Bitcoin is a revolutionary concept.
Bitcoin is not controlled by any one group; not a government, not a greedy corporation, and definitely not a bank.
To lay the groundwork, think of Bitcoin as both a system (i.e. bank) and a currency (i.e. dollars) at the same time.
Bitcoin at its core is a system.
In the Bitcoin system, thousands of computers called ‘nodes’ operate the Bitcoin software all around the world.
Think of Bitcoin nodes as similar to the banking system’s ATM machines around your town, or in technical terms, the bank’s database connected to your local ATM.
When you go to an ATM machine to withdrawal cash, the ATM machine will check the bank’s database and ensure you have the desired money available within your account. Functioning similarly, a Bitcoin node’s job is to check Bitcoin’s database, called the ‘blockchain’, to ensure Bitcoin senders actually own the Bitcoin they are trying to send to another user.
In essence, a Bitcoin node’s blockchain is a distributed accounting ledger retaining all transactions ever created on the Bitcoin system. When a Bitcoin node’s blockchain is analyzed, it will display every Bitcoin address’ past and present balance.
What makes Bitcoin so different from the legacy banking system is Bitcoin’s accounting ledger is duplicated evenly on every single Bitcoin node in the world (over 10,000 nodes operating at the time of writing), compared to a handful of accounting databases per banking entity in the legacy banking system.
In other words, the Bitcoin blockchain is so secure that if 5,000+ Bitcoin nodes were taken offline all at once by some crazy cyber attack, your Bitcoins would still remain safe. No other banking system in the world can claim this level of bulletproof security for your dollars.
Better yet, in order to use the Bitcoin system, you do not have to labor through all the painstaking bureaucracy traditional banks make you go through to maintain an account or send large amounts of money. If you own Bitcoin, then you can use it!
So how do these Bitcoin nodes work with the rest of the Bitcoin system?
Working alongside Bitcoin nodes are Bitcoin ‘miners’. In the Bitcoin system, miners add new Bitcoin transactions to each and every node running throughout the world.
Bitcoin miners operate similarly to the mobile check deposit feature on your bank’s mobile app. When a mobile check deposit application verifies a check is valid, the application automatically adds money to your account and sends a transaction to remove money from the check writer’s account.
When a Bitcoin miner confirms a sender’s address holds Bitcoin, and the recipient’s address in-fact exists, the Bitcoin miner adds a transaction to the global Bitcoin blockchain to transfer the Bitcoin ownership from the sender’s address to the receiver’s address.
Important to note here is that the Bitcoins aren’t actually sent from one user to another. Instead, Bitcoin ownership and control on the worldwide Bitcoin blockchain is simply transferred from one user to another.
In Bitcoin ownership transfer, facilitated by Bitcoin miners, Bitcoins always remain safe, secure, and in-tact on every single node throughout the world. What changes is the individual who can now access the Bitcoins.
Similarly to how your bank holds your money and gives you control to spend from your checking or savings account, the Bitcoin system holds your coins on the worldwide blockchain and gives you freedom to spend your coins with the help of Bitcoin miners.
Now that we have covered Bitcoin nodes (i.e. digital ledgers) and Bitcoin miners (i.e. transaction facilitators), let’s turn our attention to Bitcoin wallets.
The third key component to the Bitcoin system is the Bitcoin wallet. Similar to the physical wallet you carry cash and credit cards in, a Bitcoin wallet stores keys to the Bitcoins you own on the global Bitcoin blockchain.
A common misunderstanding around Bitcoin wallets is thinking that Bitcoin wallets hold actual Bitcoin. Building upon the distributed Bitcoin node concept, we can recall that all Bitcoins are permanently stored on the global blockchain. Wallets instead hold the keys to, or access to, the Bitcoin already securely locked into the blockchain.
Since all Bitcoins are stored on the publicly viewable & distributed blockchain, the general public can see all Bitcoin quantities and associated Bitcoin public address.
A Bitcoin address is similar to an account maintained at a bank, however, unlike restrictions placed on opening and maintaining new bank accounts, in Bitcoin you can have as many Bitcoin addresses as you would like…for no cost at all.
Bitcoin wallets create, store, and provide access to Bitcoin addresses. When a Bitcoin wallet creates an address, a public key (i.e. public address) is created for display on the global blockchain and for receiving Bitcoin, and a private key is created for your eyes only to control the public address.
Wallets come in all shapes and sizes, and range from digital applications on your phone/computer, to physical electronic devices. Bitcoin wallets even come in paper or steel format!
No matter what format a Bitcoin wallet comes in, the core component across all wallets is creation by ‘seed phrase’. Most of us are accustomed to creating accounts with a password, so let’s start with associating a Bitcoin wallet’s seed phrase with a login password to your bank account.
A seed phrase creates the Bitcoin wallet and grants anyone with the seed phrase full control of all Bitcoins on every address within the Bitcoin wallet. What makes seed phrases different from a password is you cannot just pick any random word – your seed phrase has to be a unique combination of 12-24 words from a list of 2048 pre-defined words.
Before we get overwhelmed, almost all Bitcoin wallets will generate this seed phrase list for you, so all you have to do is write this phrase down. The most hard-core Bitcoin users will even etch their seed phrase in steel for safe keeping.
Once you have your seed phrase, any Bitcoin wallet will cryptographically derive addresses from this phrase and grant you access as the sole controller. Of course this is a complex process, but fortunately you don’t have to understand the technical details to use Bitcoin.
Now that we have covered the basics on how Bitcoin operates as a system, let’s consider the Bitcoin currency.