While Bitcoin has been around almost a decade, one of the most confusing things to understanding cryptocurrency is that it is virtual, meaning it is something you cannot touch or hold. And since you cannot touch it or hold it, it is hard to visualize or understand what it is. Even harder is to know how Bitcoin is moved from one person to another and what the value is of such a transaction.

Let me simplify what cryptocurrency is, how it is transferred, and how it is used in transactions and to transfer goods. Once you understand this, you too can become a believer in Bitcoin or other digital currencies and start your journey into a digital world.

First off, cryptocurrency is a type of digital currency, such as using a credit card, and Bitcoin is one type of cryptocurrency.

Let’s start with understanding "digital currency" with Bitcoin. You can take an analogy of Bitcoin from the dollar bill, a piece of paper that denominates the value of a dollar backed by the US Government. The value of $1 is made up from all of the workers in the USA. When these workers produce goods or provide services in terms of Labor, they are paid in dollars. The value that they put into their work is rewarded by the dollar. That dollar value is derived from that service. If the value of the service is good, then its value increases; and if the value of that service is not as good, it will drop in value.

Similarly, this is how other currencies in other countries are valued, like the Mexican Peso and the Indian Rupee. The more that goods & services that a county produces are valued, the more value that countries currency has. Of course, there are other factors like debt, corruption, imports and exports, but we are keeping this simple.

Before we see how Bitcoin’s value is derived, lets understand how Bitcoin was created and transferred.

Think of Bitcoin as a Dollar Bill - as cash that is in your pocket.  And let’s assume that you are at a party and you meet someone that you want to make a transaction with. They tell you (let’s call him Tom) that if you give Tom a dollar today, he will bring you a piece of candy tomorrow. You both agree to meet the next day.

You and Tom meet and you ask him for your candy. ‘Do you remember I gave you a dollar yesterday so that you can give me a piece of candy today?’ Tom says, ‘Hey buddy, I don’t know what you are talking about.’  And there you are - you just lost one dollar. Now let’s do a similar transaction over the internet, where this transaction is not in person, you have no confirmation that it can take place over the internet, and you don’t know who you are having the transaction with or where they are.

Well, this is where digital currency comes in and this is what Bitcoin does to solve this problem – it creates a verified transaction from one person to another.

Let’s redo the previous scenario, but this time you tell everyone at the party, ‘Hey, I am giving Tom a dollar bill, and Tom agrees that he will give me the candy tomorrow. Can I have everyone witness this transaction?’ And sure enough, 10 people said ‘yes’ that they have witnessed the transaction.

Next day you ask Tom if he has your candy, and Toms says, he doesn’t know what you are talking about. Again, remember you gave Tom one dollar in cash. You get frustrated and stand on top of the table and shout out, ‘Hey! those who witnessed the transaction yesterday between me and Tom, can you please step forward and tell Tom that he agreed to give me a piece of candy in exchange for the dollar I gave him?’

Now, only 3 of the 10 people said they witnessed the transaction, and the rest said they were drunk and had no recollection. Again, you lost the dollar and the candy that you were craving.

One more time, but this time you and Tom are at a courthouse with 50 other witnesses. And those 50 witnesses are attorneys and have been given documents to read and take a test. If they pass the test, they are allowed to confirm that they have witnessed the transaction.

Next day you show up at the courthouse, along with Tom and those 50 witnesses with their certifications of the test. You ask Tom where your candy is, and he can no longer refuse, because there is a verified transaction by 50 other witnesses.
Tom now has confirmed that he has received the dollar. You now receive the candy. And the transaction is written in the court documents by the judge and the 50 witnesses that they attested that this transaction has occurred.

This is how a Bitcoin is transferred between two people over the internet. When you send Bitcoin to another person over a network, there are computers, also knows as "nodes" (the witnesses) that are given a complex problem to solve (the test) When a certain amount of nodes solve the transaction problem, they are allowed to write that information into a ledger or database that they have witnessed a transaction between two parties. Once that is done, the Bitcoin is transferred from one person to another.

This is part one of a series, to understand Bitcoin and Digital Currencies. We will go into more depth into the value of Bitcoin, digital wallets and signatures, and other currencies like Etherum, in the following series.

Hani Khanani, Khanani Avenue, Teds Community