There's a lot of new-blood coming to this subreddit in light of recent events and so I wanted to write a quick post explaining a bit about how bitcoin works, in hopes that more of you might understand why we're so excited about Bitcoin!
Most of the mainstream media just talks about the price and investing. Bitcoin is a great opportunity to invest, of course! We're still quite early in the adoption of this fantastic technology and it's bound to grow a great deal over the coming years, in my opinion at least. But even beyond that, bitcoin is designed to appreciate over time. It is deflationary by design and so holding onto your bitcoins will always be a smart investment.
However, bitcoin is so much more than an investment tool! Bitcoin was the culmination of decades of research into cryptography and economics. The white paper is a beautifully succinct solution to a problem that had existed in all previous attempts at an electronic cash system. The double-spend problem.
How do we prevent someone from spending the same coins twice? If there is no physical coins or tangible object, then how do we ensure it cannot be duplicated? After all, computers are just bits and bytes and copying that information is trivial. Well, by combining the wonderful concept of a blockchain with an algorithm like proof-of-work to create consensus, that's how! There can only be one single agreed upon chain of events, a shared ledger that accurately depicts who owns what and that cannot be brought into question or maliciously altered.
Blockchain is just a type of database. One that is structured in sequential blocks of data, added one after another. Each block makes reference to the previous block, providing confirmation that all previous blocks are the agreed upon chain of events. With each new block that is added to the chain, the previous blocks are cemented deeper into the Blockchain and we can be increasingly certain that they are correct.
These blocks simply contain information about transactions. Whenever a user wants to send bitcoins from one place to another, they put together a little record that describes how much they're sending and to where. They "sign" the transaction record with their private key and then broadcast this to the other nodes on the network, asking for it to be included in the next block.
Proof-of-work is very clever little maths puzzle for computers that we call mining. It's basically a random number generation game where each computer has to generate a random number, run it through a computationally difficult algorithm designed to take a long time, and hopefully get the "right" answer. How difficult the game is can be tweaked by changing the definition what a "right" answer is (there are many potentially right answers, but only one needs to be found). We call this the "difficulty". The difficulty changes depending on how many computers are competing, or more accurately how much computational power they collectively have. The more computational power on the network, the harder the game gets. The winner of this game is rewarded with bitcoins!
When a miner wins the game, that means they have "found" a new block. We say found because they found the right random number to solve the puzzle. This random number, along with all the transactions that the miner chose to include, is then broadcast to the rest of the network as the next block to be added to the chain. Assuming the maths checks out and puzzle was correctly solved, then the other nodes on the network will agree and add that new block onto their Blockchain.
This creates a self-balancing network of nodes, all being kept honest by each other. If one node disagrees with the others, they will be out-voted by the rest of the network, because everyone is financially incentivised to stay honest. The only way this could be beaten is if a single person were in control of a majority of the network (called the 51% attack). As the network grows in size and has more miners participating, the possibility of carrying out a 51% attack becomes more and more infeasible. This is why it's good to incentivise mining and get as many people doing it as possible!
So now we have a single, unchangeable, and verifiably correct ledger that contains a record of every single bitcoin transaction that has ever taken place. The double-spend problem has been solved!
TL;DR – Bitcoin isn't just an investment tool, it's a very clever technology that combines Blockchain with the proof-of-work algorithm to create consensus, thus solving the double-spend problem that had previously been the main hurdle in developing an electronic cash system.