What’s a Bitcoin?

Bitcoin is a cryptocurrency that is stored on a blockchain and secured by cryptography. It is designed to allow people to store, send & receive money between themselves without any intermediaries.

What is Money?

Money is an item or verifiable record that is generally accepted as payment for goods and services. It has three functions.

It is a Medium of Exchange in that it is used to intermediate in the exchange of other goods and services. This function solves the barter problem where you have chickens and want a haircut but the barber wants beans. Without a money, you’d need to trade your chickens for beans so that the barber would cut your hair. This is known as “The Barter Problem” or “Coincidence of Wants“.

It is a Unit of Account in that it is a standard measure of value in a marketplace. This function allows money to work in complex or commercial transactions that may need debt. It also facilities easy pricing and comparison within a marketplace.

It is a Store of Value in that it is stable over time. This allows it to be used with the same impact today as well as in the future. Inflation, or the creation of additional money, erodes this function in most fiat currencies.

Nearly all modern money systems are fiat money systems. Fiat money has no actual commodity value but is backed by a government. The government gives fiat money value by declaring it legal tender and requiring that it be accepted as a form of payment.

Money must have 5 properties to successfully fulfill its three functions.

Money must be fungible. Each unit must be exactly equal to every other unit. There can be no “special” units nor can there be any “dirty” units.

Money must be durable over time.

Money must be portable.

Money must be recognizable and its value easily identified.

Money must be stable in its value and not fluctuate over time.

What is a Currency?

A currency is a type of money that is in circulation and being actively used.

What is a Cryptocurrency?

A cryptocurrency is a form of digital money, used in circulation and secured by cryptography.

What is Cryptography?

Cryptography is the science of encrypting and decrypting information so that it can not be read or understood by anyone without the cryptographic keys.

What is a Cryptographic Key?

A cryptographic key is one of two or more unique alphanumeric “string” (a list of characters) used to encode and decode information that has been secured with a cryptographic algorithm.

Where did Bitcoin Come From?

Bitcoin was “designed/created/invented” by Satoshi Nakamoto in 2009. Satoshi mysteriously disappeared in mid-2010 after turning over administrative control to the code that was being used to develop the only Bitcoin client at that time. Those developers and others continue the work to improve and secure the Bitcoin protocol. Nobody knows who Satoshi Nakamoto is and this is considered a “good thing”. Bitcoin was the first of many digital currencies that effectively solved the “double-spend” problem that prevents counterfeiting digital money and eliminates the need for trusted third parties in any transaction.

Who Controls Bitcoin?

Nobody controls Bitcoin. An open group of software developers controls the privilege of adding and changing the software functionality which creates and distribute Bitcoin. Miners control the hash power which contributes to the overall security of all Bitcoins. They do this by making it extremely difficult and expensive for anyone to attempt to change the blockchain. People who run “nodes” help maintain the integrity of the system by verifying the integrity of the blockchain. Users have the ultimate control via their adoption and usage (or lack thereof) of Bitcoin. Generally speaking, a consensus is required for any change to Bitcoin.

It’s worth noting that there are multiple Bitcoin implementations by different groups of developers and none of them can force anyone to run the code they write.

What’s special about Bitcoin?

Bitcoin has a number of properties or characteristics that make it useful and valuable.

Bitcoin is digital peer to peer cryptocurrency that has global reach and usage.

Bitcoin eliminates the need for a trusted third party or middleman in a digital transaction.

Bitcoin is decentralized across thousands of computers and cannot be subverted.

Bitcoin is protected from counterfeiting and double spending by cryptography.

Bitcoin has a finite supply of 21 million coins.

Bitcoins are divisible to 8 decimal places and the smallest unit is called a satoshi.

What does a Bitcoin Look Like?

A Bitcoin is digital so the only thing you’ll really see is numbers/letters in a ledger.

These numbers/letters in a ledger are transactions.

A transaction consists of an Address, Inputs, and Outputs.

The Address is actually derived from one of two cryptographic keys.

The second cryptographic key is your secret key and is required to process any Outputs.

Inputs add “coins” to the Address and do not require a secret key – anyone can add coins to any Address.

Outputs send “coins” to another address and require your secret key.

Each time “coins” are added or removed (Input or Output) a new transaction on the Address is required and mined into the next block.

New Bitcoins are automatically created as the first transaction each new block as a reward to the winning miner. The miner also collects all of the transaction fees for all of the transactions mined into the most recent block.

Yeah, it’s complex but luckily, a wide variety of software applications makes this very simple and easy.

How Do I Get and Use Bitcoins?

There are 2 primary challenges to getting and using Bitcoins. The first challenge is purchasing Bitcoins with US Dollars or other fiat currency. The second challenge is learning to control Bitcoins without getting scammed, making a mistake with an Address or losing your secret keys.

Numerous exchanges provide the ability to purchase Bitcoins with US Dollars. You should be aware that the US Govt requires exchanges that sell Bitcoins for US Dollars comply with KYC/AML (Know Your Customer/Anti Money Laundering) regulations. Be prepared to share your Drivers License and some other relevant information so that the exchange can verify you and comply with the laws. This is typically done very easily while you are online by snapping a picture of your driver license and submitting it as part of your account creation. I recommend setting up your account on a mobile device where this step is very easy.

Spending Bitcoins is equally easy. All you need is the Address of where you want to send Bitcoins and your secret key to release them from your Address and send them onward. All of this is accomplished with a Wallet. If you keep your coins on an exchange, they will keep them in their wallet for you and allow you to spend them directly from that wallet. You can also keep your coins in your own wallet on your mobile device, desktop computer or specific hardware device. Keeping your coins in your own wallet is always safer than keeping your coins in an exchange’s wallet for you.

My next newsletter will have a lot more details about how and where to get Bitcoins and how to keep and spend them safely.

If you’re in a rush and want your’s now, please reply to this email and I can walk you through it over the phone.

My Personal Take on Bitcoins

I’m a big fan of Bitcoins. The first thing that caught my attention was the finite supply of 21,000,000 coins – I like that a lot. I started buying Bitcoins in 2012 and it was a challenge to get them at that time. Since then, the on-ramps where you can convert fiat to crypto like Coinbase have made it much easier. I have a very long-term perspective on Bitcoins and am using them to hedge my US Dollars for retirement beyond 2030. I really enjoy watching how Bitcoin matures. The price volatility doesn’t bother me and following the process and thought leaders in the Bitcoin community is very entertaining and educational.

Thinking Questions

What else do you need to know to decide if Bitcoin would be something valuable to you?

Why wouldn’t or haven’t you gotten Bitcoins prior to now?

If you did decide to get some Bitcoins, why would you do that?

Links

Why Bitcoin Works by Jimmy Song
A Guide To Bitcoin’s Technical Brilliance (For Non-Programmers)
Shelling Out | The Origin of Money by Nick Szabo

Podcasts

Unchained | Laura ShinBlockchain 101 with Andreas Antonopoulos: How Bitcoin Makes Each of Us as Powerful as a Bank

PermaLinks

Curated Bitcoin Resources by Jameson Lopp – https://lopp.net/bitcoin.html
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