WEBVTT - How Does Bitcoin Work?

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<v Speaker 1>Welcome to brain Stuff from How Stuff Works. Hi, I'm

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<v Speaker 1>Christian Seger. This is brain Stuff, and I've got some

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<v Speaker 1>bad news for you. Money is imaginary. Now, I don't

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<v Speaker 1>mean that printed pieces of paper are make believe. I

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<v Speaker 1>can feel a dollar's texture and the ink even smudges

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<v Speaker 1>on my hands. But when you compare it to a

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<v Speaker 1>blank piece of paper, what's really the difference. Well, one

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<v Speaker 1>is a recognized currency and the other isn't. And the

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<v Speaker 1>reason why people agree that one piece of paper is

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<v Speaker 1>a dollar and has value, that's where money's worth comes from.

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<v Speaker 1>We all pretend it's a currency. This is one reason

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<v Speaker 1>why the digital currency bitcoin appeals to some people. It's

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<v Speaker 1>not tied to any political system or government, so it's

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<v Speaker 1>not vulnerable to any of their failings, like the economic

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<v Speaker 1>collapse in two thousand and eight. All it needs is

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<v Speaker 1>for people to believe in it. But lately, well some

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<v Speaker 1>people are having a crisis of faith. That's why today

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<v Speaker 1>on brain Stuff, we're going to quickly establish some facts

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<v Speaker 1>about bitcoin to better inform your beliefs about it. Basically,

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<v Speaker 1>it's virtual money you can use to buy and sell

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<v Speaker 1>things online, and it mimics real world limited resources like gold,

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<v Speaker 1>for instance, it's also a cryptocurrency, meaning it's encrypted in

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<v Speaker 1>a way that prevents it from being copied. See every

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<v Speaker 1>bitcoin transaction is recorded using a blockchain. That information acts

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<v Speaker 1>like a ledger that is encoded onto the bitcoin itself.

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<v Speaker 1>This prevents people from spending the same bitcoin more than once,

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<v Speaker 1>since everyone else on the currencies peer to peer network

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<v Speaker 1>knows that it's been spent. It's essentially just a number

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<v Speaker 1>associated with an Internet address. You can store it on

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<v Speaker 1>your phone or a hard drive until it's used again.

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<v Speaker 1>Here's some ways you could acquire bitcoins, accept them as

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<v Speaker 1>payment for goods and services, exchange them for a more

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<v Speaker 1>traditional form of currency. Or you can mind them. That's right,

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<v Speaker 1>Like gold, bitcoins are mind not by old timey grizzled prospectors,

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<v Speaker 1>but by powerful computers. And like gold, the more people

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<v Speaker 1>mind bitcoins, the less there are to be found, so

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<v Speaker 1>they become harder to find. Instead of physically mining with

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<v Speaker 1>the pick axe, you can attempt to solve math problems

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<v Speaker 1>with a computer. Imagine the problem is something like X

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<v Speaker 1>plus Y equals fifteen. If you can figure out what

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<v Speaker 1>X and why are, you get a bitcoin with little competition.

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<v Speaker 1>The problems are easier to solve. But when more people

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<v Speaker 1>join the search, you've got a race, and the problems

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<v Speaker 1>get way more difficult. People start teaming up, crunching numbers

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<v Speaker 1>by networking multiple parallel processors together. Suddenly it's like Deadwood

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<v Speaker 1>meets Silicon Valley and them bitcoins ain't so easy to

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<v Speaker 1>find no more, especially because there's a limited supply of

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<v Speaker 1>about twenty one million bitcoins. These can be divided down

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<v Speaker 1>fractionally to eight decimal places. So the more we mind,

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<v Speaker 1>the less bitcoins there are possible to find. Mind. In fact,

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<v Speaker 1>every four years the amount of bitcoins you can find haves.

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<v Speaker 1>We're at a point now where people need computers specifically

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<v Speaker 1>designed for bitcoin mining to even have a decent chance

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<v Speaker 1>of getting them. But as bitcoin miners dwindle, the math

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<v Speaker 1>problems will get easier again. To ensure the flow is steady,

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<v Speaker 1>their value is boosted and they remain inflation proof. Not

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<v Speaker 1>all have been mined yet, and we expect they won't

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<v Speaker 1>be until around So let's say you just heard all

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<v Speaker 1>this and you thought, well, I want to grow up

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<v Speaker 1>and be a professional bitcoin miner and trader. Well, there

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<v Speaker 1>are a few risks you should probably know about first.

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<v Speaker 1>For instance, because there's no regulatory agency setting a bitcoin's value,

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<v Speaker 1>it tends to fluctuate wildly. Let's go back to the

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<v Speaker 1>dollar bill. Today, I might be able to buy a

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<v Speaker 1>candy bar with it, but what if tomorrow it could

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<v Speaker 1>buy dinner at a nice restaurant, or a week later

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<v Speaker 1>it could buy the entire restaurant itself. Bitcoin is kind

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<v Speaker 1>of like that, except the dollar would suddenly drop in value,

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<v Speaker 1>so you couldn't even buy a piece of gum with it,

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<v Speaker 1>And why would you spend it anyway if it could

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<v Speaker 1>be worth a hundred times more tomorrow. Another bitcoin problem

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<v Speaker 1>is security. Actually, the format itself is fine, but that

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<v Speaker 1>doesn't protect it from hackers who targeted the banks and

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<v Speaker 1>exchanges that deal in bitcoins. So, for example, Mount Cox,

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<v Speaker 1>one of the largest bitcoin trading floors, was hit for

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<v Speaker 1>the equivalent of around four hundred and eighty million dollars

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<v Speaker 1>that's seven percent of the world's supply of bitcoins. Flex Coin,

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<v Speaker 1>a bitcoin bank, announced to all its users that their

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<v Speaker 1>accounts had just disappeared, and when the online market silk

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<v Speaker 1>Road was shut down in October, the FBI became one

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<v Speaker 1>of the largest holders of bitcoins in the world. Now again,

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<v Speaker 1>This isn't the fault of the currency. If a bank

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<v Speaker 1>was robbed, you wouldn't blame the dollar bill for getting stolen, right. So, yeah,

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<v Speaker 1>Bitcoin has its slumps, and for it to become widely used,

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<v Speaker 1>its volatility needs to settle down quite a bit. It's

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<v Speaker 1>currently a high risk currency that is totally unpredictable, and

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<v Speaker 1>we didn't even get into the mysterious identity of Bitcoin's founder,

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<v Speaker 1>Satoshi Nakamota. Check out the Brainstuff channel on YouTube, and

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<v Speaker 1>for more on this and thousands of other topics, visit

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<v Speaker 1>how stuff works dot com.