Often I'm asked to explain Bitcoin to someone and occasionally I come up with something stellar that really nails it, but most times it's a rambling incoherent mess.
What I would like to see is a short and simple explanation of what Bitcoin is that is suitable for someone non-technical to understand.
Bitcoin is a new kind of money. It's the first decentralized electronic currency not controlled by a single organization or government. It's an open source project, and it is used by more than 100,000 people. All over the world people are trading hundreds of thousands of dollars worth of bitcoin every day with no middle man and no credit card companies. It's a startup currency which has never happened before.
Bitcoin is the first digital currency that is completely distributed. The network is made up of users like yourself so no bank or payment processor is required between you and whoever you're trading with. This decentralization is the basis for Bitcoin's security and freedom.
Email let us send letters for free, anywhere in the world. Skype lets us make phone and video calls for free, anywhere in the world. Now there's bitcoin. Bitcoin lets you send money to anyone online, anywhere in the world for less than a cent per transaction! Bitcoin is a community run system not controlled by any bank or government. There's no wallstreet banker getting rich by standing between you and the people you want to send and receive money from.
Bitcoin is more efficient than all competing currencies. This will drive its adoption in the same way computers were adopted, in that computers made people more efficient in competing in the marketplace. A currency has value by it being widely used. Bitcoin is a startup currency with a deflationary bootstrapping economy. Its use spreads by providing the speculator incentive.
Bitcoin is going to be the biggest opportunity for innovation that the world has seen since the industrial revolution. An idea whose time has come.
Adapted from the New to Bitcoin? Start here! post on the bitcointalk forums that has received over 250,000 views:
Introduction to Bitcoin
Forget most things you've heard. People discover Bitcoin in a variety of ways, but usually pick up some sort of misconception like "Bitcoin gives free money to people with computers" or "in order to use Bitcoin I have to use a program that wastes electricity for nothing" along the way. Here is a good summary to help you understand Bitcoin in general, by focusing on what Bitcoin is and what problem it solves. These two things are not typically well explained on most websites, and it is difficult to appreciate just how effective a technology Bitcoin is until they are understood.
What Bitcoin is: An agreement amongst a community of people to use 21 million secure mathematical tokens--"bitcoins"--as money, like traditional African and Asian societies used the money cowry. Unlike the money cowry:
This is accomplished by the use of powerful cryptography many times stronger than that used by banks. Instead of simply being "sent" coins have to be cryptographically signed over from one entity to another, essentially putting a lock and key on each token so that bitcoins can be securely backed up in multiple places, and so that copying doesn't increase the amount you own.
Because bitcoins are given their value by the community, they don't need to be accepted by anyone else or backed by any authority to succeed. They are like a local currency except much, much more effective and local to the whole world. As an example of how effective the community is at "backing" the bitcoin: on April 4th 2011 30,000 bitcoins were abruptly sold on the largest Bitcoin exchange, consuming nearly all "buy" offers on the order book and dropping the price by nearly 1/3. But within a couple of days, the price on the exchange had fully rebounded and bitcoins were again trading at good volumes, with large "buy" offers slowly replacing the ones consumed by the trades. The ability of such a small economy (there were only 5 million out of the total 21 million bitcoins circulating then, or about 3.75 million USD worth at then-current exchange rates) to absorb such a large sell-off without crashing shows that bitcoins were already working beautifully.
What problem Bitcoin solves: Mathematically, the specific implementation of the bitcoin protocol solves the problem of "how to do all of the above without trusting anyone". If that sounds amazing, it should! Normally a local currency has to trust all kinds of people for it to be able to work. So does a national currency. And in both cases, that trust is often abused. But with Bitcoin, there's no one person who can abuse the system. Nobody can print more money, nobody can re-use the coins simply by making a copy, and nobody can use anyone else's coins without having direct access to their keys. People who break its mathematical "rules" simply end up creating a whole different system incompatible with the first. As long as these rules are followed by someone, the only way Bitcoin can fail is for everyone to stop using it.
This marvelous quality of not having to trust anyone is achieved in two ways. First, through the use of cutting-edge cryptography. Cryptography ensures that only the owner of the bitcoins has the authority to spend them. The cryptography used in Bitcoin is so strong that all the world's online banking would be compromised before Bitcoin would be, and it can even be upgraded if that were to start to happen. It's like if each banknote in your pocket had a 100-digit combination lock on it that couldn't be removed without destroying the bill itself. Bitcoin is that secure.
But the second way of securing the system, called the blockchain, is where the real magic happens. The blockchain is a single, authoritative record of confirmed transactions which is stored on the peer to peer bitcoin network. Even with top-notch digital encryption, if there was no central registry to show that certain bitcoins had already been "paid" to someone else, you could sign over the same coins to multiple people in what's called a double-spend attack, like writing cheques for more money than you have in your account. Normally this is prevented by a central authority, the bank, who keeps track of all the cheques you write and makes sure they don't exceed the amount of money you have. Even so, most people won't accept a cheque from you unless they really trust you, and the bank has to spend a lot of money physically protecting those central records, whether they are kept in a physical or digital form. Not to mention, sometimes a bank employee can abuse their position of trust. And, in traditional banking, the bank itself doesn't have to follow the rules you do--it can lend out more money than it actually has.
The blockchain fixes all these problems by creating a single master registry of the already-cryptographically-secured bitcoin transfers, verifying them and locking them down in a highly competitive market called mining. In return for this critical role, the Bitcoin community rewards miners with a set amount of bitcoins per block, taken from the original limited quantity on a pre-agreed schedule. As that original amount gradually runs out, this reward will be replaced by fees paid to prioritise one transaction over another--again in a highly competitive market to ensure the lowest possible cost. The transactions are verified and locked in by the computational work of mining in a very special way so that no one else can change the official record of transactions without doing more computational work than the cumulative work of all miners across the whole network.
In conclusion: All this mathematical technology may be a bit of a mouthful, but what it means in practice is that Bitcoin works just like cash. Bitcoin transactions are intentionally irreversible--unlike credit cards or PayPal where chargebacks can invalidate a payment that has already been made. And there are no middlemen. Transactions are completed directly between the sender and the receiver via the peer to peer network.
Because of Bitcoin's intricate design, the network remains secure no matter where or how you process bitcoin transactions. Which is incredible--no one else has ever tried to create a system that worked this way! All previous monetary systems have relied on trusting somebody, whether it was the king, town hall, the federal reserve, or banks. Bitcoin doesn't. It's guaranteed instead by the laws of mathematics, and that's why it has everyone from technologists to economists very excited.
Quite concisely, bitcoin is to money what email was to letters . . . and the post office is in trouble.
Bitcoin has a lot of complexities making it tough to describe in the time of an elevator ride.
Still, it can be described as:
A distributed system for people to send and receive payments anonymously, instantly, reliably, and for free. Payments are made in a new kind of money whose total supply is limited and not controlled by any party. E-commerce would benefit and services, for example escrow or securing and remotely accessing your wallet, could be built on this technology. Think BitTorrent meets PayPal.
The only problem with that: bitcoin transactions are not sufficiently anonymous, instantaneous nor free.
Bitcoin is a mathematically secured currency system which enables ultra low fee internet commerce using coins and fractions of coins which are in some ways similar to traditional cash.
Acting something like a shared accounting ledger, the record of all transactions is stored in a semi-anonymous way within the network of bitcoin participants. This means that there is no company, government or authority with whom you need to identify yourself and open an account. Simply running the software provides an initially empty wallet on your device which can receive Bitcoin from any other Bitcoin user - and can also easily be loaded via Bitcoin exchanges operating in many countries and accepting various currencies.
The issuing of coins into the system occurs via computers specifically set up to process transactions and assist in securing the network. Commonly referred to as 'mining' - this is open to anyone, but requires additional computer hardware and incurs electricity costs. Issuance occurs at an ever decreasing rate, topping out at around 21 Million full coins some time well after 2030. As coins can be traded even in tiny fractions, this allows more than enough to go around, no matter what size the economy they are a part of. Products and services may ultimately be priced in hundredths or thousandths of a bitcoin if ever the scale of the bitcoin economy warrants it.
(Hmm - concise is hard. Maybe the 1st 2 paragraphs as intro is enough though.)
Bitcoin is the currency of the future.
In order to understand why this is true, there are two key pieces of information that a person must have:
The short answer is that Bitcoin does everything you'd like a currency to do, and it doesn't have any of the drawbacks associated with any of the other currencies available.
It is amazing acceptable as a currency to every honest and rational person who also really understands money, and it is a magnificent protest against everything that is wrong with politics, wall street, the global central banking system, and our grossly manipulated economy.
Oh, you want more details? Great! Here's a great explanation in 104 seconds: http://www.weusecoins.com/
You want even more? That AWESOME TOO!
The below is a bit meater, but it's important information to understand the real problems that Bitcoin solves.
Every currency has it's own rules for it's creation. Some currencies are made out of a precious commodity that is inherently valuable (like gold and silver coins, or in the past: shells and jewelry), some currencies are paper for easy exchange but backed by a commodity (like gold or silver certificates), but most modern currencies are simply paper that is printed by a private central bank empowered to print a nations currency by that country's government.
Modern currencies enter the marketplace by being lent out through a series of banks that charge interest. The country's central bank prints the money and lends that money out to the big banks in the country at the "discount window" interest rate; these banks then lend out the money on consumer loans through their branch banks.
This system ensures that there is never enough money for all the people to pay off their debts. It ensures that there are always people who will be motivated to work for money. This system also allows the banking industry to basically control when there will be massive defaults and foreclosures. Defaults and foreclosures are built into the system itself. A quick visual example to demonstrate this: imagine if there was no money in a country of 2000 people, then half the people in this country all borrowed $1000 from their chosen bank, injecting $1M worth of currency into the country, and these individuals who received loans all agreed to pay back $1100 a year later (the loan plus $100 interest). The banks are going to get a vast amount of that money paid back to them, and the people who aren't as good at getting money will lose their assets which the banks will seize through foreclosure. The banks themselves did nothing to create value, they did not put up the money themselves, they borrowed it from the central bank, and they sold the FHA compliant mortgage to a federally insured government sponsored enterprise like fannie-mae or freddie-mac, which get bailed out at tax payer expense... so the banks don't really have to deal with foreclosed properties either. The foreclosed properties end up going to HUD, and someone else will take out another loan to buy them.
This system works incredibly well for the banking industry, they get to collect interest and seize properties without having put up any capital themselves; their loses are pushed onto the tax-payers through bailouts; and their profits accrue to shareholders.
Politicians accept this mostly because they don't understand it, or if they do, they have positioned themselves to benefit from it.
This system provides those in the government (and those with connections to the government) with easy access to new money; The Federal Reserve, a private company, with private and secret shareholders, is empowered by the federal government to be the sole printer of Federal Reserve Notes (US Dollars), and in exchange, the Federal Reserve MUST purchase any treasury bonds that the US Treasury requires it to purchase. This arrangement means that the US federal government may issue an unlimited number of US Treasury Bonds without fear of ever not having a buyer for them.
The four reasons that US Dollars (Federal Reserve Notes) are considered valuable are:
US Citizens are forced (under penalty of asset seizure and imprisonment) to pay taxes using US Dollars
EVERY US Dollar currently in existence (and many more that are not in existence) are owed as debts to banks who were able to create loans as the vehicle for injecting money into the economy. (Thus fear of asset seizure [foreclosure] drives debtors to get US Dollars to pay off their debts).
The US Court System has established that Federal Reserve Notes are "Legal Tender for All Debts Public and Private", this means that all penalties and fees imposed by any government body in the US must be denominated in US Dollars, and any debt may be discharged in US dollars. (This means a contract that was originally between two people and said that Bob would pay Jean one ounce of 0.9999 gold, if Bob fails to pay and Jean takes him to court, the court will assert that Bob owes Jean a debt, and the amount will be denominated in US Dollars, and Bob will be able to discharge his debt to Jean in US dollars. This is the meaning of "Legal Tender for All Debts Public and Private") AND FINALLY
Other countries are forced (under OPEC rules) to use US Dollars for making exchanges of oil; this dramatically strengthens the international demand for US Dollars.
The basic reason US Dollars are valued is because the people agree to these rules. Debtors cannot simply walk away from their debts (though now, more than ever, people are); Tax Payers cannot pay their taxes with any other currency; and individuals who are found liable in a lawsuit are required to pay in US Dollars. All of these actions fundamentally introduce the use of real or threatened police force against anyone who does not deal with Federal Reserve Notes in the US (and similar laws exist in other countries).
Additional information how how force and covert aggression are used against countries that resist participation in the Global Banking System, you might consider reading: Confessions of an Economic Hit Man.
The bottom line is that most modern currencies are injected into society only with the creation of debt, and then the government uses threat of asset seizure and imprisonment and taxation and fines/fees to ensure that the currency is accepted.
Bitcoin is a purely electronic currency. It is created using very precisely controlled and agreed upon algorithms that are open source and totally transparent. No one is forced to use it, and it is not based on debt.
It is valuable precisely because rational and honest people don't want to manipulate, control, and enslave debtors. Bitcoin is the ultimate economic self-defense against dishonest individuals who have found their way into leadership positions within the banking industry, individuals who have positioned themselves as the Gods of Money, and who seek to use violence and threat of asset seizure against individuals who have had difficulty earning sufficient money to pay their debts (debts largely entered into as a pledge on the part of the debtor, and for which the creditor did little more than authorize an electronic funds transfer).
Bitcoin is fast, global, secure, largely anonymous, and less expensive than nearly any other transaction processing services (compare rates with credit card merchant services, paypal merchant services, and the many other bank fees associated with having an account).
Bitcoin is valuable because the community of users all agree that it is valuable. And every person who uses Bitcoin, who recognizes the value of this idea, strengthens the value of the currency. It is an idea whose time has come.
Create a Wallet, let people know that you accept Bitcoin. Learn more about Bitcoin. Consider purchasing Bitcoin on an exchange market. Consider operating a Miner. Buy something with Bitcoin. Help others discover Bitcoin as well.
Bitcoin is a perfect opportunity to help educate others about the realities of Money.
Continue your own education.
An excellent documentary that presents the almost unbelievable and borderline terrifying history of money is "The Money Masters" ( http://www.youtube.com/watch?v=lXb-LrVkuwM )
We are a community of individuals who are honest, strong, and fully grounded in reality.
You are invited and welcome to participate in the paradigm shift and the revolution.
Recently I stumbled across this question as I was supposed to explain what Bitcoin was to my 5-year-old nephew.
As the question states that it needs to explain the concept of bitcoin to a non-technical person, I took it a step further and explained it to the kid, who knows nothing (literally).
So here goes my 2 satoshis on what is the best explanation (according to me and the kid).
The time when computers were made, they were pretty dumb. They could understand only Yes (1) and No (0). This information of Yes and No was stored in a box called a Bit. A computer was made of a lot of such boxes.
A few decades later a very noble man, Mr. Satoshi wanted to help the dumb people, as smart people used to take their undue advantage by asking the dumb people to trust the smart people.
So, he created what is called a Bit-Coin, where Bit means something stored inside a computer and Coin means money.
This bitcoin was such that it didn't require anyone to trust others (Trustless). Now you might be wondering how is this possible, well, bitcoin stores all the information (about giving or taking bitcoins) in a chain of boxes (Blocks) and everyone has a locked and framed photograph of these boxes, which they could only see but not change. There were a lot of people working for Mr. Satoshi to help him store a lot of different copies of these framed photographs. They got paid in a lottery system.
What if there's new information and we want to include record; the people doing jobs for Mr. Satoshi were all are given a random question to solve. The one who solved this question first won the lottery and could open the locked frame and attach the new box's (containing the information) photo, only to the end of the current chain of photographs of these boxes. These people weren't allowed alter the existing chain of photographs.
Now that everyone had the same set of photographs, there's no need to trust anyone.
P.S. This was explained to a 5-year-old kid, hence a lot of analogies have been constructed, which may or may not exactly translate to the core of bitcoin technology.
There's a good reason for why when people try to understand Bitcoin and ask the most obvious question "What is it?" they only get even more confused and discouraged. This reason is the fact that this question doesn't really have a single concrete answer and usually receives multiple answers from those who do understand it that include a lot of technical speak and jargon. Hence the likely additional confusion.
So instead of asking what it is I'd like to propose a different question: "Who is Bitcoin?" and the answer I'd argue couldn't be simpler: Bitcoin can be virtually anyone from a business man in Chile to a wallstreet banker in New York to a grandmother in England to a college student in China, anyone with a computer or another device connected to the internet and running the free Bitcoin software can be part of Bitcoin. Those who run this Bitcoin software on their device not only do so but they also get connected directly to each other forming a person to person or in technical speak a peer ot peer network. The really brilliant aspect of it all is this next part where these people using the Bitcoin software connected to each other are able to issue, own and trade units of account, a digital currency - called bitcoins - where because of how the Bitcoin software is coded, and done so completely openly for anyone to see, they don't even need to trust any person who's part of the network other than the laws of mathematics to be virtually certain that the person giving them some bitcoins is following the same exact rules as they are.
With this picture in mind to sum it all up in technical speak: Bitcoin is a payment system with a digital currency in a decentralized peer to peer network. Does it make any more sense now? I hope so.
The realistic, honest answer to this question is that Bitcoin is a "Digital Commodity".
Bitcoin cannot currently be described as a digital currency since it cannot, practically, fulfill the basic functions of a currency. The wildly fluctuating USD/BTC exchange rate alone means there is price instability. How would YOU like to offer your labour for a few BTCs only to find, the very next day, that you're going to get paid MUCH less (or MUCH more) in USD. And, no, you can't ignore the USD/BTC exchange rate and just deal within the BTC community because everyone measure the REAL 'value' of BTC by the exhange rate.
Bitcoin can, and must, currently be described as a digital commodity with a wildly fluctuating, uncertain, speculative USD price.
I make no judgement about BTC's future usefulness as a genuine digital currency. Just pointing out that what it IS (now) is very different to what it MIGHT be in future.
Bitcoin is a global payment network on the internet. It is self-sustained and allows users to make payments between individuals like cash.
Instead of a company being the referee, Bitcoin is governed neutrally by rules asserted through a network of computers running the same open-source software.
Bitcoin is completely transparent, in that anyone can see every transaction, yet private as the identity of sender and receiver remain unknown.
New currency units are solely added as recompensation for verifying the network's transactions, yet their number is finite. The currency units are valuable because they are scarce and useful.
Bitcoin transaction is a verifiable message that says that user Alice gave certain amount of bitcoins to user Bob. Bitcoin it self is just a number mentioned in bitcoin transaction and it could be a small fraction. 21 million bitcoins is the maximum number that would ever be in circulation.
For non-technical users, I found this video to be extremely clear and helpful in explaining the details of how Bitcoin works:
I think most people don't get the decentralized part. To explain, I have made a few questions and their answers:
Bitcoin is a distributed ledger. Everyone knows how many bitcoins are around and which address sent how many to which address (sort of).
A1. Bitcoins are created at a controlled rate. Once every 10 minutes (currently 25 bitcoins every 10 minutes). The first one to solve a hard problem gets awarded those coins.
A2. Bitcoin transactions are public. So everyone can check if a transaction is a double send.
A3. Central authorities are removed because of the mining reward every 10 mins. This consists of the 25 bitcoins plus any transaction fees. It requires people to process ("verify") new transactions in the form of a solution to a hard puzzle. The first one to solve gets the reward. A majority (51%) of the network breaks ties if two solutions are presented at the same time. Once the solution is accepted by the network, the trasactions are considered "verified".
Cash on the internet.
It can be spent anonymously, and stolen if you're not careful.
Bitcoin is a digital currency stored on the internet that allows users to send value without asking a third party for permission. It is secure because it rewards users who validate transactions and is independently reviewed by thousands of peers.
What is bitcoin? Bitcoin is digital cash.
Okay, why we need bitcoin? It is global, so you can send money to your family living in Zimbabwe immediately and with low transaction fees.
Okay, so Bitcoin is an organization that provides this payment service? No It is decentralized. Basically, anyone in the world can join the network and help network validate the transactions. Thus, there is no single party validating the payment transfers but users like me and you can also validate it. It is peer-to-peer decentralized digital cash.
Okay, so what is stopping me or any user from validating wrong transaction? You can join the network without any permission but if you want to move transactions to the valid set of transactions then you have do some work (computation) first. Once you povide proof of your work then only you can add transactions to valid set of transactions.
Okay, so if I want to transact I have to work everytime? No normally users don't do work, they send their transactions to miners. Miners gather all the transactions and do work and add valid transactions after regular intervals.
Okay, why are they called miners and how do they manage valid set of transactions? So, valid transactions are distributed among blocks. Each block contains many transactions and every block are chained together to form blockchain of valid transactions. Miners provide proof od work done to add block of valid transactions to blockchain. And whenever they add a new block to blockchain they get some newly generated bitcoins as reward. That's ,how supply of bitcoin is managed. And bitcoins are created from thin air and awarded to block-adder, they are called miners.
Oh cool, a bit clear now.
bitcoin is a type of currency which has its value established cryptographically, meaning that each blockchain, or record of transactions, is secured by cryptography.
The experience of paying for an item in bitcoin is similar to any banking app (paypal, bank of america, online banking) , however, the technology is drastically different.
Bitcoin relies on a decentralized, global network of computers to verify the truth of the transactions in the blockchain.
Bitcoin is the most popular form of cryptocurrency, but there are over 1600 all with their own configurations of features. The current market cap for all cryptocurrencies is over $250 billion.
Bitcoin is like digital coins that live on the internet. Instead of using paper money or coins from your piggy bank, you can use Bitcoin to buy things or send money to friends. It doesn't need a bank, and you can keep track of all the digital coins with special computers. Just like video games have points or coins, Bitcoin is a kind of money you can use on the internet.
Bitcoin is a type of digital or virtual money that exists only on the internet. It's not controlled by any government or bank, and people can send and receive it directly to each other without needing a middleman, like a bank. This makes transactions faster and often cheaper. To ensure that everything is secure and accurate, a network of powerful computers, called miners, work together to maintain a public record of all transactions, known as the blockchain. People can use Bitcoin to buy goods and services from businesses that accept it or exchange it for traditional money, like dollars or euros.
I really love the video Ever wonder how Bitcoin (and other cryptocurrencies) actually work? by 3Blue1Brown.
The video doesn't use vague terms such as digital money, digital gold or mining. It rather starts off demonstrating how you might use a common ledger to keep transactions between with your friends so you don't have to settle up all the time. Building on top of that, it builds bitcoin from scratch.
It also tries to give you a basic understanding of digital signatures and hashes without too much of a headache. It is a little bit technical, however if you want to really understand the fundamentals of Bitcoin, you need to have at least somewhat understanding of basic cryptography.
Go watch it.
Just tell them bitcoin is Digital Gold, everyone understands why gold is valuable... yet they don't understand WHY specifically. Same idea should be used to sell Bitcoin, not EVERYONE needs a thorough understanding...
