, giving the impression that your coins exist on your PC , but in reality the coins aren't Stored” in your wallet at all. You don’t physically hold them you just have a claim on an amount of bitcoin that raises and lowers as you perform various transactions.

The record of the amount of bitcoins attributed to you actually exists as balance on a massive digital ledger held in the network . This can be thought of as the second part of the Bitcoin security mechanisms and is really the foundation of the whole bitcoin system. Its called the “block-chain”


The block-chain is effectively a list of every bitcoin transaction that has ever been performed. It's made visible to and shared by all users via the wallet software. When you elect to participate in the bitcoin network you go through a process of downloading the block-chain which can actually take several days due to its size .

Through the mining process, mentioned previously , the transactions that make up the Block-chain are checked and confirmed over and over again by multiple parties and the records are continuously updated .

Every time a user opens his bitcoin wallet . It synchronises with the network and downloads all the new transaction blocks that have been added to the block chain since the last time it was connected . Because of this, the possibility of introducing fake transactions or hacks is almost negligible, as you would have to change the records in every wallet that connects to the network.

A basic representation of the Bitcoin mining process

This distributed nature of the bitcoin network architecture, also helps prevent any single entity from gaining independent or even influential control over the currency. This is why Bitcoin is often referred to as a de-centralised currency and it is this attribute that makes it an attractive, viable alternative to the current world monetary systems that many authorities warn, are on the verge of collapse.


Some people would have you believe this .Clearly the system is pretty cleverly designed and in reality quite secure. However, Bitcoin continues to be viewed with suspicion by a large faction of society who associate it with anonymous criminal activity, hacking and drug dealers. However, these criminals also use cash to protect their anonymity, so why doesn't that make cash less trustworthy?

More often than not , underlying this background murmur of mistrust is the basic issue of physicality or more specifically, the lack of it . The general consensus seems to be , that because bitcoins are not "real" and only exist "in the cloud" they must be an extremely risky investment and cant be taken seriously. But honestly, is this lack of physicality really all that strange and new?

Consider how you handle your day to day finances. Nowadays, we all use digital transactions, You rarely need to see your money. Your pay goes into a bank account electronically and your balance goes up . You verify this electronically by viewing your account details ...probably on line...and then set about spending it . Most of your spending is done through digital withdrawals against the balance in your account ...B-pay, direct debit, Visa debit etc etc . So how is that any different to a Bitcoin transaction?

The obvious answer is because the bank will "guarantee" your money. If you're ripped off, the Bank will cover your loss ...probably....and you can also go to the bank and convert your electronic balance into hard cash any time you want, Which you obviously cant do with a bitcoin ...right ?

WRONG ! WRONG ! WRONG ! Today Bitcoin can be exchanged for over 20 different international currencies. It's traded vigorously on specialized currency exchanges. Its transferred and exchanged for around 100000 different goods and services at last count. You can withdraw and deposit bitcoins using specialized ATMS .You can even open a bitcoin account tied to a debit card that will work with EFTPOS.... you can literally buy the family groceries with your bitcoins!!! The bitcoin landscape has changed drastically from it's early beginnings where it could only be exchanged for a handful of Fiat currencies in very few places

Despite the resistance and lampooning coming from the glass towers of the economic overlords, Bitcoin continues to grow and gain in acceptance . Practically every month, a new entity emerges offering some kind of innovative , novel or even mainstream use for bitcoins or altcoins in general. And the level of adoption is ramping up too, fueled by currency crippled third world countries, desperate for an accessible monetary system.

The stage is set and bitcoin looks like it will be around for a long time to come. Its future is promising and there is an open invitation for everyone around the world, to come join the party !

If you would like more detailed information about the way in which the bitcoin system works, I'd encourage you to watch the following video. It offers an insightful look at the way in which the Bitcoin system hangs together, but is presented in a way, that even the least "bitcoincentric" individual will appreciate and understand.

Featured diagrams : created by Julia Zakharova sourced from: TECH.EU/features/808/bitcoin-part-one/
Video:A GUIDE TO BITCOIN (PART1): A LOOK UNDER THE HOOD April 9 2014.shared via Facebook creator CuriousInventor

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