What is Bitcoin? Bitcoin Explained Simply for Dummies
Bitcoin wallets, Bitcoin trading, and much more. Today, we’re going to start from the beginning and explain what Bitcoin is, which is currently the third most searched term on Google. Before we go into Bitcoin, let’s speak about money for a minute.
What precisely is money?
Money is, at its foundation, a representation of value. If I do some labor for you, you compensate me financially for the value I provided. I’ll be able to use that money towards getting something useful from someone else in the future. Value has taken numerous shapes throughout history, and people have utilized a variety of materials to represent money. As a means of exchange, salt, wheat, shells, and of course gold have all been utilized.
However, in order to represent value, people must believe that it is valuable and that it will remain valuable for long enough for them to redeem it in the future. Until about a century ago, we always put our faith in anything to represent money. Allow me to explain. People discovered that carrying gold bars or other types of money around the world was too inconvenient over time, thus paper money was produced.
Not only were these pieces of paper easier to carry, but they also meant you could spend a dollar on a cup of coffee instead of cutting your gold bar into a thousand pieces. And if you wanted your gold back, all you had to do was return $1000 in bills to the bank and have them exchanged for the actual form of money, in this example a gold bar, whenever you needed. As a result, paper began to be used as money as a practical and convenient tool.
This relationship between the paper receipt and the gold it represents was broken as time passed and due to macroeconomic changes. Now, it’s difficult to explain the path that took us away from the gold standard but suffice it to say that governments persuaded their citizens that they would be responsible for the value of their paper money. “Let’s simply forget about gold and trade paper instead,” we all said. As a result, people continued to trade with receipts supported only by the government’s guarantee.
Why did that keep working?
Because of faith, to be precise.
People trusted the government, therefore fiat money was created, despite the fact that there was no actual commodity supporting paper money. Fiat is a Latin word that roughly translates to “by decree.” That is to say, the dollar, the euro, or any other currency has value because the government has mandated it. It’s what’s known as “legal tender,” which refers to coins or banknotes that must be accepted as payment if provided.
The value of today’s money is derived from the legal status bestowed upon it by a central authority, in this case, the government. As a result, the trust model has shifted from believing in something to believing in someone.
Fiat money has two major drawbacks:
- It’s centralized for a start:
It is controlled and issued by a central authority.
- It is unrestricted in terms of quantity:
The government or central bank can print as much as they want to inflate the money supply on the market whenever they want.
The problem with printing money is that when the market is flooded with more money, the value of each dollar decreases, making your own money less valuable. When you see prices rise over time, it doesn’t necessarily mean that prices are growing as much as your money’s purchasing power is declining……
You’ll require more money to buy something that used to be “cheaper.” The transition to digital money was quite straightforward once fiat money had been established. Why not make money primarily digital and allow that authority to keep track of who owns what? Credit cards, wire transfers, Paypal, and other kinds of digital money are the most common methods of payment nowadays. The amount of physical money within the world is nearly negligible and is getting smaller with annually that passes.
So, how does that work if money is now digital?
If I even have a file that represents a dollar, what’s to prevent me from copying it 1,000,000 times and having 1,000,000 dollars?
This is referred to as the “double-spend problem.” Banks currently utilize a “centralized” method, in which they retain a ledger on their computer that keeps track of who owns what. Everyone has a separate account, and this ledger keeps track of them all. Because we all have faith in the bank, and the bank has faith in their computer, and so the solution is centralized on this ledger during this computer.
You may not be aware, but there have been numerous attempts to develop alternate kinds of digital currencies, but none have been effective in resolving the double-spend problem without the use of a central authority. When someone gains control of the money supply, they gain great power, which leads to three significant issues: Corruption is the first concern; power corrupts, and absolute power corrupts totally. When banks are given the authority to generate money or value, they effectively control the movement of value throughout the world, giving them near-unlimited power.
The Wells Fargo scandal, in which staff surreptitiously created millions of unlawful bank and credit card accounts in order to increase the bank’s revenue stream without their customers knowing for years, is a minor example of how power corrupts. Mismanagement is the second concern with a centralized system. There may be money mismanagement if the central authority’s interests aren’t matched with the individuals it governs. For instance, printing a large amount of money to prevent a bank or institution from collapsing, as happened in 2008.
The issue with printing too much money is that it leads to inflation, eroding the value of citizens’ money. Venezuela is an extreme example of this, where the government has created so much money and the value of it has plummeted to the point where citizens are no longer counting money but instead weighing it. Control is the final point to consider. You’re essentially handing over complete management of your finances to the government or a bank. The government has the authority to freeze your account and deny you access to your funds at any time.
Even if you solely use cash, the government can revoke your currency’s legal existence, as happened in India a few years ago. Until 2009, this was the situation. Creating a viable alternative to the current monetary system appeared to be hopeless. However, everything changed after that. Published a document online in October 2008 by Satoshi Nakamoto. The document, also known as a whitepaper, proposed a method for developing a system for Bitcoin, decentralized money.
This system claimed to create digital money that eliminates the need for a central authority and solves the problem of double-spending. Bitcoin is, at its foundation, a decentralized ledger with no central authority, but what does this befuddling phrase even mean? So, let’s make a comparison between Bitcoin and a bank. Because the majority of money is now digital, the bank maintains its own record of balances and transactions.
The bank’s ledger, on the other hand, is not transparent and is kept on the main computer. You can’t look into the bank’s ledger, and it’s completely in the bank’s control. Bitcoin, on the other hand, is a publicly accessible ledger. I can look into the ledger at any time and view all of the transactions and balances that are taking place. Who owns these amounts and who is behind each transaction is the only thing you can’t figure out.
Even if everything is open, visible, and traceable, you still have no way of knowing who is sending what to whom. Let’s have a look at an example.
Certain rows from Bitcoin’s ledger are visible on your screen. We can observe that in May of 2010, a specific Bitcoin address delivered 10,000 Bitcoins to another Bitcoin address. This transaction was the first time Bitcoin was used to make a purchase, and it was used to buy two pizzas by a man named Laszlo. In 2010, Laszlo put up a post on Reddit, asking for someone to sell him two pizzas for 10,000 Bitcoins.
Someone did, and the value of these two pizzas has already risen too far over $100 million. Bitcoin is also decentralized; the ledger is not held by a single machine. Every computer that participates in the Bitcoin system also keeps a copy of the ledger, which is referred to as the Blockchain. So, if you want to take down the system or hack the ledger, you’ll have to take down hundreds of computers that are continually updating and preserving a copy. Bitcoin, like most money today, is a digital currency. This means that there is nothing physical in Bitcoin that you can touch.
There are no physical coins; instead, rows of transactions and balances are displayed. When you say you “own” Bitcoin, it means you have the authority to access a certain Bitcoin address record in the ledger and transmit payments from that address to another. So, what does it all mean? What’s the big deal about Bitcoin? For the first time since the invention of digital money, we now have a viable alternative to the current system. Bitcoin is a form of money that is uncontrollable by any government or bank. Consider how centralized the flow of information was before the Internet.
Basically, if you needed information, you could acquire it from a few large publications such as the New York Times, Washington Post, and others. Information is now decentralized thanks to the Internet, and you may converse and consume knowledge from all over the world with the press of a button. Bitcoin is the Internet of Money, and it provides a decentralized financial solution. Over the current system, Bitcoin provides a number of advantages. For starters, it allows your entire financial control. You alone can access your funds With Bitcoin.
No government or bank has the authority to close your account or seize your assets. Bitcoin also eliminates a lot of the intermediaries in the money transfer process. As a result, Bitcoin is often less expensive to use than standard wire transfers or money orders. Also, unlike fiat currencies, Bitcoin was designed to be digital naturally, this suggests you’ll add additional layers of programming on top of it and switch it into “smart money”. Finally, Bitcoin exposes digital commerce to 2.5 billion people around the world who don’t have access to the present banking industry.
Because of where they come from and the reality they were born into, these people are unbanked or underbanked. Today, they may start trading with Bitcoin with just a phone and a click of a button, and no permission is required. Several merchants, both online and offline, now accept Bitcoin. If you choose, you can use Bitcoin to book a flight or a hotel. There are also Bitcoin debit cards that allow you to use your Bitcoin balance to pay at practically any store. However, there is still a long way to go before the bulk of the public accepts it.