How Does Bitcoin Work? Clear SIMPLE Steps!

How does bitcoin work? After all, it feels totally confusing and complex, doesn't it? Well I think you'll be pleasantly surprised because here, we're gonna break it all down and make how bitcoin works super-simple.

Show Notes

Here are links and resources mentioned in today's video. Enjoy!

Transcription

First, bitcoin is built using blockchain technology -- you've probably heard this before. This sounds complicated but honestly, since you and I are not programmers or developers, we don't need to be experts with this stuff.

After all, are you an expert on how the electricity in your house works? Are you an expert on exactly how your car works, with all it's complex components? How about the human body -- you've got one after all! -- and it's incredibly complex.

No, you and I don't need to be experts on any of these things. We simply need to know that they'll work when we need them to work. And blockchain is no different -- we really don't need to know exactly how it works beyond the basics.

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More importantly, all we need to know is that it DOES work!

That said, here's the gist -- and I'll give you a simple example in just a second to help it all "click" for you:

A blockchain is simply a network of computers on the internet that maintain and uphold a set of pre-programmed rules called a protocol.

Admittedly, this is an incredibly simplified and basic explanation -- there's a whole heck of a lot more to it than this -- but again, for our everyday purposes, we don't need to know much more than this (unless you want to delve down that rabbit hole).

Now what do I mean when I say, "a network of computers that maintain and uphold a set of programmed rules called a protocol?" Well, here's an analogy to hopefully make this easy to understand:

Let's say you and some friends get together to play baseball in the park this weekend. You divide up the players onto teams and away you go. Now in this friendly game of baseball, who's the umpire? Who maintains the rules?

Well here, you all do -- you and all your friends, all the players, uphold the rules. In fact, it's in the best interests of everyone playing that the rules be upheld...otherwise it would be chaos and anyone could make up any rules they wanted.

Imagine a player on the opposing teams says, "New rule! Every time our team scores a run it counts as two runs!" Obviously, the other players -- especially those on the opposing team -- would agree to that.

But what if one of the players said, "New rule! Underhand pitches only!" If all the other players agreed, then they'd all uphold this new rule.

This is exactly how blockchain protocols work. In other words, all the network nodes who run and maintain the network have to agree upon and follow the same set of rules -- the blockchain protocol.

So that's how blockchain technology works...but what about bitcoin itself?

Well, bitcoin -- or BTC, the actual digital currency -- resides on top of the bitcoin blockchain global network.

For us users who want to buy, hold, and spend bitcoin, we'd need a crypto wallet. There are a few different types of crypto wallets that we can use, but software and hardware wallets are the most common.

It's a little beyond the scope of this video and I have some other content that covers bitcoin and crypto wallets which you might want to check out, but whether you go with a hardware or software wallet, your wallet will have both a public key and a private key.

Don't let this confuse you, it's actually very simple: Think of your wallet’s public key just as you would your traditional bank account number.

Anytime you or anyone else wants to deposit funds into your account, they'd need your bank account number, right?

It's exactly the same with your crypto wallet's public key. If I or anyone else knows your wallet's public key, we can send you some bitcoin in just a few seconds.

And your wallet’s private key is just like the pin password you’ve set on your bank card, which of course you use to access funds in your traditional bank account.

Anyone who knows your pin can access your funds right? So you've gotta keep it safe -- and the same goes for your crypto wallet's private key.

I hope this all makes sense. I know the whole thing can feel confusing and complex. There's certainly no shortage of jargon, new terminology, and that the whole thing can be difficult to wrap your head around.

But remember -- if you're old enough to remember -- when the internet and email first came along, it was very difficult to understand and get our heads around too.

In fact, right now -- Q4 of 2021 -- crypto and bitcoin and all this stuff reminds me of the early, early days of the internet. Way back then, the internet was complex, technical, and difficult to use.

I remember one guy who I worked with thought that to send an email, he had to type the email address into Yahoo! Back then of course we didn't have smartphones and simple apps and streaming video or any of this stuff.

But over time, the internet got easier and easier to use...and the same thing will happen with bitcoin and cryptocurrencies. It'll get so easy that anyone, even senior citizens, will be able to use it with just a few taps on their smartphone.

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