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Explain Bitcoin like I’m Five

“Bitcoin?! What’s that?!” Whether you’re breaking down Bitcoin to your children or your grandparents, we’re here to break BTC down in the simplest terms.


What is Bitcoin?

If you were asked to describe Bitcoin on the spot, would it be something like this?

“Bitcoin is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. 

Furthermore, a blockchain is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.”

Probably not! Sometimes, that's what we see when we research Bitcoin and blockchain technology. So, why aren't we breaking it down differently? That's what we're going to do here.

Let's break it down

Bitcoin can be a pretty complex topic. It involves tricky finance terms that can be confusing. You might be riddled with questions like: “Are Bitcoins the same as the blockchain?” 

To keep things simple, let's break down Bitcoin and the technology behind it in a more basic way with an example.

Alex and Cindy decide to have a garage sale at Cindy's place. They invite Cindy's cousins, Lucy and Nick, to come to the garage sale. When they are about to start, Cindy's cousins realize they forgot to bring cash! 

The group decides they'll pay each other later, and they make a deal to have Cindy's parents write down every transaction on paper to ensure everyone will pay.

  1. Each person starts off with a budget with how much they can spend. 
    • Alex has $20.
    • Cindy has $10.
    • Lucy has $15.
    • Nick has $5.
  1. The garage sale starts and each person starts buying and selling items at the same time, and things are moving fast!
    • Alex buys a $15 board game from Cindy. 
    • Cindy buys a $5 book from Lucy. 
    • Lucy buys a $15 plant from Nick.
    • Nick buys a $20 pan from Alex.
  1. Since things are moving so fast, every 15 mins, Cindy's parents check each transaction with the buyers to check who owes money and who gains money.
  2. Let's break down how much each person has now with simple math.
    • Alex has $20, spends $15, but gains $20 from Nick. He has $5 left.
      ($20 – $15 +$20 = $5)
    • Cindy has $10, gains $15 from Alex, but spends $5. She has $20 left.
      ($10 + $15 – $5 = $20)
    • Lucy has $15, gains $5 from Cindy, spends $15, but. She has $5 left.
      ($15 + $5 – $15 = $5)
    • Nick has $5, gains $15 from Lucy, but spends $20. He has $0
      ($5 + $15 – $20 = $0)

What does this remind you of?

Does this garage sale remind you of Bitcoin and the blockchain in any way? Yes! It actually resembles blockchain technology and Bitcoin in many ways:

    • The money being spent and given is like Bitcoin. It is a form of non-physical currency
    • Each payment written down represents blocks of information
    • The paper records of the transactions represent a network of computers sharing the same transaction records
    • The 15-minute checkpoints are an analogy of the confirmations and cryptographic hash of the previous block 
    • Cindy's parents writing down each transaction is like the blockchain ledger
    • Cindy, her cousins, and Alex represent the peer-to-peer nature of cryptocurrency

Why do people use bitcoin?

People use bitcoin for a variety of reasons. Some may use Bitcoin as a form of investment, and others may do so to preserve their wealth from intense local inflations. Some people may even use Bitcoin to send funds to their family members back home. 

But, this is getting complex again. Let's put this in simpler terms.

Let's say a teenager named Alice wants to sell one of her books. She knows about a website, iSell.com where she can sell her book, so she uploads a photo of her book and lists a price. 

Luckily, she is able to sell the book right after posting, but she is discouraged by the 10% fee that iSell.com charges to all of its sellers. In this example, iSell.com is a middle man in the selling process.

Alice then finds a new website, iCrypto.com, where she can directly send the book to the buyer without a fee. In this example, iCrypto.com is like a blockchain network. It is this magical technology where Alice can sell directly to her buyer without paying 10% to iSell.com. How great is that?

Sending crypto is easier and cheaper. Cryptocurrency allows you to send money to your family abroad without any hassle. Also, because there is no centralized bank that controls crypto, there is less of a chance of hyperinflation when you send over digital currencies to your family.

 Typically, you have two options when sending funds to your family:

  1. Send money to your cousin through banks and with high processing fees. This process will take days or weeks.
  2. Send money to your cousin in minutes through a new system that requires little to no fees. Then transfer your crypto into a different currency with a peer-to-peer network, like Paxful. 

To us, option 2 sounds way more enticing. 

How do I buy Bitcoin?

There are several ways you can buy Bitcoin and other cryptocurrencies. The easiest way is to use peer-to-peer cryptocurrency platforms, such as Paxful. All you have to do is sign up and you'll be able to trade crypto with over 400 payment methods. You can even buy Bitcoin with Paypal on Paxful.

Explaining the future of Bitcoin

In different corners of the world, Bitcoin is becoming increasingly accepted in everyday stores and restaurants. This is an encouraging sign that cryptocurrency is changing the way our financial systems work.

Bitcoin and crypto alike are built on the idea of financial freedom from traditional banking structures. This may seem like a hard concept to grasp, but with time and mainstream acceptance, it can only get easier. 

How have you been explaining bitcoin to other people? Let us know in the comments below!

About the author

Lucy Hudson is a freelance writer, blogger, and travel enthusiast. She also has a passion for Cryptocurrency which is currently working its way into her writing skills. She loves to travel and live a life of adventure. Ultimately for Lucy, the aim is to ensure that anyone reading her content is informed and interested in what she has to read.

Last Updated on May 1, 2024 10:21 am CEST

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