BitCoin, also known as a “Cryptocurrency” is not as complex to understand as one might think. To understand BitCoin, let’s first review what “real” money is (or what it’s supposed to be):
In the United States, “Real” money is paper and coins, manufactured by the Federal Reserve. It has no real value on it’s own. It’s a low cost representation of gold. At least, that’s what it used to be. When it’s backed by a real world and limited resources that can’t be duplicated, it can represent real value because the item behind the money (the gold) is rare, limited, and can’t be duplicated. Instead of exchanging actual gold for goods and services, we exchange the paper and coin representations of that gold.
So, what about BitCoin?
Now, think of this: You have a set of incredibly complex mathematical formulas that you want to calculate the answers to. The problem is that it takes a high speed computer days (or more) of crunching numbers 24/7 before it can find an answer to just ONE of those formulas. That’s what a BitCoin is! It’s an answer to one of those complex numbers. You can’t duplicate it. You can’t fake it. You have to mine it, just like you have to mine gold. But instead of picks and axes, you use CPUs. It’s still a LOT of work to “find” the “nuggets” of answers. Additionally, there are a limited number of answers… about 21 million. So, once the last one is mined, that’s it. No more manufacturing of more BitCoins.
Now, as you know, gold is represented by paper and low cost metal coins. How is BitCoin represented? Well, it’s NOT represented with tangible things you can hold in your hand. It’s just numbers… the numbers that represent the answers to the formulas. You CAN print them out on paper and store them under your mattress, if you like, so in a way, you CAN make paper representations of it. But, you CANNOT counterfeit it. When you buy something with BitCoin, you don’t just hand someone a printed piece of paper with a bunch of numbers on it. I mean, you COULD, but that, by itself, won’t fly. You give them the numbers (either electronically or on paper) and they then run the numbers through one of many transaction processors (actually, I think it goes through many). The processors are servers run by many people around the world. They VALIDATE that those numbers are, in fact, an actual BitCoin… an actual answer to one of the 21 million formulas. Once validated, the person you’re buying form can accept it, then give you the goods or services you’re wanting to buy.
A BitCoin is a limited and non counterfeit-able asset, just like gold. But instead of a tangible asset, it’s an answer to a complex math problem. Your “money” in BitCoin is usually kept in digital form and is validated on each transaction as being real.