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Digital Money – Taking a Look at Bitcoin

This article is part of a series looking at cryptocurrencies – how they work, the problems they solve, and the problems they create. Cryptocurrencies are a complicated subject. These articles will present a general overview in simple terms.

In recent years, a kind of digital money, called “cryptocurrency” has been getting more and more attention. Many people are excited about the way the money works, and believe cryptocurrencies will become even more popular in the future.

There are many kinds of cryptocurrencies, but the most famous one is called Bitcoin. To keep things simple, this article will focus on Bitcoin. Most other cryptocurrencies are based on the same ideas and are similar to Bitcoin.

Bitcoin logo
There are many kinds of cryptocurrencies, but the most famous one is called Bitcoin. Most other cryptocurrencies are based on the same ideas and are similar to Bitcoin. The name is a little confusing, since it’s “digital money” and there aren’t really any coins.
(Source: Bitboy [Public domain], via Wikimedia Commons.)

When Bitcoin’s electronic money was first developed in 2009, it was a huge change from other kinds of money. To understand why, it’s helpful to think about the way money normally works.

Money is based around an agreement to pay someone something. Usually, banks or governments are in the middle of this agreement.

A banknote or coin from any country usually isn’t actually worth much, since it’s really just a piece of paper or metal. But most people have agreed that the banknote or coin represents a certain amount of money. That allows you to exchange it for something else – like food or a toy.

Foreign Currency and Coins
A banknote or coin from any country usually isn’t actually worth much, since it’s really just a piece of paper or metal. But most people have agreed that the banknote or coin represents a certain amount of money. That allows you to exchange it for something else.
(Source: Philip Brewer, via Flickr.com.)

If you have a lot of money, you might open a bank account to keep your money safe. That’s really just an agreement between you and the bank: the bank will keep track of how much money you have, and give it back to you when you ask for it.

Bitcoin is a computer-based currency that doesn’t involve banks or governments at all. Instead, it uses a huge network of users connected by the internet to keep track of all the Bitcoin that was ever made and how it has been exchanged.

Instead of storing this information in just one place (like a bank’s computers), it’s stored in a huge computer file that’s usually called the “blockchain”. That’s because it’s a long chain of specially encoded blocks. These blocks permanently record everything that’s ever happened with Bitcoin.

Simplified figurative process of a Cryptocurrency transaction
Bitcoin is a computer-based currency that doesn’t involve banks or governments. A network of internet users keeps track of all the Bitcoin ever made and how it has been exchanged. The information is stored in a huge computer file called the “blockchain”.
(Source: Based on work by Mikael Häggström [CC0], via Wikimedia Commons.)

Anyone can get a copy of the blockchain. In fact, the system counts on lots of people doing just that. The software that drives Bitcoin runs on the computers of people who make Bitcoin. These programs are constantly checking and fixing the blockchain to make sure it’s correct and up-to-date.

Using Bitcoin, anyone can pay anyone else, anywhere around the world, with no banks or governments involved. And because everyone has the same blockchain that’s constantly checked and fixed, it’s almost impossible to trick the system. So no one can pretend to send money, but really keep it.

A photo of two mobile phones displaying Bitcoin.com Bitcoin Cash wallets.
Bitcoin users keep their digital money in a special “wallet” app on their smartphones. These wallets let them quickly and easily exchange money with other Bitcoin users around the world.
(Source: Hyena and thecryptokidd [CC0], via Wikimedia Commons.)

Bitcoin users keep their digital money in a special “wallet” app on their smartphones. These wallets let them quickly and easily exchange money with other Bitcoin users around the world. This can be done without giving away information about who is sending or getting the money.

Many more people are now using Bitcoin than when it was first developed. Many businesses now allow people to pay with Bitcoin. Some countries are even considering using Bitcoin or other cryptocurrencies.

bitcoin accepted here
Many more people are now using Bitcoin than when it was first developed. Many businesses now allow people to pay with Bitcoin. Some countries are even considering using Bitcoin or other cryptocurrencies.
(Source: Francis Storr, via Flickr.com.)

Bitcoin has changed the way people think about money and how it works. It has used the internet and computer power to create a clever payment system that solves some important problems.

But Bitcoin has also created a number of new and serious problems that NewsForKids.net will look at in the rest of this series.


Did You Know…?
Bitcoin was developed by a person – or a group of people – known as Satoshi Nakamoto in 2008. The true identity of Satoshi Nakamoto is still a mystery.

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