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

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Curated Bitcoin Resources by Jameson Lopp – https://lopp.net/bitcoin.html
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BBBC #1 – How I Got Started
BBBC #2 – What’s a Blockchain?

How I Got Started in Bitcoins, Blockchains & Cryptocurrencies

How I Got Started in Bitcoins, Blockchains, and Cryptocurrencies

I got interested in Bitcoin in early 2013 when I read about it on Reddit. It was interesting and I started learning and accumulating bitcoins. As Bitcoins gained momentum and increased in price & popularity, I started asking people if they knew about Bitcoins and most just laughed. A few got annoyed.

2014 thru 2017 have been a crazy roller coaster ride for Bitcoin prices. I’ve learned a lot and formed a number of opinions and ideas about blockchains, bitcoins, and cryptocurrencies. I’m still excited about these for a number of reasons that I’ll explain.

What I’m Doing

During the Fall of 2017, Bitcoin had a huge rise in popularity, notoriety, and price. Information about Bitcoins started flooding out of every device we own and every program we saw or listened to. Hell, even TV sitcoms were talking about it.

But, when I talked with my friends and family, I discovered that they had a bunch of misconceptions and fears about Blockchains, Bitcoins & Cryptocurrencies (abbreviated BBC). Most folks were curious but very wary of bubbles and scams. They wanted to hear simple explanations, facts and helpful links where they could learn more and form their own opinions.

I decided to improve and sharpen my own learning by explaining what I know, sharing what I learn and improving my own beliefs and strategies.

I’m going to write a periodic blog post about a single topic and share it with you via newsletter.

My goal is to share useful insights into Bitcoins, Blockchains & Cryptocurrencies and what I think that means.  Possibly more importantly (Keith Cunningham taught me to love great questions), I’m going to share some powerful thinking questions about BBC with you as well.

I encourage you to do three things.

  1. DYOR – Do Your Own Research and form your own opinions. Please, use my thoughts and questions as a starting point. Learning by asking great questions.
  2. Get Involved. I recommend a very small monthly investment in one or more cryptocurrencies. Think of it as very tiny dollar cost averaging. There are a couple benefits. You’ll be more motivated to learn about BBC. You’ll almost certainly make a little profit and the downside is very small. Possibly even spend some in online transactions. Learn by doing.
  3. Share your enthusiasm, curiosity, and learnings with other people. Discuss and debate. The BBC is still in the early innings and how the game plays out will depend on how the rest of the world perceives and uses BBC. Sharing what you learn will sharpen your own opinions, beliefs, and strategies. Learn by sharing.

Why I’m doing this

I think there are four reasons I’m doing this – there may be more later as I learn more.

  1. I like learning and sharing. It forces me to sharpen what I learn and ask better questions. I’m not teaching a class but it’s well known that is the best approach to learning a topic.  I hope you learn from what I’m learning.
  2. I see tremendous opportunity and I want my friends to benefit. More on this in a later post but most of what I’ve seen, experienced and learned over the past 5 years leads me to believe that BBC is a lasting and increasingly valuable phenomenon. Sure, it has risks but I believe the long-term outlook for BBC is far more laden with opportunity than peril.
  3. I make a small amount of crypto when you click and complete a transaction from some of the links on this site. It costs a little money to run the website, email, and newsletter so making a little money here will be nice. I won’t include any links that I haven’t used my self. But, as always, DYOR!
  4. My cryptocurrencies get more valuable and so will your’s. It’s simple. Bitcoin supply is fixed at a max of 21 million coins. So, in the supply-demand curve that determines prices, increasing demand when there is a fixed supply increases the price.  If I can convince you to buy BTC, my BTC becomes a little more valuable. When you get disillusioned and dump your BTC, mine possibly becomes a little less valuable. Increasing the value and adoption of BBC is my ultimate goal.  There are numerous benefit from this happening and increasing the price of BTC helps my portfolio immensely. I want you to have a portfolio and feel this way too.

Lastly, Do Your Own Research – DYOR

Don’t believe me or trust me.  I’m not a financial advisor and you shouldn’t take any advice I give you. I hope you enjoy the explanations and questions but Do Your Own Research.

A Final Thought

I named this Boomers, Bitcoins, Blockchains & Cryptocurrencies because I’m 56 and a tail end Baby Boomer. Most of the folks I talk with are of a similar (distinguished) age. Mostly, what we hear about are Bitcoins but blockchain and other cryptocurrencies are important to understand as well.

I’ll explain and link here later but I believe that the current generation of Millenials+ believe more in data and technology than banks and credit card companies.  Bitcoins, Blockchains & Cryptocurrencies appear to be the most likely path forward for the Millenials+ to create, accumulate, store and trade their wealth.  We could keep insisting that this is a bubble but it’s their world and we’re just living in it. Wouldn’t it be wiser to watch what they’re doing and where they’re headed and then learn and adjust to where the world of capitalism and commerce is going than to sit back and loftily claim it’s doomed?

Or, said another way, these kids are going to be keeping our retirement funds solvent and growing through their future work and efforts. Doesn’t it make sense to get a detailed understanding of where they are taking capitalism and commerce? I think we ignore this at our peril.

And, PS. I’m not an expert. I’m more of an educated fanboy. I promise I will make mistakes and tell you things that are wrong.  If you find a mistake, by all means, tell me and I’ll make sure to update and correct the mistake. I’m not an expert.

– Jeff

You can subscribe to my newsletter here.

BBBC – What’s a Blockchain?

Please note that my simple descriptions won’t be perfectly accurate – there are and will be more exceptions. I’m going to focus primarily on the Bitcoin blockchain to keep things as simple and useful as possible. There are many different blockchains. Other cryptocurrencies use a blockchain with the features & benefits that support their unique value proposition. If you see something wrong, please speak up so I can get it corrected. The last thing we need is more wrong information.

A Blockchain is The Foundation

A blockchain is the foundation of a cryptocurrency like Bitcoin. A blockchain is a specialized type of database that provides a unique set of features that makes it a powerful tool in certain usecases like digital money and other applications where accurate, unchangeable historical information is very important and multiple parties all have a vested interested in the accuracy of the information.

A Blockchain is a Database

A blockchain is a relatively new type of computer database. Almost all computer programs use a database to store information. There are a wide variety of databases and each has a unique aspect that gives it superiority in different situations. A blockchain database has several unique characteristics that are listed below.

A Blockchain is a Ledger

Your bank uses a ledger to store your account information. Your bank doesn’t really keep a separate stack of cash in their vault for each depositor. Instead, they maintain a ledger of transactions where money is either added (deposited) or subtracted (withdrawal) from your account ledger. Yes, the bank has other databases too, but your deposits and withdrawals are stored on a ledger. Ledgers are specifically designed to be very fast to add information and completely comprehensive containing all transactions related to an account. Each one starts with a zero balance and contains nothing more than transactions adding to or subtracting from that original zero balance. A ledger does not allow for records to be changed once they are entered – only a reversing ledger entry is allowed to correct a mistake. A ledger may account for one or many different accounts at the same time.

A Blockchain is Distributed

An exact copy of the blockchain exists on many, many internet connected computers. Since the ledger exists on many different computers and the ledger changes frequently with additional transactions, all of the computers must agree that their copy of the ledger is the true and most recently updated ledger. This sounds like a big problem but it is actually very beneficial to a blockchain. The distributed nature of the blockchain forces consensus among all of the computers that contain a copy of the ledger. There can only be one truth and it must be agreed upon by all the computers participating in the distributed ledger. Technically speaking, it is possible to have a blockchain run on a single computer but doing so eliminates the ability to completely validate and secure it from any changes.

A Blockchain is Immutable

Once something is written to a blockchain, it can not be changed. Accounting ledgers are similar in that transactions that have already been recorded may not be changed – an “offsetting” transaction is required rather than editing or deleting the original transaction. This immutability provides a unique historical perspective on the transactions contained in the blockchain that is largely unavailable with any other type of database. Immutability is not perfect and not guaranteed but is implemented by using a proof of work algorithm that makes it incredibly expensive to make any historical changes – typically far more than the historical change might be worth.

A Blockchain is Transparent

Blockchains can be viewed and read in their entirety by anyone with permission and/or access. While you can easily see the records in the blockchain, you may not be able to understand the origination, destination or purpose of them. Some blockchains are permissioned – meaning they are not publicly visible and you must have permission to view them.

A Blockchain is Secure

Blockchains are secured by miners. Miners compete or work collaboratively to add new records to the blockchain. The miners must all agree that a single blockchain is the single truth. Miners are either paid or rewarded for their work securing the blockchain. Miners protect the blockchain in several ways – preventing double spending, preventing changes to the historical ledger, preventing address blocking (fungibility) and minting new coins. There are a variety of schemes to secure a blockchain and Bitcoin’s blockchain is secured by Proof of Work which rewards miner’s efforts to secure the transactions and places a heavy cost in front of anyone who desires to change historical transactions and violate the security of the blockchain. Proof of Stake, Federated Consensus, Proof of Elapsed Time and Proof of Storage are examples of other security schemes used to secure different blockchains.

The Bitcoin Blockchain Summary

  • Bitcoin, the dominant cryptocurrency, is stored on a single Bitcoin blockchain.
  • All Bitcoins are stored on the bitcoin blockchain = Database.
  • Bitcoins consist of an Address on the blockchain with transactions = Ledger
  • The Bitcoin blockchain is distributed all over the world and run by Miners and Nodes = Distributed.
  • The Bitcoin blockchain cannot be changed to prevent double-spending = Immutable
  • You can see the Bitcoin blockchain at https://blockchain.info = Transparent
  • Bitcoin Addresses can be seen by anyone but can’t be changed by anyone without the proper key = Secure

A short video explaining blockchains in 2 minutes – https://youtu.be/r43LhSUUGTQ

Summary

A blockchain is a powerful technical tool in certain use cases like digital money. There are new uses for blockchains being devised or discovered every day. Maybe the best summary of the power of a blockchain is a publicly viewable database of historical transactions that is verified to be true and secured to prevent malicious actors and only allow the owners of each data record to control that data. You’ve already heard the words “Accountable” and “Transparent” used by the younger generations. These traits are highly valuable to the younger generations as a way to control and improve society. Blockchains provide and promote these traits, so it’s not a surprise they are one of the driving forces of technical and social innovation.

My Personal Take on Blockchains

I like blockchains as a technical tool for storing and retrieving information. But, I’m also skeptical that they can solve every problem out there as I frequently see and hear in the news media. I see blockchains as very useful for managing accurate historical information among a diverse group of interested parties – and that’s about it. Sure, it can apply to almost every situation that needs a database, but the cost of running a blockchain as a database is higher than other types of databases so the benefits of using a blockchain need to be relatively high and unique. They’re almost the only viable option for digital currencies where they prevent double spending. But, just because it has a blockchain doesn’t mean that it actually solves a problem.

Links

https://lifehacker.com/what-is-blockchain-1822094625

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Curated Bitcoin Resources by Jameson Lopphttps://lopp.net/bitcoin.html
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BBBC #1 – How I Got Started