I wrote this article to try to explain Bitcoin to my mother in a very basic "cents." It may not be completely accurate, but I think it's a good primer. Feel free to skip over sections that don't interest you.
What Bitcoin is NOT:
It is not tangible. It's not centralized (there is no specific person or company that controls it). It's not infinite (only 21 million will be produced).
So, what is it? It's a digital currency.
How are Bitcoin made?
Let me make this very, very simple. If I were the ONLY person creating Bitcoin (the act of creating Bitcoin is called "mining"), I would get exactly 25 Bitcoin every 10 minutes.
The Bitcoin that I mine come in a "block" of 25, but this amount is cut in half every four years, giving a finite number mined until the year 2140. Supply and demand would tell us that Bitcoin's monetary "value" comes from this fact... they're incredibly limited.
Bringing this to a bigger scale, let's say that I'm mining with nine other people. Together, we would find a Bitcoin block (read: 25 Bitcoin) every 10 minutes. The time never changes. This Bitcoin amount would be split between the 10 of us (me and nine others), giving us about 2.5 Bitcoin each. I say "about" because some miners (people who mine) work harder than others. The speed at which you help generate the Bitcoin is called a "hash rate." A faster hash rate means a larger cut of the Bitcoin reward.
At present, there are a LOT of Bitcoin miners, all mining with different computer hardware. Some work MUCH faster than others, some much slower (read: hash rate higher, lower). The 10 minute production time never changes, and neither does the 25 Bitcoin reward. The time is controlled by a Bitcoin difficulty that self-adjusts to keep the 10 minute time in check.
My desktop computer can mine approximately 0.02 Bitcoin per day. If I were to mine alone (without grouping with others), I would probably never get paid, because ONLY the computer that finds the exact solution (hash) at minute mark 10 gets the Bitcoin block.
The same sentence again: the computer that solves the LAST hash at the ten minute mark gets 25 Bitcoin block. (This is simplified.)
The hash rate of the entire Bitcoin network, with tons and tons of miners, is SO high that the probability of MY computer getting the exact "winning" hash is astronomically low. This is why miners group together and share the rewards. If you have 1,000 people together, the odds are (simply) 1,000x higher that your group will solve a block. This is called "pooled mining," and virtually all miners participate in a pool.
Unlike a United States dollar, you can split Bitcoin into VERY small amounts. You can split Bitcoin out to eight decimal places, making the smallest payment 0.00000001 Bitcoin.
Pooled mining is very much like winning the lottery. You could buy 10 tickets, or you could buy 10,010 tickets if you and 1,000 others all bought 10. Then you'd split the reward.
Where do you keep it?
Bitcoin is stored in a digital wallet. Very much like your own wallet, you can put money inside the wallet, you can take money out of the wallet, and you can see how much is in your wallet. Bitcoin is regarded as highly anonymous because anyone can create a new wallet, for free, at any point.
What can you do with it?
Lots of things!
1. You can use it to buy things. In most cases, paying and receiving in Bitcoin is free. Some people use Bitcoin to buy illegal drugs in the underground Internet network called Tor. In my opinion, this is one of the biggest reasons that governments are coming in and attempting to reign control... at one point you could purchase guns, anonymously, with Bitcoin.
2. You can exchange it for a different currency. Much like you can turn US dollars into Euro, you can turn Bitcoin into other currencies. This can be accomplished face to face, sold online through an auction site (eBay), or through a Bitcoin exchange.
3. You can invest with it. Lots of people buy low and sell high, just like stock and other gambling.
What are the biggest threats?
Again, not inclusive and not completely my own opinion, but Bitcoin is threatened by regulation, cyber warfare, and volatility. Governments aren't sure how to treat Bitcoin -- is it a commodity or a currency? -- and regulators always want some type of control. Cyber attacks can slow or halt Bitcoin exchanges and make trading the currency difficult. Volatile prices make investors nervous. Bitcoin recently went from ~$80USD/BTC to over $260USD/BTC before settling around its current rate of $120USD/BTC. That's scary.
How safe is it?
Well, it's pretty safe. There are really only two caveats that could ruin Bitcoin. First, a lack of interest. Of course, if everyone stopped creating and using Bitcoin, its value would be irrelevant. Second, a 51% control of Bitcoin creation. In theory, if one person (or entity) controlled 51% of the creation, they could introduce false transactions and other bad things. (Grossly over-simplifying.) Because of the way Bitcoin records are kept, each created block contains the transactions from the past. You can prove, at any point in time, that a Bitcoin transaction is valid or invalid.
I'm out of words for the night. I'll probably re-visit this article and add more, but for now... happy mining!
Your mileage may vary. /j
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