What is Bitcoin? a Beginner's Explanation

Bitcoin is the first digital money that is not centralized. All Bitcoin transactions are recorded on a virtual ledger known as the blockchain, which is open to the public. Unlike other assets you possess that are regulated by banks and governments, Bitcoin provides you total sovereignty over your money. As bitcoin grows in popularity, more and more businesses are accepting it as a payment method.

Money, at its essence, symbolizes value. If I perform some labor for you, you pay me in exchange for the value I provide. I'll be able to utilize that money to obtain something valuable from someone else in the future. Value has taken various shapes throughout history, and humans have utilized a variety of materials to symbolize money. As a means of exchange, salt, wheat, shells, and, of course, gold have all been employed. However, for anything to symbolize value, people must believe that it is valuable and will remain valued long enough for them to redeem that value in the future.

Until around a hundred years ago, we always relied on something to represent money. However, something happened along the road that caused us to shift our trust paradigm from trusting things to trusting in someone. Allow me to explain. People found it very difficult to go across the world carrying gold bars or other kinds of money over time, thus paper money was developed. Here's how it worked: a bank or government would offer to take custody of your bar of gold, say for $1000, in exchange for receipt certificates, often known as bills, worth $1000. Not only were these pieces of paper easier to transport, but you could spend a dollar on a cup of coffee instead of having to chop your gold bar into a thousand pieces. And if you wanted your gold back, you just returned $1000 in notes to the bank and exchanged them for the true form of money, in this case a gold bar, anytime you needed... As a result, paper began to be used as money as a practical and convenient tool.

However, as time passed and macroeconomic changes occurred, the link between the paper receipt and the gold it represents was severed. The road that took us away from the gold standard is quite complicated, but suffice it to say that governments promised their people that the government would be accountable for the value of that paper money. Basically, we all decided, "Forget gold, let's just trade paper instead." As a result, people continued to trade with receipts supported only by the government's word. And why did it keep working? Because, well, trust. Despite the fact that there is no physical object supporting paper money, people trusted the government, and thus fiat money was established.

Fiat currency, Fiat is a Latin phrase that translates as "by decree." That is, the Dollar, Euro, or any other money has value because the government commands it to. It's what's known as "legal tender"; coins or banknotes that must be accepted as payment if given. So the value of today's money is derived from the legal status bestowed upon it by a central authority, in this case, the government. As a result, the trust model has shifted from believing in something to believing in someone (in this case, the government). Fiat money has two major disadvantages: It is centralized, with a central authority in charge of controlling and issuing it. The government or central bank in this situation. It is not restricted in amount; the government or central bank can create as much as they want anytime they want to inflate the market's money supply.

The problem with printing money is that by flooding the market with additional money, the value of each dollar falls, making your own money less valuable. When you observe prices growing over time, it is not always because prices are rising as much as the purchasing power of your money is declining. You require more dollars to purchase something that used to be "cheaper."

Once fiat money was in existence, the transition to digital money was very straightforward. Because we already have a central authority that issues money, why not make money mainly digital and allow that authority keep track of who owns what? Credit cards, wire transfers, PayPal, and other types of digital money are often used nowadays. The amount of actual money in the world is almost insignificant and shrinking with each passing year. So, if money is now digital, how does it work? What's to stop me from copying a file that represents a $1 a million times and having a million dollars? This is known as the "double spending problem."

Banks now employ a "centralized" system in which they store a ledger on their computer that keeps track of who owns what. Everyone has an account, and this ledger keeps track of them all. We all have faith in the bank, and the bank has faith in their computer, therefore the answer is centered on this ledger in this computer. You may not be aware, but there have been several attempts to develop alternate forms of digital currency, but none have been effective in resolving the double spend problem in the absence of a centralized authority.

When you give someone authority over the money supply, you offer them immense power, which causes three big problems: corruption, power, and absolute power. When banks are mandated to produce money or value, they effectively control the flow of value in the world, giving them near-unlimited power. A tiny illustration of how power corrupts may be seen in the Wells Fargo scandal, in which workers covertly opened millions of unlawful bank and credit card accounts in order to boost the bank's income stream for years without their customers knowing.

If the central authority's interests are not aligned with the individuals it governs, there may be a case of money mismanagement. For example, printing a large amount of money to keep a certain bank or organization from failing, as happened in 2008. The problem with printing too much money is that it generates inflation, eroding the value of the citizen's money. Venezuela is an extreme example of this, where the government has produced so much money and the value of it has fallen so much that citizens are no longer counting money but instead weighing it.

You are essentially handing over complete control of your money to the government or a bank. The government can decide to freeze your account and restrict you access to your cash at any moment. Even if you just use cash, the government can revoke the legal validity of your currency, as happened in India a few years ago. This was the situation until 2009. Creating an alternative to the present monetary system seems to be a futile endeavor. But then something happened....

Satoshi Nakamoto, a man who goes by the alias Satoshi Nakamoto, published a paper online in October 2008. The article, also known as a whitepaper, proposed a method for developing a system for a decentralized money known as Bitcoin. This method promised to generate digital money that overcomes the problem of double spending without the need for a centralized authority. Bitcoin is, at its heart, a transparent ledger with no central authority, but what does this perplexing word even mean? So, let us compare Bitcoin to a bank. Because most money is now digital, the bank essentially controls its own record of balances and transactions. The bank's ledger, on the other hand, is not visible and is housed on the bank's primary computer. You can't peep into the bank's ledger, and it's completely within the bank's control. Bitcoin, on the other hand, is a public ledger. I can peek into the ledger at any moment and view all of the transactions and balances that are going on. The only mystery is who owns these amounts and who is behind each transaction. This implies that Bitcoin is pseudo-anonymous; everything is open, visible, and trackable, yet it is still impossible to determine who is transferring what to whom.

Let me provide an example to demonstrate this. Prior to being able to view specific rows from Bitcoin's ledger. We can observe that in May of 2010, a certain Bitcoin address transmitted 10,000 Bitcoins to another Bitcoin address. This transaction was the first ever conducted with Bitcoin, and it was used to purchase two pizzas by a man named Laszlo. Laszlo made a post in 2010 asking for someone to sell him two pizzas for 10,000 Bitcoins. Someone did, and the price of these two Pizzas is now worth well over a billion dollars.

Bitcoin is a decentralized currency. The ledger is not held by a single computer. Every computer that participates in the Bitcoin system keeps a copy of the ledger, commonly known as the blockchain. So, if you want to bring the system down or hack the ledger, you'll have to bring down hundreds of computers that are storing a copy of it and continually updating it. Bitcoin is a digital currency. This implies that there is nothing tangible in Bitcoin that you can touch. There are no physical coins; instead, rows of transactions and balances are shown. When you "possess" Bitcoin, you hold the right to visit a certain Bitcoin address record in the ledger and transfer money from it to another address.

What's the big deal about Bitcoin? For the first time since the invention of digital money, we finally have an alternative to the present system. Bitcoin is a kind of money that is not controlled by any government or bank. Consider how centralized the flow of information was before to the Internet. Essentially, if you needed information, you could obtain it from a few large players such as the New York Times, The Washington Post, and others. Today, information is decentralized owing to the Internet, and you may converse and consume knowledge from all over the world with the press of a mouse. Bitcoin is the financial Internet; it provides a decentralized alternative to money.

Here are some of the reasons why Bitcoin differs from the present financial system. With Bitcoin, you have complete control over your money; you and only you have access to it. No government or bank has the authority to freeze or seize your assets. Eliminating the intermediaries as a result, in many situations, Bitcoin is less expensive to use than standard wire transfers or money orders. Furthermore, unlike fiat currencies, Bitcoin was meant to be digital by nature, which means it can be enhanced with extra layers of programming to become "smart money." Everyone has access to it. Bitcoin enables digital trade for the 2.5 billion individuals worldwide who do not have access to the current financial system. Because of where they live and the reality they were born into, these people are unbanked or underbanked. Today, however, people may start dealing with Bitcoin with a mobile phone and a click of a button, with no authorization required.

Bitcoin operates by updating a transaction ledger (aka the Blockchain). Every computer in the Bitcoin network has a copy of this ledger and validates every transaction that passes across it. It's as if we're keeping tabs on one other, and each new transaction is publicized so that everyone may update their own copy of the ledger. If you want a more in-depth explanation with examples of how Bitcoin works, I'll be writing another post about Bitcoin mining soon.

Bitcoin is valuable because people are ready to exchange money for it. That is, someone sees it as valuable and decides to purchase it from someone else. At that same time, Bitcoin increased in value. When people talk about Bitcoin's "price," they're really talking about the price of the most recent trade on a specific trading platform (e.g. Bitstamp, Binance, Coinbase). Unlike US currencies, there is no one worldwide Bitcoin price that everyone adheres to. For example, the price of Bitcoin in some countries may differ from the price in the United States since the primary exchanges in these countries include different deals. In general, as more individuals’ desire to acquire Bitcoin (i.e. demand increases), the value of Bitcoin rises. If fewer individuals want to acquire Bitcoin (i.e. demand declines), they will be unwilling to pay as much. In that situation, the value of Bitcoin will fall.