Bitcoin, Explained

Let’s start at the ground floor. This article is for anyone who’s still stumped on “what is Bitcoin?”

Here is a non-technical explanation of Bitcoin, where you’ll learn how it works, and why it’s going to change the world.

Background

Let’s forgo technical terms and take a side door to explain what Bitcoin is, shall we?

Imagine that I physically possess an orange. It’s my only orange, and I give it to you; you have an orange and all its tasty citrus goodness. Previously, I had an orange and now you have an orange. Because I gave you something you didn’t have before as a gift, the gesture was valuable to you for sentimental reasons.

Alternatively, you could trade me something else I need in exchange for my orange, like a pencil. In that case, the orange has tangible value.

We didn’t need a third party to make this transfer. We did it on a park bench on a sunny day.

Now let’s apply this logic to the internet; if I had a digital orange and I sent it to you over Skype, we’d both have a copy of the same orange.

If there are infinite copies of the same digital orange, that digital orange is less valuable. It goes from “Wow! Thank you so much!” to “Oh, isn’t that nice.”

“Nice.”

It’s like the difference between being marriage material — and just another friend of the family. Scarcity pulls anything out of the friend zone and into “To the Moon!” territory.

A physical orange has value because it takes time to grow another one. Only so many oranges are harvested each season, so their number is variably finite. Sometimes there are very few oranges because of a drought — which makes the value of oranges go up.

So we could trade physical oranges for other goods or services of value because a physical orange has value.

Since digital oranges can be copied, pasted, and duplicated at the click of a mouse, they’re nice, but of little or no value.

So, how do we ensure the digital orange that was once mine and given to you, is yours — and only yours? How can we give it value?

Keeping Track

In order to ensure that you’re the only one in possession of the unique digital orange I gave to you, it would make sense to use a ledger.

If I had this ledger in my house and I was in charge of it, I could just change it. I could sneak extra digital oranges into my orange box. I could become a digital orange baron! It would give me an unfair advantage. I’d be the Rothschild of oranges.

If we kept a digital orange ledger in a public place, we could both access and verify but it could get lost, damaged, or stolen. Or hell, the ledger people could charge us just to see it.

If we both kept a copy of our digital orange ledger and I changed the value of my digital oranges on my own ledger, we’d have a conflict. Then you’d just change the number of digital oranges you have on your own ledger. The ledgers and the digital oranges wouldn’t have any value.

One way we could solve this problem is if we gave a copy of our digital orange ledger to everyone. Any transfer of digital oranges made between anyone on the planet could be recorded on one giant ledger. Everyone exchanging digital oranges could see transactions for everyone else exchanging digital oranges in real time.

If everyone in the giant sea of digital oranges could verify who has what digital orange in real-time, we would have trust for these digital oranges and put value on them — just like a physical orange.

Our “peer-to-peer” digital orange ledger would give our digital oranges value because it’s a system we can all trust and agree on.

And since we can all edit this public ledger, we still don’t need a middleman to make a transfer. If a single person’s copy of the ledger says they have all the oranges, the majority of ledger copies overrule such an anomaly. Trust is built into the system.

By now, you probably understand that my digital orange was a Bitcoin. The ledger I referred to was the blockchain that helps everyone exchanging Bitcoin keep track in an honest, decentralized way — without the aid of a middleman (and their fees).

What is Money?

Before we wrap this up, let’s take a timeout to consider what money is. And more specifically, what a bank note or bank-issued coin is.

The question of “what is money?” has been coming up more and more as Bitcoin and other cryptocurrencies continue to percolate in the minds of the mainstream population.

And it’s hard to get a straight answer. That’s because what money is has changed over time.

Dictionary.com defines money as “a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively”.

But what are bank notes? Today, they’re just paper whose value can rise and fall based on external factors and how many are in circulation.

Bank notes have value because of trust. We choose to use bank notes. We place a value on them in our minds. If we valued physical oranges more, we’d buy and sell goods or services with oranges.

So, money has value because it’s easy to exchange and we trust it. It’s the status quo.

Are Banknotes Fair?

Where is the ledger for this money? Can we see it? Is it so complicated we have to just trust the issuers of banknotes that they will maintain a fair system?

That’s interesting. I mean, humans disagree on faith-based arguments all the time. Take Christians and Atheists, for example. Both believe in a process without ever physically seeing a God or finding the missing link, or seeing an animal become an entirely different species since recorded science began.

People protest and kill each other over faith.

So why would anyone trust a banker? A middleman? With OUR LIVELIHOODS? That’s a hell of a lot of control we’re handing over, if you ask me.

It’s more punitive than the Atheism vs Christianity debate, wouldn’t you agree?

Is there a chance that some people get to edit the world’s existing ledger and create their own money for personal gain — an unfair advantage? Is that what globalization is all about? Is that what a bank note really is?

The History of Money

Money used to be tied to gold. But gold was cumbersome to carry around, so people traded in their gold for a note that said “I have x amount of gold in a vault”. If they exchanged that note for a product or service, the next holder of the note could turn it in for the gold stored in said vault. And rarely people exchanged the notes for gold. Gold was a pain in the ass.

Money had value because it was tied to a finite resource. And that resource could be turned into things, like jewellery. This made money “deflationary”.

After awhile, the people with the vaults started to make IOUs for gold and charged fees for storing it over time. The value of money became perceived value, and the proliferation of these IOUs lessened the value of money through inflation. Sneaky, sneaky, sir.

In essence, money started as deflationary; it had a finite quantity. When it became IOUs, it became a debt. So, people actually started trading debt instead of a finite resource.

We kept using bank notes — money — the same way, but how its value is determined changed drastically.

Related: Bitcoin is a Deflationary Currency: What does it Mean

This video explains this little history lesson in much more detail, in a way that even a child could comprehend. I strongly endorse giving it a watch.

In Summary

The media we consume contributes to how much we trust one thing and don’t trust another. If you had a magical ticket to an unfair advantage like printing money, wouldn’t you try to keep people with your program? Heads have rolled to make the status quo what it is today.

Something to keep in mind the next time you read about another Bitcoin scandal: Dig deeper.

And I’d love to hear from you in the comments; what do you think? Too “tin foil hat” –or did I hit the nail on the fat banker’s head?