the vast majority of people in the world don't hold Bitcoin yet but even among those who do there are many who don't truly understand exactly what it is as Bitcoin continues to grow and Evermore people begin to accumulate it those who have this knowledge will have an edge over the rest of humanity so in this video we're going to go back to basics and explain in simple terms what Bitcoin is and how it works in just a few minutes time Bitcoin along with all the terms associated with it like blockchain mining proof of work and
private keys will all make sense perhaps the simplest way to think about Bitcoin is to begin with an example so let's say I owe you ten dollars how am I going to pay you well the simplest way for me to do that would be for me to give you ten dollars in cash now there are a few things which make this a good way to do it for a start it's instant the moment I hand over the cash our debt is settled you have your money and can then do whatever you need to do with
it there's also no third party involved it's just me giving you the money directly this is known as a peer-to-peer transaction we don't need to involve anyone else and most importantly we don't need to trust anyone else there's no need for a bank or any other sort of middleman to get involved which means that it's a private transaction as well the only people who need know that it has taken place are you and me but of course there's one rather big problem with my paying you in cash we have to be in the same place
sure I could put the cash in the post but then we'd have to trust the Postal Service to deliver it it would also take time and I'd have to pay the postage costs too so perhaps we could wait until we are in the same place well if you happen to live in a different country you might be waiting a while for your money if you need the money quickly that's no good assuming our paths aren't going to be Crossing anytime soon how do I get you your ten dollars in today's world there are of course
a lot of ways of sending money electronically I could send it to you via a bank transfer though it might take a while especially if we are in different countries and using different currencies anyone who's tried to do an international bank transfer before will know it ain't straightforward or quick you could end up waiting several days for the money to arrive and in the meantime you won't have the use of that money we could use a money transfer service like Western Union or MoneyGram and pay a hefty fee to do so I could pay you
using a debit or credit credit card if you have the facility set up to receive those sorts of payments or we could use PayPal or a similar such service there are in short a number of ways to do it but they all involve a middleman of some kind be it a bank card Network money transfer service or a platform like PayPal we've had to trust at least one other entity to ensure the transfer happens at all so the ideal solution to this problem is a form of digital cash that can be transferred peer-to-peer without having
to trust any third parties and that can settle a payment quickly between two people in two different places well that is essentially what Bitcoin is let's delve a little deeper into this Bitcoin is a software program an online Network that enables value to be transferred across the internet between individual users without the need for an intermediary this software program has a built-in currency also known as Bitcoin with a small B you transfer value using Bitcoin small B on the Bitcoin capital B Network the currency is often referred to by its ticker symbol BTC so from
here on I'll use BTC to describe Bitcoin the currency as opposed to the network the currency exists on now this network was created by an unknown individual who went by the name of Satoshi Nakamoto his real identity Assuming he's a he is unknown Satoshi published the Bitcoin white paper which explained in depth how Bitcoin works and why it was created on the 31st of October 2008. it was titled Bitcoin a peer-to-peer electronic cash system and its opening line reads quote a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from
one party to another without going through a financial institution all of which brings us to the tricky problem Satoshi had to solve how do you create a system that allows people to transact over the internet but which doesn't have some form of centralized Authority in the middle keeping track of everything how do you cut financial institutions out of the equation and allow everyone to just transact peer-to-peer it's an incredibly difficult problem because if you don't have a third party keeping track of everyone's spending then how do you make sure everyone is only spending what they
have if there's no one keeping a record how do you stop people spending their digital money many times over in short how do you engineer something that doesn't require trust it's no use expecting people to be honest and only spend the digital money they actually have because well their people and will eventually act out of self-interest there has to be a way to prevent them from acting dishonestly otherwise there's no point in even trying to make the system work now in everyday life there are ways to stop us doing this cash is hard to forge
and you can expect to be punished if you try when transacting electronically Banks keep a tally of how much everyone has and when they spend or receive money when you spend on your card or make a bank transfer your bank updates your balance to reflect that and will make sure you're not able to spend Beyond a certain agreed amount so again we have to rely on a third party to keep track of things we have to trust that third party to keep honest records and we also have to trust that the Central Bank issuing the
currency in question won't devalue it by printing more and more of it which is pretty much what every Central Bank around the world has been doing in recent years Satoshi figured out the answer to this problem and it's one of the things which makes Bitcoin so revolutionary rather than have one centralized entity keeping track of all transactions and balances Bitcoin is engineered so that anyone running a node on its Network keeps a record of all transactions and balances now a node is basically a computer that has downloaded and is running the Bitcoin software you can
think of each node as being like an individual bookkeeper so imagine a big accounts Ledger distributed across all nodes on the network but it's been constantly updated in real time it's constantly being checked and verified by these nodes to keep everyone honest you see that's the thing with a ledger or database kept by a bank or other financial institution these databases are centralized all the records are kept in one place the problem with this is that with all that data in that one place just imagine what could happen if for example someone with bad intentions
were to gain access to it imagine if a hacker managed to gain access to the database of a big bank and alter or destroy all its records the results would not be pretty so satoshi's way of enabling people to transact on the Bitcoin network was to use a distributed Ledger system like that just described every transaction that takes place on the network gets checked and validated by the nodes every few minutes the records of these validated transactions are grouped together into a block these blocks get linked together to form a chain of blocks or as
it's more commonly known a blockchain here's the thing though each block is linked to the one before it using an encoding process known as hashing without getting into too much detail here this means that if someone were able to alter the information in a block say to award themselves more BTC than they actually had then this would mean having to alter all the information in all the blocks that come after it in other words the network would notice that something fishy was going on and reject the change this feature helps to make the Bitcoin blockchain
an immutable record of transactions not only is there no Central Authority overseeing it all but it's virtually impossible to tamper with record but you might be wondering how the network is maintained after all if there's no Central Authority overseeing things then who exactly is and what's in it for them as we've seen the network is made up of nodes now running a Bitcoin node is actually a pretty straightforward process and can be done on a basic computer running the Bitcoin software it doesn't require vast amounts of processing power and the only really specialized requirement is
a decent amount of storage in order that the node in question can store bitcoin's full transaction history there aren't really any rewards for running a node as such other than knowing that you're playing your part in helping to maintain the network and contributing to its decentralization after all the more nodes there are the more bookkeepers there are overseeing the network but there is another type of node that's a lot more involved with running the Bitcoin Network and is financial incentivized to do so these nodes are known as miners now you might have wondered what mining
has to do with an asset that exists only in digital form well it relates to the way Bitcoin is designed the number of units of BTC the software will issue over time is fixed at 21 million no more than this will ever exist now these coins aren't issued all at once their release is pre-programmed by the code Satoshi wrote every time a block is added to the blockchain a predetermined number of coins are released in the form of a block reward this block reward diminishes over time slowing btc's issuance and inflation rate all the miners
on the network compete for these block rewards and this entire method of maintaining and keeping the network honest is called proof of work now here's where things get a bit crazy Bitcoin miners all want to be the one to add the latest block containing all those recent transactions to the blockchain and claim the block reward of freshly issued BTC to do so they all compete to be the first one to essentially guess a random number now this massively oversimplifies what's going on but we don't need to make it too complicated the number all these miners
are trying to guess is made up of a lot of digits and that means they have to submit a lot of guesses as to what it might be and I mean a lot of guesses as in trillions of guesses all while the rest of the miners on the network are doing the same one Miner eventually gets lucky and and the process begins all over again and if you're wondering yes submitting all those guesses does indeed require a lot of computing power which in turn uses a lot of electricity this is why many say that Bitcoin
mining is bad for the planet well not if the energy being used is coming from renewable sources as much of it now does but that's a topic for another video one last thing to note about Bitcoin for the purposes of this introduction though you might imagine that in order to use Bitcoin you need to download and run the software that is be a node or a miner not so anyone with an internet connection can use Bitcoin to send BTC to any other Bitcoin user no matter where they are on the planet one of the fundamental
ways in which Bitcoin functions as the most secure payment Network on Earth is through the use of public key encryption now there are three components to this and they work together to enable anyone to use the network to transfer BTC the first component is a private key randomly generated for a new user by the Bitcoin software this private key as the name suggests needs to be kept secret without it you can't access your BTC and if someone else gets hold of it they can access your BTC it's analogous to the password for your online banking
service now I'll tell you how private keys are stored in a minute this private key is then used to generate a public key both of these keys by the way are rendered as long strings of letters and numbers the private key is subjected to a mathematical process too complex to go into here which generates the public key note that this process is irreversible a public key can be generated from a private key but not the other way around this ensures your private key remains private your public key meanwhile again as the name suggests can be
made public it's analogous to your bank account number and it's required for anyone to send you BTC however the public key itself undergoes one more set of mathematical processes before it can be shared with anyone wanting to send you BTC the result is your Bitcoin address which is again represented as a sequence of letters and numbers that can be copied and pasted in order to send BTC over the network this address can also be represented by a QR code which can then be scanned to obtain the receiving address now back in bitcoin's early days the
process of generating private Keys public keys and addresses was a little more complicated than it is today there were various sites that would do this process for you or you could download and use the Bitcoin core wallet and there's another bit of Bitcoin related jargon that it's important to understand a Bitcoin wallet is another piece of software with two main functions holding your private keys and holding your address this then allows you to interact with the Bitcoin Network to send and receive BTC nowadays wallets have a little more functionality than this but these two main
functions are what's most important so with the core wallet downloaded and set up the only thing left to do was to get yourself some BTC which brings us to today now these days by far the easiest and most popular way of getting some BTC is to buy it through an exchange like coinbase or binance for example when you create an account on an exchange it creates a wallet for you and if you want to do this then the link in the description will get you a nice bonus at some of the top rated exchanges out
there once you've set up an account you then send regular money like dollars Euros pounds Etc to The Exchange buy BTC with it and that BTC is recorded as being in your wallet on that exchange here's the important thing to remember though because your wallet is hosted by the exchange it means that the exchange also holds your private Keys now it wouldn't be very good business for the exchange to use these private keys to send your BTC elsewhere although dodgy exchanges have done just that in the past but even the biggest exchanges can be hacked
or like ft X be rotten behind the scenes so one of the most important things any Bitcoin holder can do is practice self-custody that is store your private Keys yourself this means that only you have access to your BTC and here's a really important point to understand when you hold your BTC balance in a wallet what you're really doing is holding those private Keys the coins themselves exist as account balances on the blockchain no one not miners nodes exchanges regular people like you and me or even Satoshi himself ever actually holds any coins everyone merely
controls the means to access whatever amount of BTC the blockchain records them as having now there's a lot of information about Bitcoin to take in there so I'll close this introduction with the most important thing you need to be aware of if you are planning to get your hands on some BTC now that you're familiar with the basics using a good exchange is the first step but the next step should always be taking custody of your private Keys yourself the best way to do this is to use a wallet that you control I.E not one
hosted by an exchange or any other third party remember Bitcoin is designed to be trustless which means if you're trusting someone else to hold your private Keys you're going against what Bitcoin itself stands for sure trusting an exchange is convenient and the best exchanges have strong security protocols in place but you can never be sure so your options are either to download a software wallet which will enable you to hold your keys securely on your laptop or mobile device or get yourself a hardware wallet which stores your keys on an encrypted device that never interacts
with the internet software wallets are good and I have a video on the best ones in the description for you however a hardware wallet is the best level of security you can get and so I advise checking out my video on the best ones of those too link to that is also in the description well I hope you found this video useful and believe me when I say the inner workings of Bitcoin go a lot deeper and get a lot more complex than what I talked about here but this should have given you a basic
understanding of what this amazing technology is and how it works and if you want to learn more then I'll leave links to some brilliant resources below that will help you dig even deeper into Bitcoin thank you for watching and if you found this useful then a like and a subscribe are always appreciated if you know of others who would get value from this video then please also feel free to share it with them check out my deals page below for those exchange offers I mentioned earlier as well as discounts on Hardware wallets too thank you
for watching and if you'd like to see more videos like this that explain crypto in simple terms then let me know in the comments till next time my friends
