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 )
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Bitcoin symbol.

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 (or mBTC) is frequently used. (Though an everyday name for them has yet to be established – Millibits? Millies? Bitties? Embies? or just Bits, maybe?)

What Are Bitcoins Like?

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.

Why Bitcoin?

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 – unlike with Visa or MasterCard – you’re not limited to transferring money to companies, shops and businesses. You can just as easily transfer Bitcoin to a friend to pay what you owe her for the beer last night, you can buy a secondhand bookshelf at a garage sale or pay the neighbours kid's when they cut that lawn for you. And when some random stranger offers you serious money for that *ridiculous* straw hat that you found in your grandmother's attic; all you need to do is whisk out your smartphones, have the stranger scan your Bitcoin address off your screen and transfer the amount to you, when you see the money appear in your account you can walk off secure in you knowledge that no one can ever step in and reverse that payment.

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.

Where Are My Bitcoins?

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.

Special magic piggy bank.

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.)

What Makes It Different From a Bank?

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).

I Hear It’s Anonymous, Is That True?

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.)

Choosing Software

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). – If you find your program to be this slow, you’ve chosen the wrong one, try installing something different.

Some Terms Used

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) – but make sure all your copies are secure (anyone who gain access to your private keys, can spend your money). All Bitcoin programs allow you to encrypt your wallet with a password.

The wallet does not explicitly contain Bitcoin addresses, as these are automatically calculated from the private key.

References

Below are links to several not-quite-so-simple explanations of what Bitcoin is, and how it works.

MultiBit Bitcoin client
A good multi-platform Bitcoin client. Even though it is written in Java it seems surprisingly fast and lightweight. (As opposed to the Ubuntu/Debian-distributed bitcoin-qt, which needs to download tens of gigabites of data – taking days – before one can start to transfer money.)
Mycelium Bitcoin Wallet (Android)
Mycelium is a Bitcoin Wallet for Android which is lightingly fast and easy to use. You can download Mycelium from Google Play.
The Official Bitcoin Site
Here you can download wallet programs for Windows, Mac OS X, Ubuntu and other Unixes.
Blockchain’s eWallet solution “My Wallet”
Seems okayish. They state that your private keys never leave your computer, and that all encryption/decryption takes place locally. They also have various apps for browsers and mobile devices.
Alternatives to Mt. Gox (a discussion thread on Reddit)
A list of sites where one can buy and sell Bitcoin.
Mt. Gox
Commonly referred to site for buying and selling Bitcoin.
Bitcoin on Wikipedia
Article gives brief overview of technique, but far too little helpful information for someone just wanting to use Bitcoin.
Bitcoin: The Simplest Nontechnical Explanation
Bitcoin: “Triple Entry Crowd Accounting”
Two attempts at writing simpler descriptions of Bitcoin. Still not as simple as this one though.
Bitcoin Block Explorer
View Bitcoin transaction history information. for the whole system. Display blocks, addresses, and transactions created by Bitcoin.
Stackexchange Bitcoin
A whole Stackexchange site dedicated to Bitcoin, for the most part this site contain very technical and detailed questions and answers.
Bitcoin: A Peer-to-Peer Electronic Cash System
Satoshi Nakamoto’s original academic proposal for Bitcoin.

About This Text

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. – I basically wanted something that my mother would be able to read and understand without too much effort.

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.