Bitcoin, what is it?
While thinking of how best to explain bitcoin, I considered trying to explain the technical details in as simple terms as possible, but I come to realise that the average user doesn’t need to know all the complex code, just as the average webpage user doesn’t need to know about TCP/IP, packet switching and a dozen other complicated technologies that allow them to view a web page.
What I’ll attempt is to explain the design, think of this as someone selling the features of a new car to your grandmother, rather than explaining the whole ins and outs of the internal combustion engine, how the tyres are made, how the air conditioner works etc.
Bitcoin in 10 simple points.
1. Bitcoin is a decentralised network where participants of the network own bitcoins, no body owns the Bitcoin network, think of it like the internet, some have coined the term “the internet of money”, I’ve met people who don’t understand bitcoin and like many people when new technology comes along, they get on the defensive and make ludicrous statements like “The government will shut this down”, “if people lose their money, the bitcoin company should be made to pay up.”
When such statements are heard by the ears of an experienced bitcoiner, this sounds completely out of touch with reality, there is no company to “pay up” and there is no central server to “shut down”, bitcoin can’t be shut down, no matter how much violence, money or power a government has, there is simply no one to point a gun at, there is no server to unplug, the only chance of stopping Bitcoin is to turn off the entire internet, you can’t create a firewall and block it, it’s completely decentralised.
Before moving on to the below points, you must come to terms with this, I’ve seen people scream at conference speakers “The government won’t allow this!!, they’ll shut this down!!!” and storm out of the event.
The irony is, if the mentioned people had spent some time to understand the technology and had they even ended up being right, they’d have stood to make tens of thousands of dollars by shorting bitcoin.
Note: even if you hate Bitcoin and are certain it will fail, you can make a lot of money from it’s demise.
2. There will only ever be 21 million bitcoin, bitcoin is scarce, currently there is around 16.3 million bitcoins in existence, today 12.5 new bitcoins are created and accepted by the network every 10 minutes. Every 4 years the number coming into creation every 10 minutes halves, in the year 2020 6.25 will come into creation, in 2024 it’ll be 3.125, 2028 it’ll be 1.562 new bitcoins every 10 minutes and so on, this 4 yearly division will keep up until the year 2140 when all 21 million bitcoins have been created.
3. There is enough Bitcoin for every human in the world. There is over 7 billion people on the planet, yet there will only ever be 21 million bitcoin, how can 21 million bitcoin be enough? A single bitcoin is divisible to 8 decimal places, so a bitcoin is practically made up of 100 million smaller units. As a single $1 goes to 2 decimal places and is made of 100 smaller units that we call cents, a bitcoin simply goes to 8 decimal places, the smallest unit being called a “Satoshi”, named after the creator of Bitcoin.
Bitcoin works upon the principles of deflation, not to be confused with economic deflation, economic deflation is terrible in a society with only inflationary currency.
Bitcoins deflationary model is completely new to humanity and works well along side inflationary currencies, by acting as a store of value.
4. Any person or machine can send Bitcoin to any other person or machine they wish, you can send money to an Iranian, a North Korean, an American, an employee of Wikileaks, Edward Snowden, ISIS, Al Qaeda, George Bush, Tony Blair or any other terrorist, you’d be breaking a law, and could face criminal prosecution, but from a technical point of view, there is no way to stop you, Bitcoin isn’t like a traditional centralised payment service like Visa, Paypal, Mastercard, traditional banking etc, where a government or bank can choose who can or who can’t have an account. Your account can never be closed, it’s impossible by design.
5. Bitcoin never closes, it’s open 24/7 every day of the year, anyone can participate, in traditional banking, international payments can take 3 to 5 business days and for many banks these transactions can only be placed between the hours of 9-5, bitcoin has no sense of out of hours, the average transaction will arrive at the recipient in under 3 seconds, the network will have settled the transaction as final on average in 10 minutes.
6. You can send however much bitcoin you own to whoever you want, if you own $1 million in bitcoin, you can send this to anyone you want, no one can stop you, no one can ask you “who is this money going to?” or “how did you get this money?” or “what is this money being used for”. At first to someone who doesn’t understand bitcoin this could sound strange or scary, however with bitcoin, money is a content type, it’s completely digital, it’s the money of the internet, it’s the internet of money, look at it like email, or a file type like a jpeg, mp3 etc, who can stop you sending an email? or sending a jpeg?, once you start to see bitcoin as a content type, it’ll all make sense.
When the world wide web first appeared on the internet, many people were disgusted at the idea that any person could publish articles online, these people were used to only government backed newspapers having this right, any individual having as much power to publish as a newspaper sounded crazy, today most people view internet censorship as far more crazy.
When the printing press first appeared, if an average person was found in possession of one, the penalty was death.
7. Bitcoin is a store of value, if bitcoin succeeds and more people start using bitcoin over time, the price must rise, this is due to the scarcity of bitcoin and it’s divisibility (to 8 decimal places).
One of the first transactions online was a guy buying pizza off another guy, he paid a guy on a forum 10,000 bitcoins to order him 2 pizzas, today 10,000 bitcoins is worth around $20 million AUD, at the time though there wasn’t that many people using bitcoin, so the several million bitcoins in existence were divided up amongst several thousand users.
Today it’s estimated there is between 6 million – 12 million owners of bitcoin. With bitcoin being both scarce and popular, bitcoin has to be divided up, 2 pizzas today could be bought for 0.02 bitcoins, rather than 10,000 bitcoins, in another 5 years, if the bitcoin network keeps growing at the current rate, the price of 2 pizzas could perhaps be 0.00001 bitcoin (or insert random guess here).
As you can probably work out, if you got into Bitcoin several years ago and held onto your bitcoin, today you’d have made considerable money.
8. Bitcoin cannot be copied, many people are confused with this at first, we’re used to anything digital being easily copied, think music, photos, documents etc, bitcoin though cannot be copied, on hearing this for the first time, many people have rolled their eyes, they think of DRM (digital rights management) which has often been hacked and proven floored.
What makes bitcoin impossible to copy is that a bitcoin doesn’t exist as a copyable coin, All bitcoin is, is a row in a database, in bitcoin we call this database The Blockchain, in this database there is a row that says this address owns x amount of bitcoin, thousands of computers on the network keep a copy of The Blockchain, so if you wanted to modify a row in this database to say you own more bitcoin, then you need to convince the thousands of computers of the network to update their copy of the Blockchain, this isn’t possible, due to the cryptographic nature of the blockchain.
What you own as a bitcoin owner is effectively a password that proves to the network that you own the said row in the database, this is known as public/private key cryptography, I won’t go too much further into the technical side as it’ll lose most people, all you need to know is that your phone app keeps hold of this private key (password) behind the scenes and signs cryptographic messages to the network, eg “Give $5 of bitcoin to John, from my account, here is proof that I own this account” then all the computers on the network validate that you own that $5 and they update their copy of the database.
The smartest minds in Cryptography have gone over the code of bitcoin and
everyone has come to consensus that bitcoins cannot be copied.
9. Bitcoin is freedom.
10. Bitcoin is a high risk high return investment.
You can use this link to buy bitcoin and we’ll both earn $10 in bitcoin, however, I’ll write further articles in the near future on whether or not I think people should buy bitcoin and how much, I’ll also cover how to securely store your bitcoin with a Trezor.