Bitcoin explained in simple terms


Bitcoin, Ethereum and the new Litecoin are three 'cryptocurrencies' currently in widespread use around the globe. But what is a cryptocurrency, and why should you care?

In the simplest (and least technical) of terms, a cryptocurrency is a currency used globally, independent of nationalistic exchange rates, and without any central or regulatory authority. It enables anonymity and simplicity, whilst retaining real-word economic value.  

In it's purest form, Bitcoin is the most capitalistic currency available, since it is solely traded on market supply and demand, and no 'middle man' such as governments or banks are profiting off Bitcoin transactions.

So why do people use it?

Easy - a merchant accepting payment by Bitcoin (or Ethereum or Litecoin) need not give any transaction fee's to a bank or credit card regulatory authority in order to receive the payment. This is good because merchants will often sell their goods at a significantly lower cost to all parties if you pay by bitcoin. For example, many pharmaceutical websites will sell their goods at 20 - 30% off when paying by Bitcoin.

Additionally, because Bitcoin is a universal currency, there is also no money or time lost in exchange between state controlled currencies. Someone can purchase 0.5 bitcoins that might be worth $X dollars in AUD, and those same 0.5 bitcoins will be worth $Y in USD - but you won't pay exchange rate fee's or transaction fee's, and the merchant will receive payment instantaneously.

Another benefit of Bitcoin is that prices are updated in real-time, and merchant prices adjust accordingly with it. For example: A merchant from the USA wants $100 USD for an item. For argument sake let's say $100 USD = 1 Bitcoin. Now let's say someone in Australia wants that item, and at the time of purchasing, the Australian dollar is worth 1/2 of USD. So 1 Bitcoin = $200 AUD or $100 USD.

Now let's say due to market demand the Bitcoin suddenly increases in cost, so it becomes $110 USD per bitcoin. In real time the merchant's item will remain at $100USD, but the bitcoin will change to a lesser amount to match that local currency. In this case, approximately 0.91 Bitcoin. So $100 USD = 0.91 Bitcoin. Still with me?

Now that AUD amount will still be $200 if that's the going exchange rate, but the bitcoin will match as 0.91 Bitcoin's for that same item.

So how do these transactions get carried out securely, and how can I know my money is safe when using a cryptocurrency? This gets technical - but in short, each transaction is verified many times over and published to what's called a public 'Blockchain' so that no transactions can ever go missing, or ever be incorrect. It's actually far more secure than any current method of trade - as long as the 'wallet' containing somebodies Bitcoins are secure. 

Finally - it would be remiss to leave out anonymity. There has been shady history of Bitcoin usage in the past due to the inherent ability to trade anonymously, since bitcoin transactions aren't linked to any bank account or regulated party. 'Silk Road' (now closed down) is probably the most infamous of these websites, trading in anything from illicit drugs to firearms and explosives internationally. Unfortunately these practices have tarnished the reputation of crypto-currencies,  but don't let that dissuade you of making use of what is otherwise a healthy economic token of value. 

And how do you use it?

The easiest way I have found so far is to use an app called "Coinbase". This is technically known as a bitcoin "Wallet".  It's very easy to instantly buy up to $150 of your local currency per week (it limits this for security) once you have verified your account. So once you pay by credit card or debit card up to $150 you will receive however many bitcoins/ethereum/litecoins $150 is worth at the time of purchase. 

You can then use that to purchase anything that is offered by way of bitcoin. When you get a merchant who wants bitcoin payment (or offers it) then once the transaction details are finalised, they will usually present you with a QR code, which CoinBase can read using your phone or tablet instantly. It will then ask you if you want to "sell" those bitcoins to the merchant, and once done the merchant will automatically and instantly receive a digital payment of X bitcoins, thus completing the transaction.

Hopefully this is somewhat clarifying - I've tried to keep the technical side out of it as much as possible and keep it to useful information - but as I said - it's difficult with a digital cryptocurrency (hell, even that term seems technical!). 

Do you like the idea of bitcoin? Or have any questions? Comment below!

- Tom