Fortunately it's easier to define what Bitcoin actually is. It's software. Don't be fooled by stock images of shiny coins emblazoned with fancy symbols.
Bitcoin is purely a digital phenomenon, a set of protocols and processes.
It is also the most successful of hundreds of attempts to create virtual money through the use of cryptography, the science of making and breaking codes. Bitcoin has inspired hundreds of imitators, but it remains the largest cryptocurrency by market capitalization and popularity, a distinction it has held throughout its decade plus history.
The Blockchain
Bitcoin is a network that runs on a protocol know as the Blockchain. A 2008 paper by an individual or a group of people calling themselves Satoshi Nakamoto first discribed both the blockchain and bitcoin and for a while the two terms were all but synonymous.
The blockchain has since evolved into a separate concept and thousands of blockchains have been created using the same cryptographic techniques. This history can make the nomenclature confusing. Blockchain sometimes refers to the original bitcoin blockchain. at other times it refers to blockchain technology in general, or to any other specific blockchain such as the one that powers Ethereum.
The basics of blockchain technology are mercifully straightforward. Any given blockchain consists of a single chain of discrete blocks of information arranged chronologically. In theory, any type of contract between two parties can be established on a blockchain as long as both parties agree on the contract. This takes away any need for a third party to be involved in any contract. This opens a world of possibilities including peer-to-peer financial products, like loans or decentralized savings and checking accounts, where banks or any intermediary is irrelevant.
While Bitcoin's current goal is a store of value as well as a payment system, there is nothing to say that Bitcoin could not be used in such a way in the future, though consensus would need to be reached to add these systems to Bitcoin. The main goal of the Ethereum project is to have a platform where these "smart contracts" can occur, therefore creating a whole realm of decentralized financial products without any middlemen and the fees and potential data breaches that come along with them.
This versatility has caught the eye of governments and private corporations indeed, some analysts believe that blockchain technology will ultimately be the most impactful aspect of the cryptocurrency craze.
In bitcoin's case though, the information on the blockchain in mostly transactions.
Bitcoin is actually just a list of transactions. Person A sent X bitcoins to person B who sent Y bitcoins to person C, and so on.
Trust
Despite being absolutely public, or rather because of that fact, bitcoin is extremely difficult to tamper with. As I said, Bitcoin has no physical presence, so you can't protect it by locking it in a safe or burying it in the ground.
Theorotically, all a thief would need to do to take it from you would be to add a line to the ledger that translates to "you paid me everything you have."
No one needs to know or trust anyone in particular in order for the system to operate correctly. Assuming everything is working as intended, the cryptographic protocols ensure that each block of transactions is bolted onto the last in a long, transparent and immutable chain.
Mining
The process that maintains this trustless public ledger is known as mining. Undergirding the network of Bitcoin users who trade the
cryptocurrency among themselves is a network of miners, who record these transactions on the blockchain.
Recording a string of transactions is trivial for a modern computer, but mining is difficult because Bitcoin's software makes the process artificially time-consuming. Without the added difficulty, people could spoof transactions to enrich themselves or bankrupt other people. They could log a fraudulent transaction in the blockchain and pile so many trivial transactions on top of it that untangling the fraud would become impossible.
Bitcoin Transactions
For most individuals participating in the Bitcoin network, the ins and outs of the blockchain, hash rates and mining are not particularly relevant. Outside of the mining community, Bitcoin owners usually purchase their cryptocurrency supply through a Bitcoin exchange. These are online platforms that facilitate transactions of Bitcoin and often other digital currencies.
Bitcoin exchanges such as Coinbase bring together market participants from around the world to buy and sell cryptocurrencies. These exchanges have been both increasingly popular (as Bitcoin's popularity itself has grown in recent years) and fraught with regulatory, legal and security challenges. With governments around the world viewing cryptocurrencies in various ways - as currency, as an asset class or any number of other classifications
Keys and Wallets
For these reasons, it's understandable that Bitcoin traders and owners will want to take any possible security measures to protect their holdings. To do so, they utilize keys and wallets. Bitcoin ownership essentially boils down to two numbers, a public key and a private key. A rough analogy is a username (public key) and a password (private key). A hash of the public key called an address is the one displayed on the blockchain. Using the hash provides an extra layer of security. To receive bitcoin, it's enough for the sender to know your address. The public key is derived from the private key, which you need to send bitcoin to another address. The system makes it easy to receive money but requires verification of identity to send it. To access bitcoin, you use a wallet, which is a set of keys. These can take different forms, from
third-party web applications offering insurance and debit cards, to QR codes printed on pieces of paper. The most important distinction is between "hot" wallets, which are connected to the internet and therefore vulnerable to hacking, and 'cold' wallets, which are not connected to the internet. It is believed that most of the BTC stolen were taken from a hot wallet. Still, many users entrust their private keys to cryptocurrency exchanges, which essentially is a bet that those exchanges will have stronger defense against the possibility of theft than one's own computer.
