How exactly to categorize Bitcoin is a matter of controversy. Is it a type of currency, a store of value, a payment network or an asset class?
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 modified Thai baht symbols. Bitcoin is a purely digital phenomenon, a set of protocols and processes.
It also is 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, a distinction it has held throughout its decade-plus history.
(A general note: according to the Bitcoin Foundation, the word "Bitcoin" is capitalized when it refers to the cryptocurrency as an entity, and it is given as "bitcoin" when it refers to a quantity of the currency or the units themselves. Bitcoin is also abbreviated as "BTC." Throughout this article, we will alternate between these usages.)
Bitcoin is a digital currency, a decentralized system which records transactions in a distributed ledger called a blockchain.
Bitcoin miners run complex computer rigs to solve complicated puzzles in an effort to confirm groups of transactions called blocks; upon success, these blocks are added to the blockchain record and the miners are rewarded with a small number of bitcoins.
Other participants in the Bitcoin market can buy or sell tokens through cryptocurrency exchanges or peer-to-peer.
The Bitcoin ledger is protected against fraud via a trustless system; Bitcoin exchanges also work to defend themselves against potential theft, but high-profile thefts have occurred.
Bitcoin is a network that runs on a protocol known as the blockchain. A 2008 paper by a person or people calling themselves Satoshi Nakamoto first described 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 similar 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 principle this information can be any string of 1s and 0s, meaning it could include emails, contracts, land titles, marriage certificates, or bond trades. 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 is mostly transactions.
Bitcoin is really just a list. Person A sent X bitcoin to person B, who sent Y bitcoin to person C, etc. By tallying these transactions up, everyone knows where individual users stand. It's important to note that these transactions do not necessarily need to be done from human to human.
Anything can access and use the Bitcoin network and your ethnicity, gender, religion, species, or political leaning are completely irrelevant. This creates vast possibilities for the internet of things. In the future, we could see systems where self-driving taxis or uber vehicles have their own blockchain wallets. The car would be sent cryptocurrency from the passenger and would not move until funds are received. The vehicle would be able to assess when it needs fuel and would use its wallet to facilitate a refill.