Explaining Bitcoin to Myself at 21
Whether you're new to Bitcoin (BTC) or you just need a refresher on its basics, I'm here to help you get a better grasp of this cryptocurrency. In this piece, I'll break Bitcoin down like I was explaining it to my 21-year-old self for the first time.
The origins of Bitcoin
In January 2009 Satoshi Nakamoto created the first Bitcoin. In recent years this digital currency has really taken off.
There are two main reasons Bitcoin was invented:
The trust-based model using financial institutions as trusted third parties suffers from the inherent weakness known as the double-spending problem. Bitcoin was invented as a proposed solution to the double-spending problem using a peer-to-peer network. Until Bitcoin, no mechanism existed to make payments over a communication channel without a trusted party.
In 2009 the world was going through a period of uncertainty known as the Great Financial Crisis. The future of our financial ecosystem was murky, and the volatility of the situation caused for some massive government intervention. During that year, the monetary supply of fiat currencies was exploding with government bailouts and other programs, many of which involved the Federal Reserve. This illustrated the need for a monetary policy that was not controlled by people. Bitcoin meets this need. Its monetary policy is removed from human control so there is no worry about long-term monetary supply inflation.
how is it similar to regular money?
Here are several ways Bitcoin is similar to US Dollars:
Like the US Dollar, Bitcoin has no intrinsic value. Both are monetary networks.
It can transfer value peer-to-peer without an intermediary.
Like real-world currencies, there are regulatory requirements surrounding Bitcoin, especially in financial hubs such as New York City.
Theft and scams exist with Bitcoin, just like they do with real-world USD wallets.
Similar to using credit cards on sites like PayPal, there are transaction fees associated with Bitcoin exchanges.
How is it different from regular money?
It's a natively digital network money versus a physical/digital hybrid network money (durability).
It contains a higher divisibility.
The cryptography behind its algorithm makes it more difficult to counterfeit.
It has a predictable supply (scarcity).
While some retailers are starting to accept Bitcoin payments, most do not.
It's decentralized, so it isn't controlled by an entity like a central bank.
It's smart (programmable).
How is Bitcoin any different than other virtual currencies like Ethereum and Litecoin?
Network effect, which means that as more people start to use Bitcoin, the more the price of Bitcoin will go up
Proven security, so you can protect your Bitcoin wallet
Proven usage case as a store of value.
More accessible (more exchanges, merchants, software, and hardware support it)
More liquid (larger trade volumes)
Can I buy stuff with Bitcoin?
Yes! More merchants than ever support Bitcoin payments, including larger companies such as Microsoft, Rakuten, Expedia, and Overstock.com. Even credit card companies are starting to get into Bitcoin. Outside of merchants, Bitcoin's peer-to-peer nature allows you to purchase anything from anyone as long as they will accept Bitcoin payment.
Why do people like Bitcoin?
People like Bitcoin because it is not controlled by any one person, entity, or government. This means they can be confident that their percent of total supply will never change. It also means they can "be their own bank" via self-custody and not be restricted on who they can make payments to.
Can people steal my Bitcoin?
Yes, just like cash, Bitcoin can be stolen. In order to steal Bitcoin, the thief must steal your private key. In most cases though, theft of Bitcoin is also directly related to human error, poor decision-making, or negligence.
Is Bitcoin going away in a few years?
No, Bitcoin has almost zero chance of fading away. This is because the Bitcoin protocol is free, open-source code that is globally available.
What is blockchain technology?
Blockchain is the technology that runs the Bitcoin network. It is a decentralized, public ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm Bitcoin transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and many other issues.
Bitcoin mining starts with the blockchain. This is where computers "mine" for new Bitcoins in order to add to their digital assets.