Bitcoin Logo on a Coin

What Is Bitcoin in Layman’s Terms? Understanding Bitcoin

Over a decade after its inception, bitcoin remains a popular search topic. Most people have an idea of what it is, but the details are harder to grasp.

What is bitcoin in layman’s terms, then? First of all, it’s important to make the distinction between Bitcoin and bitcoin. The former is the name of the system, while the latter is the name of the actual unit of currency.

The other thing about bitcoin is that it’s a virtual currency. Much like dollars or euros, you can spend bitcoin to buy goods and services. The main difference is that bitcoins consist of a bunch of 0’s and 1’s stored on many computers around the world.

How does bitcoin work? To get to the bottom of that, we must go over the concepts of decentralization, mining, and blockchain. Here’s a simple guide to help you out.

Decentralization

To understand Bitcoin, you need to understand decentralization. After all, this is one of the main value propositions of this system.

When you spend traditional money, your transaction gets recorded somewhere. This allows banks and credit card companies to keep track of when and what you spend. This information goes to the place known as the ledger.

Now, the legitimacy of the ledger is just as important as what’s recorded onto it. We’ll use an analogy to illustrate why this is a big deal.

Let’s say you have a spelling bee competition. There’s one judge, two finalists (Jack and Emma), and 999 audience members. Finalists get a point per correct spelling, the score is 25-25, and all the information is on the judge’s ledger.

In this scenario, there are several things that create potential for mischief. For example, the judge may rig the results or add arbitrary rules. Someone else may come in while the judge is away and add a few points to Jack’s or Emma’s score.

With decentralization, this is not an issue since anyone can get a copy of the ledger. Other than the judge, the entire audience will keep the score as well. They’ll write down who scored the point, when they did it, and which word they used.

You can see how this counters each of the potential issues we described above. Even if the judge or a third party tries to rig the score, they can’t update the audience’s ledgers. They also can’t change the rules without the audience’s consent.

Mining

With Bitcoin, the audience members from our example fulfill the role of miners.

In total, there are only 21 million bitcoins that can ever exist. Right now, there are over 18 million bitcoins in circulation. The exact number changes every 10 minutes, when miners mine some of the remaining blocks.

What is mining, you ask? In simple terms, mining refers to writing a block of transactions and broadcasting it to other miners. Since new transactions happen all the time, it’s important to complete them as soon as possible.

So, how do miners manage to broadcast this information in a reasonable time frame? They do it by installing certain software on their computers. This software allows them to talk to others in their network (chain), so it’s called a blockchain.

Blockchain

Now, let’s assume that you are the first to broadcast a new block of transactions. Before everyone includes it in their ledgers, you go through a verification process.

This process consists of other miners looking at their ledgers and comparing it to yours. If something seems off, your ledger won’t get verified and the blockchain will wait for the next miner. If everything is in order, they’ll agree to use your ledger.

In our analogy, each block of transaction could be a set of 5 scores. One block would say “Jack got 3 points, Emma got 2, and here are the receipts for each point.” Another block would say “Jack got 1 point, Emma got 4, here are the receipts, etc.”

Every time an audience member completes a block first, he’d shout, “Look at my ledger!” Then all other members would take a look to make sure he’s right. If he is, they’ll update their ledgers with his new block and prepare for the next set of scores.

Becoming a miner is as simple as becoming an audience member. The real challenge is in managing to update your ledger before everyone else. If you’re the first to push out a new block, you’ll receive 12.5 bitcoins for your troubles.

This incentive for speed is why people buy high-performance computers. The more powerful a computer is, the better chances it has of making it to the finish line first.

Value and Regulations

Bitcoins don’t have inherent value, so their value is whatever someone’s willing to pay for them. Right now, they’re priced at $6,594.

Much like other currencies and stocks, you can trade bitcoin on an exchange. For example, the RoundBlock trading platform is a good place to get started. They specialize in Bitcoin futures and options contracts.

Of course, the fact that bitcoins don’t have inherent value calls for regulation. That said, the world has a lot to gain and lose from cryptocurrency. This is likely why many lawmakers have yet to acknowledge this growing trend.

Though the currency’s legal status isn’t established, all states have their own regulations. Some states prohibit the use of bitcoin, but most either restrict or legalize it. In the U.S., Bitcoin is legal and often treated as property for tax purposes.

More on What Is Bitcoin in Layman’s Terms

As you can see, Bitcoin isn’t all that complicated. This article won’t make you an expert, but we hope it makes the concept a bit easier to grasp.

Should you invest in bitcoin? That’s a complicated question, but most experts seem to agree that the currency will only keep rising in value. That said, Bitcoin is still new, and it’s important to understand how it works before investing.

Still struggling with the question, “What is Bitcoin in layman’s terms?” Looking for more information on investing in bitcoin or other cryptocurrencies? Check out our “Financial Guides” section!