I was sitting at home thinking, if my grandma asked me to explain Bitcoin in simple terms, what would I say without all the unnecessary technical jargon?
If I explained to Grandma the following technical version, I’ll lose her on the first sentence…
Bitcoin is money over IP. Bitcoin is Network money. Money is the language to communicate value to each other. Bitcoin is digital and represents an exchange of value (like any other currency) between its users. Bitcoin is run on a computer network of trust without any borders or permissions. It is free from government immunity and it cannot be frozen, stopped, intercepted or seized.
Owners of Bitcoin are in complete control and have total authority over their holdings. It is the concept of decentralision applied to the human communication of value. It is completely unregulated by governments and corporate entities.
Bitcoin is the equivalent to a British pound coin or US quarter. They all have a value. 1 Bitcoin has the value of 1 Bitcoin, 1 pound has the value of 1 pound and 1 quarter has the value of 25 cents. Bitcoin is digital (over the internet) and both the pound & quarter coins are physical.
You can look at your bank statement today and see your pound or dollar monetary total in your account. You don’t physically have all those coins together in your own private vault. It’s just represented on a computer screen at the bank. You don’t have to physically handle the money to know it’s real. It just is. Bitcoin is the same. Just because Bitcoin isn’t physical, it still exists!
Bitcoin is not just for computer geeks but for the many. It is for everyone. Anyone with a smart phone can download a Bitcoin app and start exchanging Bitcoin within minutes.
Imagine you’re going on your holidays. You have 100 pound in coins and you want to exchange them for euros. You need to go down to your local post office, tip them out of your savings jar onto the counter and exchange them. I would currently get 117 euros (Jan 2020).
Bitcoin is the same. Instead of going to a post office, I go to an online exchange. I can exchange 1 Bitcoin for £6,656 or $8,527 today (Jan 2020).
Like with any commodity, market demand sets the buying and selling price. For example, Apple shares are trading at $318.83 today (Jan 2020). The people buying and selling the shares set their limits and therefore determine the price.
The Bitcoin price acts the same way. Buyers and sellers within the exchange decide what they want to buy and sell it for. They decide on how much Bitcoin is worth. It is not randomly picked from the air.
Visualize quiz night down the local pub. Team A, Team B & Team C are level on points and are waiting on the landlord to ask the deciding finale question. The quiz master announces that the first team to shout the answer wins. The question is 12×11…Team A shouts out 132. We have a winner!
Now imagine a pub room filled with 25,000 quiz teams.
Bitcoin has shouted this question every 10 minutes since Jan 2009. It is known as the Bitcoin heartbeat. Instead of quiz teams, we have computers that are called Nodes. Bitcoin is created and given to the first computer that can answer the question. This Bitcoin reward is called a ‘Coinbase’ and the question is extremely difficult and takes on average 10 minutes to answer! The person that owns this winning computer can then exchange the won Bitcoin on an exchange for physical money. Computing (answering) the complex question in Bitcoin terms is called mining.
When sending money from your bank account you can use a traditional paper cheque. You complete the payee section ‘Bob Smith’, the amount of ‘£100’ and then sign the cheque. Your cheque also has an account number including a sort code that your bank uses to fulfil and validate the transaction. It’s then sent through a clearing house and finally reaches Bob.
Bitcoin is very similar with a Bitcoin wallet representing the traditional cheque book. Instead of paying to a person’s name, you pay (transmit) to a Bitcoin address. The Bitcoin address represents the account number and sort-code. You sign the digital cheque with a ‘public key’ and enter the desired amount. Your request is then sent to all the other nodes (computers) who act as Bitcoins clearing house and then checked to see if the funds are available.
Sending Bitcoin is known as a transaction. A transaction is the transfer of value (money) between two Bitcoin addresses.
When you send a traditional banking cheque or make a credit card payment, you are charged fees for the privilege. You are contributing towards shareholders profitability, gigantic data centers, immense corporate infrastructure, company wages, administration, taxes and so forth.
Bitcoin has none of those hefty expenses. Bitcoin rewards a computer node (the winning quiz team) with Bitcoin and fees from the previous block (the actual quiz). Miniscule fees are charged by the size of the transaction and NOT by the amount of monetary value. These fees are accumulated and rewarded to the winning node. Fees are charged in Satoshi and range from a few pennies to many depending on the time of day or month.
Fees are charged to prioritise which order transactions are processed by the network. The higher the reward fee per byte, the higher up the priority queue.
Your Bitcoin address is like a traditional cheque and must be signed before money can be sent. The signature is called a ‘public key’ and is like a pin number for your credit card. Your secret private key is encoded to generate the public key. The private key is much longer than a credit card number and securely stored within your digital wallet. There is no need to remember it. If a thief has access to your pin number, they can steal your money. Without it, your money is secure.
A Bitcoin digital wallet is the equivalent to online banking. It’s a place where your funds are stored together in one place. You can access your wallet online or through a variety of smart phone apps. You can also access your wallet with a home computer or tablet. Most wallets are secured with a random 24-word phrase called a seed or mnemonic phrase. This 24-word mnemonic phrase helps generate the spending ‘private key’. This phrase is safely backed-up on creation and only required if you lose your wallet due to computer or software failure.
Bitcoin was created in Jan 2009 by a supposedly Satoshi Nakamoto but no one really knows the truth or holds any valid evidence to the contrary. Theories suggest that a group of programmers wrote the original Bitcoin plan (the Bitcoin whitepaper) and mined the first genesis block including the text “The Times 01/Jan/2009 Chancellor on brink of second bailout for banks”.
Bitcoin isn’t money but a platform in which you can run currency as an application, on a trusted network without any limits or point of controls. Bitcoin is completely decentralised, just like the internet we surf every day! No one tells you what sites you can and cannot visit. Bitcoin is not controlled by anyone. Bitcoin is not truly a currency. Currency was the first application that was developed under blockchain technology. It is not a company or product or software service you sign up for.
Many years ago, I got my first modem around the age of 25 years old. Shortly after the modem, I started to surf the web within a web browser and then email came along. I can just about remember sending my first email with the expectation taking around 3 days to get to the recipient. I can’t even remember who it was or whether it reached its destination.
These were all technical wow moments for me. I found technology amazing and just wanted to know more and more. Then 9 years ago, I found Bitcoin and my life changed, I was totally besotted.
Money is one of the oldest things recorded by humans. Money proceeds writing in accounting spreadsheet forms in the form of a stone tablet to represent a ledger. Ledgers recorded over 10,000 years ago, mainly listed debtors who owed money.
Money started with precious metals, then progressed to paper, plastic money in the form of credit cards and now network money, Bitcoin. Bitcoin is the evolution of money. Bitcoin is the procession of innovation. Not many banks adopt innovation and without it will fall by the wayside whilst Bitcoin innovators continue to evolve and enhance opensource plugins, services and extensions.
You can send Bitcoin payments within seconds and have them verified on the trusted network in less than 10 minutes. Banks still promote 3 to 5 working days. You can send a micro payment or large payment through Bitcoin anywhere in the world.
Bitcoin is the recipe for thousands of other crypto coins in existence today called altcoins. There are 6,000 altcoins in existence today (Jan 2020) and ever growing. Bitcoin is the daddy of them all. If cryptocurrency is going to thrive, then Bitcoin is going to be at the helm.
Children born today will not have a bank account but will possess a banking app. They will have a software wallet on their future smart phones. They will be their own bankers with their own rules.
They will never use paper money just like the youth of today have never used VHS video tapes, Walkman’s or 8 track machines to play the latest hit parade. It’s the equivalent to the fax machine and horse & cart to us. Another example is the folded map and the car sat nav. We’ve moved on and so has the concept of money.
Blockchain technology will somehow be integrated with the title of your home, the keys to your car or possibly the contract of your marriage. It has high probability that it will be the standard of ownership.
Banks hold people’s money and potentially then can run away with it. Regulation is then enforced to prevent this for banks, hedge funds and financial institutions. Banks can go bust and cripple economies. Bitcoin is regulated by you, the users and the network of trust. If one rogue computer does not abide to the Bitcoin consensus or rules on the Bitcoin network, it is evicted and banned from participating for increments of time depending on severity.
Bitcoin never closes and has no close price. It has a market cap of $55 Billion (Jan 2020) which is larger than most countries GDP combined. Ignore the Bitcoin revolution at your peril because it’s not going to go away, it’s definitely, in my opinion here to stay.
There are an estimated 6 million users of Bitcoin (2017, Bitcoin Core). Are all of them being scammed?
People are scammed after being tricked by fraudsters to reveal their private keys. Would you give your pin number and credit card number to a potential scammer? This the equivalent of giving a fraudster your private keys. Computers have also been hacked for notepad text files storing seed phrases. Have yours been backed up lately? Have you written down your seed or mnemonic phrase? Do you have adequate antivirus protection on your pc and smartphone? I sincerely hope so.
One simple fact to remember is ‘your keys your money’ and ‘not your keys not your money’.
Exchanges have also been hacked. Exchanges are proven ‘honey pots’ that attracts every hacker on the planet. One slight security breech and your Bitcoin is gone. Many savvy Bitcoin users use exchanges to exchange fiat money and crypto only. They don’t hold crypto for long periods on an exchange. Your choice!
Doubters accuse Bitcoin of being solely for pornographers, terrorists, drug dealers and gamblers. These same doubters said the same thing about the internet. All new groundbreaking technology is tarnished with the same ‘doom and gloom’ brush.
Only a few websites currently accept Bitcoin. Bitcoin Payment processing is a growing industry but still in its infancy. Major cities have ATMs and cashpoints that are physical locations to trade and exchange Bitcoin.
Volatility, in simple terms, menas the jumping up and down of prices.
Bitcoin is a commodity and so therefore has a perceived value. Market supply and demand determines prices. Greed and fear are the main influencers of Bitcoin volatility. Major money players known as whales jump into the markets from time to time and chuck the price around.
From time to time without notice, whales dump huge amount of Bitcoin onto the exchanges and cause huge price spikes. Price spikes may cause an emotional response from Bitcoin traders who then panic and sell off their position at a reduced rate. This is one of the main causes of volatility.
In 2041 there will be no more newly created Bitcoin. Bitcoin is a blockchain application and is programmable. Miners have a reward model in total proportion to the amount of electricity and CPU power spent trying to solve the current 10-minute riddle. Banks have been known to freeze accounts that buy or sell cryptocurrency including Bitcoin and Ethereum. Bitcoin mining rewards halve every four years. Bitcoin has 8 decimal places whilst the USD (US Dollar) and GBP (Great British Pound) has only 2. The Bitcoin stock price symbol is BTCUSD and BTCGBP respectively.
You require identification to set up an account on a cryptocurrency exchange. The owners are required by law to do this for money laundering regulations. This is present in the form of your passport, driving license or both. They also require your bank account details to exchange crypto for your chosen fiat currency (Dollars to Bitcoin and vice versa).
Therefore, when you exchange your currency for Bitcoin, you are given a Bitcoin address. This is clearly traceable through the future blockchain thereafter and you can see the addresses where money is being transferred to.
Stating that, nobody can see what goods or services you are paying (exchanging) for unless you know the company or person who owns the receiving the Bitcoin address (the recipient).
When any future Bitcoin address converts the Bitcoin value back to fiat money (hard cash) through a bank account, there are corresponding Bitcoin addresses to make that amount.
So yes, the government could generate a paper trial if needs be but could they do it for everyone?