Bitcoin is a peer to peer, cryptocurrency created in 2008 by a mysterious and unknown character named Satoshi Nakamoto. It is called peer to peer because all the computers that are mining for cryptocurrency are in a peer to peer network which allows them to easily talk to one another. It is called cryptocurrency (cc) because of how it is acquired.
Cryptocurrency is a little bit like a mineral like gold, copper silver etc. The way you mine gold is my digging in the ground, looking for something shiny, then testing to make sure that it is gold. To mine cryptocurrency your “shovel is a computer that can add/subtract/multiple and divide and your testing kit is a an internet connection so that your computer can talk to all the other computers that are also mining. Instead of digging in the dirt, to find something that looks like a bitcoin, your computer trys to solve a pretty difficult math problem that has many correct but not an infinite number of correct answers. Since there is a finite number of correct answers, every bitcoin that is found means one less bitcoin to find.
Once your computer thinks that it has found a correct answer, it will ask the asks all the other computers that are also mining for bitcoins if it is correct answer. When 51% of the mining computers agree that an answer is correct, the mining computer is awarded a Bitcoin by the network.
Here is an example. Lets say that the correct answer to match question to be awarded a bitcoin is “What is a whole number between 1-99 that ends in a zero.” The correct answers would be 10,20,30,40,50,60,70,80,90. If our computer started mining, in this case counting from 1-99, when it hit 10 it would realize that it found a correct answer. It would then ask all the other computers that are mining if 10 is a correct answer. Once a majority of those computers agree that 10 is a correct answer your computer would get a bitcoin and no other computer could ever be awarded a bitcoin for finding 10.
Buying and selling with bitcoins
Every bitcoin or fraction of a bitcoin starts life the same way – as a hidden number that must be “found” by a computer that is mining (doing calculations) to find bitcoins. Once a bitcoin is found it is placed in a digital “wallet”. It stays in the digital wallet. If the owner wants to sell, give or trade bitcoins (or a fraction of bitcoins), they typically enter the number of bitcoins to send, and the recipient’s bitcoin wallet address (likely a long string of numbers and digits). Then they press a button and the bitcoins are transferred through the bitcoin network to the recipient’s digital wallet. There are many reasons cited as benefits for buying and selling with bitcoins rather than currency or credit. Some of the most popular are:
(1) The transactions are anonymous. In the “real” world you can walk into a store wearing glasses, a hat a long coat and buy something with cash and be pretty anonymous. This is not really an option online since almost all transactions require a credit card or bank account. Bitcoins and other crypto-curriences level the online playing field by allowing the buyer to pay for goods and services online without revealing his or her identity.
(2) Also transaction fees are typically less than other digital or credit options. Credit card and debit transactions can range from 2% to 10%. Bitcoin transaction fees are typically less than 1%. Many are are low as .02%. Those signs that say “we charge $.50 for a debit card transaction under $10 (a 5% fee) would be more like we charge $.02 to .$.10 for bitcoin transactions under $10.
(3) It is extremely (if not impossible) to counterfeit bitcoins because validity requires over 50% of all the computers mining bitcoins to agree that a bitcoin is real. That is like having every person look at every bill and only if a majority agree will it be considered a “real” dollar.