Bitcoin: What is it?

but what I want to do in this video is talk about what a bitcoin is in more general terms and what differentiating characteristics they have compared to other approaches surfer starters bitcoin is just an electronic payment system and by electronic payment system I mean it's just a vehicle a conduit by which two parties can transact over the Internet I call these parties Alice and Bob and let's say Alice for whatever reason wants to give money to Bob over the Internet and this may be because she owes Bob money or maybe Bob is a merchant and Alice's buying something from Bob or maybe Bob is a not-for-profit and Alice is making a donation to Bob so there could be many reasons why Alice is trying to pay Bob over the Internet in some capacity now if Bob is willing to accept bitcoins which are a form of electronic payments and Alice can go ahead and and send Bob some value in bitcoins and really a Bitcoin transaction between Alice and Bob amounts to especially constructed a sequence of numbers that Alice will basically send over to Bob and this will be done entirely over the internet these numbers will have certain mathematical properties that make it hard for someone to really defraud the system or to conduct some type of nefarious action on the system and the way that alice is actually going to conduct this transaction in practice is either by installing a special piece of software which we call a Bitcoin client or she can work with a third party service that can handle these mechanics for her but in either case either the client or the service is going to generate these numbers for Alice and on the flipside Bob will also typically either have a piece of software installed or he'll use a third party service that will take these numbers and allow him to do something else with those numbers for example Bob can in turn buy something of his own with those numbers or you can trade those numbers in for for real money and so on and so forth all right now one of the first questions you might have and I kind of eluded this earlier is is why would Bob even want to accept bitcoins in the first place after all a Bitcoin is just a bunch of numbers you know what intrinsic value would it conceivably have and it turns out quite surprisingly that bitcoins actually have real-world value there are more and more merchants popping up each day who accept bitcoins for transactions there are also Bitcoin exchanges places where you can go and exchange bitcoins for more mainstream currencies and some of these exchanges include the major one is one called mount GOx and at mount cox you can exchange a Bitcoin for a euro a yen $1 and so on and so forth now the current price of a Bitcoin the current value of a Bitcoin in US dollars as of this video is approximately 100 US dollars per Bitcoin that number is fluctuating this is the new currency and there's going to be some fluctuation but as people understand the currency better the hope is that that fluctuation will decrease but I think ultimately the thing to keep in mind is that the value of a Bitcoin is going to be derived from the faith that you have in the value of what you can procure with that Bitcoin it's just like you would for a dollar or euro or yen the faith that you have in that currencies value is how you value that currency now another question you might have is why do people even bother with bitcoins in the first place I mean aren't there other more standard ways why couldn't Alice and Bob use PayPal like when they use a credit card number to transact why couldn't Alice just send Bob and electronic check you know what why not use one of these other approaches that are more well understood that are more mainstream that are more established why on earth would you possibly want to mess with a good thing so it turns out that there are a few properties of bitcoins that are worth noting and for starters there's privacy it turns out that within the Bitcoin ecosystem within the Bitcoin network people can transact without divulging who they are in the real world from the perspective a Bitcoin Alice's identity is going to be a sequence of numbers and that sequence of numbers is effectively going to function like a pseudonym for Alice and that sequence of numbers has nothing to do with two real world identity nobody needs to know this is Alice transacting all they need to worry about is their pseudonym within the system and this is kind of but not quite like what you would get if you bought something using cash you know that capacity when you buy something using cash then you don't have to provide any details or proof reguar who you are in the real world and that's different from let's say using a credit card where you have to provide your name and your building address and so on or let's say providing and electronic check where you need to tie that electronic check typically to your bank account details okay now I do want to also mention here that sometimes when you have a cashed list or a transaction that uses cash there is now the possibility that people might try to use these transactions for malicious purposes to buy illicit goods and services that definitely is a risk that occurs when you provide anonymity and privacy but there are certainly legitimate reasons why somebody might want to conduct a transaction privately and not have the whole world know what their their transacting another property of Bitcoin is that it's open literally anyone can get involved literally anyone who has an internet connection can make a Bitcoin transaction and all you need to do to get started is I alluded to earlier is download the special Bitcoin client and the Bitcoin client or for that matter you can use a service like Mount Cox which will affect that we do the same work as a client for you but the short of it is that anyone who has a Bitcoin client or was an account with with an exchange like Mount Cox can engage in Bitcoin transactions that transaction that details of it the mechanics of it will be transparent to the user all these rest to worry about all Alice needs to worry about is how much money she has and whether she can give that money to Bob the actual software underneath will take care of all the underlying mechanics of making that transaction work now this is different I mean when you think about a traditional currency like I like a dollar if I want to transact something online typically I need a bank account I need a credit card and so on and so forth then we often take it for granted that there are people out there who may not have access to credit card you may not have a bank account for example in the United States alone it turns out I just look this up the number of households without a bank account I read it is somewhere north of what eight percent so it's pretty high there a lot of people out there who wouldn't be able to conduct a traditional internet transaction but if you conduct a transaction using Bitcoin and by the way there are people using Bitcoin all over the world and literally it doesn't matter where you are in the world as long as you have an internet connection you can you can start transacting bitcoins now another property bitcoins that's worth mentioning is that it's decentralized there is no bank or or centralized entity that can really control what's happening in the in the Bitcoin ecosystem it's all done in this kind of ad hoc fashion and what that means is that when you do a trans actor when Alice transact with Bob over the internet that transaction doesn't have to go through a third party there's no there's no bank that gets in the way of that transaction and that can have certain benefits as well for example that means that no one entity can directly control the money supply of bitcoins and so on then that also means that no one entity can let's say seizure assets or for that matter no one entity can reverse a transaction which is definitely desirable for certain merchants some merchants might not be able to conduct business online because of fraud concerns and if you have a system where the transactions cannot be charged back easily then from the merchants perspective they may be able to inhibit fraud of nearby that might enable their business entirely online now I want to point out that this last property of decentralization definitely causes concern among some people around Bitcoin after all when you think about it a central authority like a bank does perform an important function in the context of a traditional currency for example banks might validate currencies they might validate transactions against fraud now in Bitcoin this validation is basically done in a decentralized way by the other party the other nodes in the Bitcoin network now the goal of the remaining videos in this series is to walk through the underlying mechanics of Bitcoin transactions and really how they're validated even though the system is decentralized and there are some pretty amazing techniques that are used to make all this work so I suspect that at this point you may have a ton of questions about Bitcoin and that's entirely to be expected Bitcoin is a very complex protocol it has many moving parts and I think it's critical when you're trying to understand something as complex and wrap your head around something it is sophisticated as Bitcoin it's important to get exposed to all the part first so that you can ultimately get a flavor for how they fit together and hopefully the other videos in this series will help you to understand these different parts and along the way address many of the questions that you might have