You probably already heard about Bitcoin in the news or from friends. You might know it is something related to money. But do you really know what it is? If not this article is right for you, as I will explain from the very basics and in a very simple manner what is Bitcoin and its main characteristics.
1. Digital Currency
The main characteristic of Bitcoin is that of being a digital currency. In other words, something like the euro or the dollar but digital. Being a currency means you can make payments with it to purchase goods and services. Second, it means you can use it to transfer money to other people or to yourself on a different account (called “wallet”).
As a currency it will also work as a store of value, meaning that you can hold it to purchase things with it in a future date. How good a store of value Bitcoin really is is debatable and certainly depends against what you compare it. For example, if you compare it with the Venezuelan currency over the last few years you will find that it is a great store of value.
Finally, one of the most interesting aspects of Bitcoin is that it mimics the gold behavior in our economy, in the sense that every year a certain amount of new coins enter into circulation, but eventually this will stop (when we reach 21 million coins) and the monetary base, which is the total number of coins in circulation, will be fixed. Some people argue that this structure will help Bitcoin gain value over time.
2. Decentralized
The second and perhaps most important characteristic of Bitcoin is that it is decentralized. This means that the whole system works without a central authority governing its behavior. In other words, there is no government, institution or enterprise behind Bitcoin. Instead, it works as a decentralized and peer to peer system where each and any person can run the Bitcoin software on its computer and effectively become one node in the network. The collection of nodes around the world are responsible for validating the individual transactions and for keeping a single yet distributed ledger (called the blockchain) which is used to verify the funds of all wallets.
The Bitcoin software is open source, which means that any person or company can look at the code, modify it and launch an alternative version. This is the reason why today you have a huge number of projects that aim to create a supposed better version of Bitcoin or one that solves a different project. Those projects are sometimes referred to as altcoins.
3. Based on cryptography
Creating a decentralizing digital currency is not trivial. What makes it possible behind the scenes is cryptography, and for this reason Bitcoin and the altcoins are called cryptocurrencies.
Cryptography is the study and practice of techniques to protect information. It can be used to transform messages into unreadable code and back (this process is called ciphering and deciphering) but it can also be used to digitally sign messages and transactions, and it is thanks to digital signatures that Bitcoin users can verify they are the real owners of their respective wallets and thus use those funds. Cryptography is also used to guarantee the integrity of the distributed ledger so that no one can temper with it.
Conclusion
As you can see, it is possible to describe Bitcoin with three main aspects are characteristics: a digital currency which is decentralized and based on cryptography.
Obviously this is a very superficial description and one could write a whole book about each of those characteristics.
The important point is that now you have a general idea of what Bitcoin is and you can research more on your own if you are interested in learning how each of those aspects work.