This isn't a simple question to answer. Bitcoin is a system of systems wrapped together for the purpose of being a secure, peer-to-peer, value-conveying network. It was created by a pseudonymous entity by the handle Satoshi Nakamoto and launched to the public in January of 2009.
This system was released in direct response to the 2008 financial crisis and was spurred on by the bank bailouts and money printing of that time. For decades, economists who subscribe to the Austrian school of economics (or who understand that "supply and demand" apply to the currency as well as the goods, services, and/or commodities) have brainstormed a way to separate the monetary system from the state.
The reason for this can be seen by observing how governments around the world for millennia have acquired control of their monetary supplies, always for virtuous reasons, only to eventually use it for their own benefit. Typically, they have the most hard and powerful currency, so other nations tend to use it in place of their own. It could be seashells, glass beads, difficult-to-obtain rocks, precious metals, bales of tobacco, livestock, or other forms of property. But given enough time and ingenuity, people tend to find ways to game these systems of tracking economic energy. They grow more tobacco, mine more gold, silver, or copper, industrialize the production of glass beads, breed more livestock, or simply melt down the coinage and recast them as an alloy with less precious metal in them.
In the extreme, they outlaw the private ownership of these valuable commodities and seize them by force from their citizens. Mandating they use a value-backed system of their choosing.
This practice of state-controlled economic energy has ALWAYS led to the debasement and devaluing of the currency. To pay their debts, finance their agendas, the state with control over their monetary supply inflates it to pay its needs.
Can't raise a tax to run a war? Print more of that economic energy, distribute it to those willing to trade their lives for money, and have your war.
Need to build infrastructure but can't convince the citizens to submit their economic energy in a tax to create it? No problem! Just MAKE more of the monetary system to pay for it. Who's it going to hurt? You're not taking it from anyone, you're just... making it.
What happens when this new economic energy makes its way into the system? Well, if you remember your Jr. High Science class, you might recall that energy cannot be created or destroyed, only converted from one form to another. So if someone adds some more energy units to an economic system, they haven't added any more energy to the system, they've simply diluted the energy on one side of the economic scale, reproportioning their slice of the pie chart in their favor.
Think of it in percentages: 100% of the economic energy is on one side of the scale, and 100% of the goods and services are on the other. If you have 5% of economic energy in your coffers and then someone who is in control of the economic energy doubles the supply of it because they can, now your piece of the pie is 2.5%. You weren't taxed, you did nothing wrong, but because of the laws of supply and demand your nest egg now only goes half as far as it once did.
So what does this have to do with magical internet money? How does bitcoin relate to supply, demand, states, economics, property, and commodities? Well, Bitcoin only exists because of this flaw in the economic system. For thousands of years, humans have been transferring value from one party to another. Whether it's a favor owed between friends, farmers bartering wool for grain, or one person trading something of value to another in exchange for their physical labor on some task.
Whether it's bartering, trading, or employing, humans have been exchanging value for value for as long as we've been advanced enough to understand the concept.
As this concept of exchanging value was iterated upon over the centuries, it began to become apparent that trading one thing for another didn't always work out. Sure, I might need food to eat and my neighbor might have some he'd be willing to trade for the right thing, but unfortunately for me, he didn't need anything I had at the moment. But in the spring, when I had some lambs, he'd want some of those. So, giving me the food now on credit, he expected payment at a later point for a good he happened to want.
This illuminates a couple concepts, first a mental ledger of debts, credits, etc., as well as a concept referred to as "the coincidence of wants problem." I want one thing, my trading partner wants another thing in return for it that I don't have, and they aren't a neighbor I can trust to settle their debt with me later.
How do we trade in that situation? Often as it happens, there are intermediate goods or commodities that can fill these gaps. And large groups of people tend to find their way to these mediums of exchange over time through trial and error.
I might not need the lumberjack's timber, even though he needs my iron axe, but I'd happily take his bale of tobacco, even though I don't smoke, knowing that I could easily trade it for something I want later, so long as it doesn't spoil in the meantime. Suddenly I'm valuing objects in increments of tobacco.
Or, I live on a mountain with my tribe and a visitor needs one of my spears, the only rare thing to me that they have on them is seashells. Sure, if I lived on a beach they would be common, but up here, miles away from the sea, those are quite rare. I could trade them to members of my tribe for other goods I need even if I don't have anything they need. They can immediately identify and authenticate my object as rare, unique, difficult to replicate, and luckily, sought after by our fellow tribe members as jewelry.
An object that would otherwise be worthless becomes seen as valuable because it has some properties that make it desirable.
The people on the beach may not find much value in shells overall, but some of them begin to identify that some of the shells, when crushed, make a beautiful, brilliant purple color. Another in their society finds it can be used as a dye. This shell and its snail counterpart are difficult to procure, the purple dye takes a lot of time and energy to manufacture. Only those with a lot of power and resources at their disposal can justify expending some of it to wear such a luxury.
It has value because it's rare, it's sought after, it's easily identifiable as genuine, it's not easy to make more of, and it lasts.
Let's look at precious metals. Gold is hard to find, if you had 1 billion atoms of materials randomly selected from Earth, 5 of them would be gold. Gold is valued for its appearance, used in jewelry, used in art, demonstrates power, useful in electronics. Gold can be proven to be gold through various authentication processes like acid tests, size and weight, density, and hardness. Even x-ray systems, but only on surfaces. Gold is formed via fusion in stars and distributed throughout the universe only when they go supernova. And of course, gold is an element that cannot be destroyed outside of splitting the atom. So gold is and has been for millennia, a means of exchange which satisfies the coincidence of wants problem well in most cases. Except...
Gold is heavy, not easily divisible for smaller transactions, easily taken by force, hard for a layperson to verify, and cannot be used for settling transactions over distances quickly. Gold is almost perfect. But because of some of the dangers involved in transporting it over vast distances to settle large balances between banks, businesses, nations, or the wealthy, it quickly becomes a target for theft or seizure by hostile states or other parties.
This weakness led to banks issuing paper certificates to be redeemed for gold which many considered to be as good as gold. Until bankers overextended themselves by issuing too many notes as loans (typically justifying the risk because it could generate them a profit on top of the value they were already responsible for), and causing bank runs when it became apparent to holders of those notes they might not be worth the paper they were printed on.
For almost a century out of the millennia, money became paper. We trusted its value because we trusted a third party was backing that value up with a rare, desirable asset that had stood the test of time for being a medium of exchange which no individual controlled. Its supply only increased if more is found, which is around 2% a year as miners and their methods become more ingenious. But its drawbacks cause us to resort to trusting someone else to keep it safe for us while we trade gold vouchers and act like they're the same as gold.
Then in 1933 Roosevelt made it illegal to own gold by executive order. His goal was to separate money from gold to help end the Great Depression. The government revalued gold from approximately $20.00 per ounce to $35.00—effectively devaluing the dollar. Decades later, Nixon killed the gold standard entirely. In 1971, he ended the dollar’s convertibility to gold, meaning U.S. currency was no longer backed by a physical asset. At that time, gold’s price had been fixed at $35.00 per ounce. But once it was allowed to float freely, the market quickly re-priced it: by 1973 it was $65.00, in 1974 it hit $150.00, and by 1980 it peaked at $850.00.
Without being pegged to the dollar, gold’s price was now set by open markets. Around this point, gold stopped serving as a reliable indicator of the money supply—it began to be treated more as a speculative commodity than a medium of exchange. From here, it became more useful to measure value by what a dollar could buy from one year to the next.
The dollar became the global medium of exchange for trade. In nations where overzealous governments printed too much currency to keep the state's cogs spinning, citizens who saved in the local currency quickly found their economic energy sapped. Today they can fill their grocery cart with a day's wage. Next week it might afford them a loaf of bread. A month later they need a wheelbarrow of it for small transactions and between being robbed of their fiat currency or the wheelbarrow, they feared losing the wheelbarrow most.
In nations like this the informed quickly move their economic energy from their easily manipulated and quickly devalued local currency and into something stronger. Those who can often convert it to U.S. dollars but with exorbitant fees and typically violating local laws trying to prevent them from fleeing the weaker currency because the action accelerates its decline. Others buy goods like bricks; at least they could build a house with it at some point. But they flee their weak currency like rats off a sinking ship.
And so, with all this in mind, let's take a turn back to the reason for this, Bitcoin.
Bitcoin is another attempt in the arms race between individuals hoping to protect and store their accumulated economic energy and the people who control the ability to print currency when it suits their needs to do so.
Before bitcoin started it was planned. It was an immune response to the constantly inflating money supply. An attempt to save the boiling frogs from the cauldron overflowing they found themselves in. Bitcoin was conceptualized as a peer-to-peer, decentralized ledger capable of instant settlement, needing no intermediate third trusted party to move value from one party to another.
It became a system that anyone who could download and run the software could opt into. By running the software you help validate and confirm transactions between other members of the network. Anyone with an internet connection and a computer can opt into the network.
If you had the technical know-how, you could participate in processing transactions in a process called "mining." Mining is a way of batching as many of the pending transactions as you can into a block of transactions, and broadcasting them and the updated ledger to the rest of the network. And it comes with a reward for doing it. This is called a block reward, and the miner of the block of transactions receives bitcoin as payment from the senders of bitcoin for processing their transactions (a minuscule fee) and also a reward from the bitcoin network for solving the puzzle that gave them the right to be the entity who gets to process the block.
The puzzle is complex, a computer has to generate random numbers over and over again until it finds one that has a specific amount of zeroes in it. The first computer that finds one of these special numbers can submit it and try to process a block and claim the reward for doing so. It broadcasts "hey I found it, here it is" to the network at which point all the other computers in the network run a test on that hard-to-generate number to confirm it's valid. Once they confirm it, they broadcast it to all the computers in their network, and the solved block with a copy of the up-to-date ledger propagates throughout the bitcoin network settling the transactions in it.
At that point the puzzle solving race begins again and continues until the next hard-to-find number with a certain amount of zeroes is discovered and another block of transactions is broadcast to, verified by, and propagated throughout the network.
Every block of transactions contains the blocks that came before it, to prove that the puzzles were properly solved all the way back to the first block. This makes it impossible for someone to rewrite transaction history or reverse transactions. And because users broadcasting their transactions to be included in the block need to use a private key (like a very difficult password) to have their transactions included and for the block to validate successfully, their transaction needs their signature or the miner can't include it in their solved block, essentially, fraud is impossible.
Only by a user being tricked into exposing their private key could they ever lose the bitcoin they control.
There is a lot more to this system which is complicated and unnecessary in an intro to the idea of Bitcoin. But the last thing to mention is the network is programmed to only ever have 21 million Bitcoin. In this system economic energy cannot drain away because someone printed more or found a rich ore deposit. This boat doesn't leak.
I wrote this in March of 2025 to attempt to explain what bitcoin is and solves for my grandpa, I would like to continue working on and expanding this over time as I learn more.