The Beginner’s Guide to understanding Bitcoin
Bitcoin is a cryptocurrency
A cryptocurrency is created by a very confusing method of coding called cryptography. People living in their mum’s basements are able to create ‘cryptocurrencies’, made of an internet-like structure called a blockchain. Bitcoin was the first one created and has become the most widely used and therefore very valuable.
The bitcoin network/blockchain is made up of and run by many different individual computers, it is, therefore ‘decentralised’, it is not owned or controlled by anyone.
The network has been divided into 21 million different ‘bitcoins’, which can be transferred directly from one person from another, by using a digital wallet. Recent advancements have made these quite simple to use, via QR codes for example. Each bitcoin can also then divided a trillion time into the penny equivalent of a bitcoin, called a Satoshi, thus being easily divisible to allow for smaller transactions.
Bitcoin is ‘mined’ by computers dedicating processing power to solving complex, predetermined algorithms, once enough lines of code have been solved the ‘miner’ is rewarded in Bitcoin. The amount of Bitcoin available to be mined has been fixed at a rate which decreases over time, this makes bitcoin scarce, resistant to unpredicted inflation and valuable, (think: Diamonds are valuable because there is not very many of them compared to gold or copper).
On 8 January 2009 the creator of Bitcoin, using the pseudonym of ‘Satoshi Nakamoto’, sent out an email to a few coding nerds explaining that he has created this revolutionary peer to peer digital currency. Many believe that it was created in response to the 2008 financial crisis which began the mass printing of modern currencies (Dollar etc), which according to these tech/economics geeks, was a sure sign of major flaws in the world’s financial and monetary system.
Although there are a few people (unsuccessfully) claiming to be Satoshi Nakamoto, to this day no one knows his (or her!) true identity.
Why do we need Bitcoin?
There are many reasons, often debated, as to why we need bitcoin, but we will briefly look at a few.
Borderless — Bitcoin is not constrained by national borders, wealth can be sent around the world without any further delays.
Fees — the transfer fees of bitcoin are much less than current systems, especially when transferring large amounts. In May 2020 someone moved $400 million in BTC for a $2.5 fee.
Central Banks — Since 2008, most central banks have begun printing vast amounts of money in response to economic hardship. Since the COVID outbreak, this has again ramped up to unprecedented levels. Throughout history, excessive production of the currency in use at the time has led to the complete demise of that current money system. For example, excessive money production and dilution of the quantity of gold in the ‘gold coins’ of the time, massively contributed to the collapse of the Roman empire. Due to the laws of supply and demand, if you create massive quantities of any object it becomes less valuable. There are consistently countries experiencing ‘hyperinflation’ around the world at any one time, which can turn citizens’ life savings into worthless paper in a very short period of time, this is not possible with bitcoin.
Peer to peer — The fact that bitcoin is decentralised means that people do not have to rely on a trusted 3rd party (a bank) to move there money. They literally are their own bank, they control the bitcoin wallet. This is very appealing as a truly ‘trustless’ currency which gives the power back to the people (sounds cheesy I know, but who doesn’t love cheese?).
Digital age — We live in an increasingly digital age and people don’t want to use actual cash. But what is wrong with the current system of debit cards and funky apps? These do work in practice, but there is a large difference between the number of ‘digital dollars’ and the number of physical dollars in existence. Many believe that this is not acceptable, at best it is illogical and confusing and at worst completely undermines the current system and renders it a total sham. (This topic is contentious, I have been giving you the perspective from the ‘pro-bitcoin’ side).
Common Criticisms of Bitcoin?
Bitcoins value is based on thin air — The quick counter argument, what is the dollar’s value based on? You guessed it, possibly even thinner air.
Bitcoin is too volatile to be a currency — This is a valid comment, no one wants to be using something that can go up 1000% in a year but also crash 80% next week. This can be countered by the fact that bitcoin is slowly becoming less volatile, the percentage change has decreased with each market cycle over the last 11 or so years. This new asset is experiencing rapid value growth (currency puberty) which will (in theory) diminish over time and become more stable. It is also worth a note that many currencies or investments are volatile, the US dollar has lost 97% of its purchasing power since its birth, whilst bitcoin was officially by far the best investment of the decade (2010–2020) with a return of 9,000,000%…
The bitcoin bubble burst a couple of years ago — This point refers to the crash in the price on one bitcoin from $20,000 to $3,100 over the course of 2018. Whilst this is dramatic, this is simply a result of the most recent market cycle (periodic price movements). This has happened 3 or 4 times before, each time bitcoin has come risen from the dead to prices higher than the previous peak. Just think, Amazon’s stock price crashed over 90% in the early 2000s, and they are doing ok now…
This (hopefully) will give the complete novice a bit of starting knowledge on what bitcoin is and why even Bill from the pub has heard about it. Please send this to your friendly neighbourhood bitcoin newbies to spread awareness.
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