Bitcoin is a way to send money from person to person without the bank as a middle person. It is a global currency not controlled by any government, company or bank. It is the cash of the internet.
In order to fully grasp the importance of Bitcoin we have to develop a firm foundation of two topics. The history of money and the history of the internet. The history of money will help us to understand the drawbacks of our current monetary system and the types of money that strengthen a monetary system.
It’s hard to believe that its only been twenty years since the internet exploded in popularity. It’s such a ubiquitous part of our lives that its hard to imagine living life without it. How did people find out the answers to random questions that they had without search engines? How did they stay in contact with all of the people in their lives without social media? How do they learn how to fix random problems that popped up without video explanations?
The internet was created in the 1960’s in a project funded by the US department of defense called APRANET. Robert Kahn and Vincent Cerf continued its developments in the 1970’s with protocols that allowed the transmission of data. in the 1990’s the web was formed which allows information to be accessed from the internet in the form of a website.
The internet is a world wide network that that is not under the control of any person, company or government. It is decentralized meaning that there is no central entity that controls it. The internet is controlled by everyone and no-one.
This new decentralized way of transferring information from computer to computer allowed things that were in the physical world to be primarily available int eh digital world. Everything from mail, to music and videos that had to have a physical existence were now alive on the internet transferred from computers in the forms of 00’s and 11s the beginning of the marked the beginning of the transition of the transfer of information from a predominately physical form via printed books and newspapers to digital form completely viewed on computers. The internet, a network of interconnected computers which provided a decentralized way to electronically share information. The internet is considered de-centralized because no one person, company or government owns the internet. Anyone can publish any content that they want on the internet and make it freely accessible to everyone. The decentralized nature of the internet is one of the things that makes it so powerful and this decentralized concept is being explored here because it is a critical part of the bitcoin protocol.
How does Money work?
As the transfer of information transitioned to a digital dominance the financial systems of the world are doing the same. The financial system has gradually become less and less physical (paying in cash or check) and more and more digital (via debit and credit cards). The majority of transactions that were conducted person to person in cash, 30 years ago are now occurring via digital transfer from bank to bank and can have many intermediaries in-between.
Let’s begin with a basic understanding of money. What is money? Money is defined as a medium of exchange, a measure of value or a means of payment. Government issued money is known as fiat. Each country issues its own fiat currency. In the United States uses dollars, Europe uses the Euro and China uses the Yen. The digital equivalent of fiat can be transferred electronically through the banking system when purchases are made with our debit card in a store or transfer with money online.
Understanding economics and how money flows through the financial systems of the world is imperative to understanding why the world could benefit from bitcoin. Unfortunately, many people have a very superficial understanding of money that rarely goes beyond earning and spending it.
In order to fully appreciate the value of bitcoin we will start with an understanding of the value of money. Money is a way to transfer value between people. When I need food for my family I go to the grocery store and in exchange for money I can get my groceries.
Inflation
As the amount of money in circulation increases the buying power of the money decreases. For example, the cost of bread in 5 years ago is less than the cost of bread today. Today the dollar has a roughly 3% inflation rate many believe that this is a gross underestimation and that the inflation rate could be as high as 7%. If the government continues to print money you are incentivized to spend money rather than to save it because you can buy more with your money today than you can buy with the same amount of money 5 years from now.
Fractional Lending
We are living in a digitized world so the government isn’t actually printing more money what they are doing is fractional lending. they are taking a portion of the money that you deposit into the bank account and lending it out. They have a small portion of money on hand in the bank but if EVERYONE were to go and try and get physical cash from the bank there would be a problem because they don’t have the cash for everyone. They lent it out and put some numbers in the computer to represent the amount you should have. The bank is the ledger that moves money digitally but the digital dollar isn’t backed by actual physical dollars.
This makes for a very unstable system. In the housing crisis of 2008 the banks irresponsibly lent money in the form of mortgages and people weren’t paying it back. so what did the government do they put a bandaid they dumped cash into the circulation to bail the banks out
The flow of money through the economy is tightly controlled by the banks of the world. The banks monitor the flow of money from person to person and bank to bank and they determine what counties are banned from the monetary network which companies are excluded from the monetary system.
Survelience
The financial system is strictly regulated by the government they control inflation, deflation who gets a bank account and where you can send your money. The banks collect data on your purchases and can sell that data to marketers that target ads to you based on your spending history
For example after wiki leaks leaked confidential US documents, PayPal, Visa, MasterCard, Bank of America and Western Union all blocked donations to the organization. They had limited banking services and had to find a way to accept donations in order to continue functioning. One of the way’s around this ban for them was bitcoin.
In China protesters were arrested based on the banks tracking their purchase of train tickets to protests.
Banks and services that resemble banks line venmo, belle and cash app require a banking license, and in order to maintain the banking license you need to follow the rules including KYC ( Know your customer) and AML (anti- money laundering). This is why you are required to provide personal information such as social security number, drivers license, passport ect in order to open a bank account.
If there is a suspicion that you are not adequately monitoring the people that you are banking. The government will take away the banking license. It is in the best interest of the companies including that deal with the banking/investing/ money transfer service sector to comply if they want to stay in business. The government is in control.
Banking Restrictions
In the state of Colorado the sale of marijuana is legal, but because it is still illegal under the federal government federal banking laws block banks from servicing these businesses. Businesses in this industry are cut off from having a business bank account and must transact locally in cash or through local credit unions or smaller banks. Being a billion dollar industry and not being able to transact through the national banking system is extremely restricting.
Seizure/ Confiscation
If you owe the government taxes or there is suspicion that you are participating in illegal activity they can freeze your bank accounts and cut you off from the financial network.
Fees
If you want to transfer money to someone in a different country you face bank fees, conversion fees and long delays. For faster transactions you could go through a money transfer service like Western Union or Money Gram but in addition to having to trust that the service will actually deliver the money there are high fees and limits on how much and how often you can send money.
In everything related to the transfer of money we must trust the banks. We trust that when we place money in our account it will be available when we are ready to spend it. We trust that if someone sends us money, the banks will verify that they have that amount in their account to send us and that they haven’t already sent it to someone else. we trust that if someone gets unauthorized access to our account the bank will make sure that our money is restored.
Why do we need a new type of digital currency?
The Unbanked
There are 2 billion people in the world who are unbanked. In the United States there are 22 million adults who do not have bank account. These people need a digital way to transact in an economy that is drifting away from cash.
The second reason is a little more complicated. Based on information contained in the genesis block of bitcoin it is highly suspected that bitcoin was released in response to the global recession of 2008.
A sound money
The genesis block contains a reference to a headline article from the TIMES a British newspaper based in London. The headline on January 3 2009 was entitled “Chancellor on brink of second bailout for banks”. This reference in the genesis block has lead many to believe that the reason that bitcoin was created was because of the gross mismanagement of the financial system by the global governments.
What is sound money?
The creator of bitcoin is pseudonyms so we may never know how long he/she/they were working on bitcoin before it was released or if it would have been released even if there had been no banking crisis. As far as we know, attempts at making a digital money for the internet started as early as the 1990’s with products such as digicash and e gold. In any case the creation of bitcoin provides a universal way for people to transfer monetary value peer to peer with no third party banking or governmental control.
We will get into the details of how bitcoin works later but the big picture is that with bitcoin you are your own bank. As long as you hold the private keys to your bitcoin wallet there is no central banking or governmental authority that can seize your bitcoin without your consent.
What is Bitcoin?
A bitcoin is a string of letters and numbers that looks like this. It is a way for two parties to transfer monetary value over the internet or via a satelite with out revealing personal information about yourself.
Bitcoin, like the internet is not controlled by any individual, company or government. It is a protocol backed by cryptography, game theory gossip protocol and its value like anything comes from the monetary value that the market places on it. Back in 2010 the value of Bitcoin was $10 in December 2010 the value got as high as $20K in December of 2018 it was around $3600 and in December of 2019 it ranged around 7200.
Bitcoin is backed by the network which is backed by cryptography, game theory, mathematics. You can privately transfer millions of dollars worth of bitcoin to someone in another country in a matter of minutes to hours without a peer to peer without a middleman. You are your own bank.
Scarcity
Apart from being decentralized, bitcoin is valuable because it is scarce. Only 21,000,000 Bitcoin will ever exist.
How are Bitcoin Created
It’s hard to conceptualize that digital money can’t be duplicated. Because it is a protocol that must be verified by hundreds to thousands of different computers across the world any Counterfeit bitcoins would be detected based on the fact that these distributed computers have a copy of every single bitcoin transaction that happened since the genesis blokh in January of 2009.
Thinking about buying a million dollar house with bitcoin? You can’t use that same million dollars to buy a Lamborghini. This problem is typically mitigated by a third party “the bank” that verifies that once you spend the money it is no longer available for you to spend again.
Private and Public Keys
How are bitcoins transferred/ How does Bitcoin work
You have wallet you decide to send bitcoin to your cousin you get the address to their bitcoin wallet there is a swap of public keys. The transaction goes to a NEM pool Miners compete for a chance to add the next block to the blockchain by solving a very complex math problem (what generates the cryptographic problem that the miners solve) this is a mathematical problem that can only happen in one direction and takes thousands or millions of guesses to solve. this is called brute force. The miner that solves the problem by brute force gets to add the next block to the block chain and gets the block reward which started at 50 bitcoin per block ( block reward is cut in half every 4 years or 210,000 blocks) and it sits here until a MINER decided to add the transaction to the next bitcoin block which occurs every 10 minutes. Once the block is created the nodes around the world all get the transaction and verify that the wallets have the bitcoin that they are trying to send.
When a bitcoin transaction occurs, the transaction is broadcast to a network of computers (nodes) all over the world. Each of the nodes contains a copy of every transaction that has occurred since the first transaction in 2009. The nodes verify that the person initiating the transaction actually has the bitcoin they say they have in their wallet and each verification is a “confirmation” that the transaction is valid. Once you have 6 confirmations – or blocks created ontop of the block with your transaction you can be pretty sure that the transaction is valid i.e they are not double spending.
This is what makes the Bitcoin network decentralized. There is no centralbank to verify that you don’t spend money that you don’t have there is a network of thousands of computers the miners keep track of all transactions created on a universal ledger and this ledger is copied onto different nodes (computers, servers, phones) all over the world. the transaction is verified
The bank that verifies funds and prevents double spending is replaced by millions of computers distributed in different continents, countries and cities, each of these computers (called a node) has a copy of the bitcoin ledger which contains a copy of every bitcoin transaction that has happened since the original bitcoin was made in 2009 (full node).
These computers solve complex math problems allowing them to verify the transactions purchases and exchanges movement of bitcoin from person to person. the reward for solving a group of complex problems and adding them to the block is newly created bitcoin (block reward) – currently 12 bitcoin per block which. ( the block reward with decrease by 1/2 to 6 bitcoin per block created every so many blocks there is a halving Until the max of. 21 million bitcoin have been created.
Step 1 verify 1 mb worth of bitcoin transactions.
Step 2 solve complex math problem so that you can add the block of transactions to the blockchain.
Mining and Electricity
As people trade bitcoin on exchanges or for goods and services miners help to maintain the network by solving complex mathematic problems by brute force and choosing transactions from the NEM pool to put into the next block. That block is broadcast to all of the bitcoin nodes which verify that you indeed have that bitcoin that you are trying to transfer in your wallet. The reward for all of that hard work is x number of newly created bitcoin.
Who are the players in this bitcoin sequence 2 people in transaction, MEM pool, miner, Nodes. Bitcoin Core.
The first one to solve the cryptographic math problem gets the reward/payment for using their computers computational power (proof of work).
All the talk about the astronomical amount of electricity being wasted refers to the amount of electricity necessary to power the miners computers (Hash power) that are solving these complex problems by brute force. The difficulty of the problems adjusts according to the volume of traffic and typically increases over time. You use to be able to mine bitcoin and run a node on your personal computer now you need a specialized computer ASIC application specific integrated circuit that is used only for the purpose of mining bitcoin and with the amount of computational power and electricity necessary to solve these problems mining may barely be profitable in some situations ( depending on how much you pay for electricity.
It’s decentralized meaning there is no middle man. There is no bank to hold your money you can transfer money between people without going through a bank. so you essentially are your own bank. You hold the bitcoin in a wallet and you are responsible for that wallet if you loose your wallet all the bitcoin is gone just like with cash – there is one way to recoup it – unless you have a backup.
Where Should You Store Your Bitcoin.
A Trezor or Ledger cold wallet where you control your private keys
If you buy your bitcoin on an exchange and leave them on the exchange the exchange is holding the private keys to your bitcoin wallet ( private keys are how the bitcoin is spent from your wallet) If the exchange gets hacked the hacker will have access to your private keys and can therefore move your bitcoin. Not your Keys not your bitcoin. You have to balance having complete control of your personal finances vs trusting the exchange. If the government decides bitcoin is a problem and they decide to freeze your account *remember KYC/AML they can do that if your money is on an exchange but they have no access to your bitcoin if its in cold storage. is time for people to have a greater stake of personal responsibility in controlling their finances. Leaving your bitcoin on an exchange allows the exchange also allows the exchanges to practice fractional reserve lending. Remember how problematic this was for the traditional banking system. They don’t have to verify the number of bitcoin that they have so they can lend fractions of bitcoins to people without anyone being the wiser until everyone attempt to take out their bitcoin and they discover they don’t have enough because the were selling bitcoin they didn’t actually have. As the saying goes. Not your keys not your bitcoin.
Can bitcoin really be used for everyday transactions?
This has been the goal and unfortunately the source of many battles within the bitcoin community. Leading to forks and bitcoin spinoff cryptocurrencies.
What is a bitcoin fork?
Because there is no central controlling entity in bitcoin if there is disagreement on how the protocol is being run or maintained you can choose to make a fork of the bitcoin protocol. making your own branch of the network. Anyone who owns bitcoin at the time of the fork gets a copy of the new coin. Then the miners have to determine which chain of the protocol they want to continue to mine.
Will the REAL Bitcoin please stand up?
The most infamous fork happened in August 2017 over the size of the bitcoin transactions leading to the creation of Bitcoin Cash (BCH). Bitcoin Cash (BCH) is a fork of the original Bitcoin (BTC). This can be confusing if you are new to the space you may think which bitcoin should I buy. The answer is Bitcoin- BTC
The value of a Bitcoin is variable but currently it is greater than $7,ooo. Needless to say, most people don’t transact in full bitcoins. When transferring funds they do so in fractions of a bitcoin known as a satoshi. The value of a satoshi is 0.00000001 bitcoin of there are 100,000,000 satoshi in one bitcoin. So if 1BTC= $7,000, 10,000 satoshi = $0.72
One way to scale the ability of bitcoinNetworks ability to process more than the current 7 tps to compete with visas capability of 65000 tps is the lightning network. An off chain (transaction not recorded on the blockchain) payment channel where both parties deposit bitcoin as a security deposit. Transactions between the two parties off chain is fast and feeless the only transactions that end up on the Blockchain are the opening the channel and deposit and the money closing the channel and paying the bill
What is A Satoshi? When trading bitcoin for altcoins
Building on Bitcoin, Layer two solutions
Should I buy bitcoin do I have to buy a whole bitcoin?
Why should I run a bitcoin full node vs light node?
The benefits being that you operate independent of govt and bank control. On the other hand you are completely responsible for your own bitcoin. If you loose the private key your bitcoin is gone forever. There is no one to call to fix it or recoup your funds. You truly are your own bank.
Reference:
The bitcoin standard – if it is hard to produce it can be used as money. If you can produce more of it that brings the value down. In 4-5!years Bitcoin has the lowest supply growth of anything that can be used as money.
Money is a way of making the fruits of our labor available later for consumption
Time is the only thing that is truly scarce for us as human beings Money is an attempt to save our wealth across time.
Bitcoin will make it harder for governments to finance their operations through inflation
Altcoins are backed by big money and marketers executive board and the investors they have to answer to financially
Bitcoin is backed by the people and the people are proving to be more powerful than those backed by the few developers analysts
Qualities of money
Qualities of cryptocurrency
Qualities of the economy
How to store your bitcoin. Full node wallet.
Hard money hard to produce gold, bitcoin easy money easy to produce fiat stocks
Important to own your keys otherwise you gave an IOU FROM the exchange saying you have bitcoin