What is Bitcoin? Is it a coin? Is it a bank or what? It can be a mind-bender, especially as terminology is used that we associate with physical objects, but if you weed out the technical jargon things become much clearer and easier to digest. And like owning a car, you don’t have to be a master mechanic in order to drive.
The Coin
When is a coin not a coin? When it's a Bitcoin. Think 'coin' and we think hard metal disk used for money. These are usually for small amounts and have limited divisibility. Bitcoin is not so much a coin as more like a £100 bill in its function, More accurately, a $1,000,000 bill, since One Bitcoin is divisible into 100,000,000 Satoshis, the pennies of your Bitcoin. Remember, we are not talking about value, we are talking about mechanism. It might be a while before One Bitcoin is worth one hundred million dollars. The dollar has to crash pretty hard for that to happen.
Imagine that you’ve been shipwrecked on a small island and you've formed a new kingdom of 10 men and women and your new king, King Satoshi (no relation) has issued new currency and given the community Bitcoin bills and Satoshi coins that you can use like dollars and cents.
The Blockchain
The Blockchain is the record keeping and account book for the Bitcoin, the ‘Distributed Ledger’. Bitcoin does not exist as coins and notes but rather an entry in this ledger. Much like dollars and cents on a bank’s server system. However, unlike the bank, Bitcoin’s ledger is ‘distributed’ between thousands of users computers and replicated, synchronised, updated and checked so that no single entity can corrupt or control the data.
In your new kingdom, King Satoshi declares that instead of issuing notes and coins for units of exchange he will do away with all that and keep transactions written down in a book. Any transaction is announced to King Satoshi and he amends his account book accordingly keeping track of your funds. People soon realise that the ledger is vulnerable to tampering since the king has it in his sole possession, so for protection, a copy is replicated to all the currency users on the island and kept synchronised with all transactions. It’s a lot of work so he creates a job for Mister Blockchain to continually do the rounds and verify everyone’s ledger.
The Wallet
When is a wallet not a wallet? When it doesn’t contain any money.
Your Bitcoin wallet is a software program and doesn’t contain Bitcoins or Satoshis, not directly anyway. The wallet contains your Key for accessing your entry to the Ledger. The Wallet acts more like a safe. The wallet is there to protect your keys from theft or replication. It's function is to be a secure home for your key.
King Satoshi says “Here, have this magic wallet that will open only to your command.”
“But it’s empty.”
“I will contact you tomorrow!”
The Key
The Key is what gives you access to your funds in the Ledger. Lose you key and you’ve lost your funds. The funds will still there on the Blockchain but locked away forever, inaccessible, with no key. Lose your wallet, no problem as long as you’ve backed up your key. Simply create a new wallet and import your backed up Key. Lose your wallet without a backup then you’ve lost your only key. Allow anyone to copy your key then you’ve lost your funds unless you get to the ledger first.
King Satoshi says “Here, put this in your wallet.”
“But this is a key.”
“Correct, that key is unique to you and gives you access to your funds in Mister Blockchain’s Ledger. Mister Blockchain used to be a tax inspector so he’s an unsympathetic guy. No key, No funds!” He leans forward and whispers
“Make a copy and keep it in a secret place in case you lose your wallet!”
The Exchange
While it’s all fine and dandy using Bitcoin as currency in Bitcoin-world. So far, it has not been accepted as a mainstream form of exchange. There are reasons for this, among which are the price volatility plus the tight fisted, parasitic, banking elite middle men clinging on with their tentacles around the world’s fiat monetary system trying to maintain control and power.
Meanwhile, we have to exchange Bitcoin for Dollars, Pounds, Euro etc. in order to trade and live. The Cryptocurrency Exchanges and Brokers are the places for that. They act like the Currency Exchange booths you go to when you go abroad for your holiday. They can also be used for trading currencies like FOREX traders do but we won't go into that here.
The Cruptocurrncy Exchanges are also the weak point in Bitcoin’s defence since they are mostly hosted by companies on centralised servers, making them vulnerable to the Banking cartel. The Banking cartel control everything.Wven the politicians that write the laws so the Bankers and can easily seize control of the exchanges, no matter where they are in the world. While they cannot penetrate Bitcoin’s Blockchain-castle directly, they can lay it to siege by attacking the exchanges. The Bulgarian based BTC-e exchange seized by the United States’ own FBI being one recent example.
Anyway, putting all that aside, Exchanges and Brokers are a service for exchanging Bitcoin and the like into fiat cash. Most require ID verification for the purposes of anti-money laundering since that is the Bankers’ own turf not to be trodden.
When your account is verified, you are given a wallet and addresses for Bitcoin and other cryptos: a wallet that is held in trust at the exchange, by the exchange. They have control of the keys, so the wallet there isn’t really yours.
One mistake people make is using the exchange for Bitcoin storage as you do a Wallet. I did too and was lucky enough to avoid Mt Gox because I had no account there and BTC-e as I withdrew my Bitcoin a couple of weeks before Team-America took it down. If you don’t have control of the keys, the Bitcoin is not yours. You have control but are trusting a third party. So you know how to handle that? Transfer Bitcoin into Exchanges just before you are going to trade and withdraw to your Wallet when you are done.
Approaching the King, you say "King Satoshi, I really like your currency. Things work really well around here but how can I change it to Dollars?"
The King replies, "Why, where are you going? We're all stuck on this desert island!..."
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