So, what the heck is this Bitcon everyone is talking about?
First up, it’s Bitcoin, not Bitcon. If there is anything con related going on, it’s connected to fiat currency. I say that because I have heard too many people I know pronounce Bitcoin without the ‘i’ in it.
Hmmm…. Maybe that’s something of an internal program they are running? I don’t see how Bitcoin relates to me, so I’ll the the ‘i’ out of it. Anyhow, I digress.
If you are like most people, you’re probably confused by the advent of cryptocurrencies. They seem to have popped up out of nowhere, and there’s still so much speculation around who invented Bitcoin.
So you’re possibly a little apprehensive, and we understand that.
At the time of writing, only four percent of people on this planet actually own some form of cryptocurrency, and most cryptos have only been around a lot less than a decade.
Isn’t Bitcoin all Too Complicated Though?
Before we get into the ‘who invented Bitcoin’ side of things, let’s take a little look at some elements of the picture that you’ll need to know about.
Cryptocurrencies are not as complicated as you may think.
In fact, you can learn the basics of cryptocurrencies in just a few hours and that will put you ahead of 96% of people on this planet. And possibly in a position to really profit from this new asset class before others even catch on (not financial advice).
In this article, we’re going to go over the basics of cryptocurrencies. We’ll show you a bird’s eye view of what they are and how they work.
It is important to learn these basics because we believe before you become involved in, or invest in anything. You should understand how it works.
With that being said, let’s begin.
Bitcoin in Relation to Other Assets
Bitcoin is considered by many to be a digital asset. While on the other hand other see it as being specifically designed to work predominantly as a medium of exchange.
Through these perceptions it can be used to store value, and pay for goods and services in a secure way.
Through the application of cryptography along with computer coding, cryptocurrencies like Bitcoin use complex mathematical methodologies to send secure transactions over an open and transparent ledger called the blockchain.
Not all blockchains are open and transparent. Some are considered to be permissioned and closed networks.
More recently we have seen the rise of ‘digital assets’, which is where you will start to see the mechanics behind what is Bitcoin. A door to a very different world is being opened up to us.
More than just Bitcoin
There are other types of cryptos out there than Bitcoin. They are being referred to as Altcoins. Mainly in that they are considered to be an alternative to Bitcoin.
Many of these are built with utility in mind. They are made to function as a means to typically ‘vote’ within specific protocols on specific things.
These types of cryptos are built with the ability for you to delegate your ‘stake’.
Your stake is the number of tokens you hold. When delegated, these allow for representatives that have the weight of your stake allocated to them to act within the protocol on your, and others behalf.
Staking doesn’t mean you are sending them your tokens. However, in the less secure of protocols there may be a need for you to do this. I personally avoid those protocols like the plague. Not your keys, not your coins.
You’re simply saying that you allocate the ‘power’ you have within your tokens to them, while retaining ownership of your tokens as your property.
Utility tokens issued for these purposes are a little more complicated than simply payment oriented.
Why are people rushing in to these?
The speculative value of these is a big part of the attraction for many to hold them. Not so much the actual utility at this stage.
But, the developers and communities around these protocols are confident that this will change and utility will increase.
Why Bother if they aren’t Currently Used?
At this stage the name of the game is largely speculation. What these assets all have in common as the main reason people hold them is that they can trade them.
They have value and when, or more so ‘if’ they do go up in value, they can be liquidated. They can also crash in value quite quickly too.
The term ‘liquidate’ simply means you can convert your assets into currency. You might call it ‘money’, but that’s a conversation for another time.
Individuals and businesses own assets primarily because they provide some type of benefit or generate an income stream. Crypto at this stage is no different.
Recently, we have seen the ICO boom, and heard the stories of Moon Boys making millions to buy Lambos.
But is that all that there really is to this? In my opinion, no. It goes much much deeper than the mad gains (and subsequent mad taxes depending on where you live).
You’re probably more comfortable and familiar with physical instruments as assets like many other people, and don’t really feel quite so comfortable about digital assets.
And that’s probably going to still be true even once you really understand what is Bitcoin. That’s ok. You’re here, you’re learning, and I can guarantee that you’ll never learn less.
Physical instruments, or assets, are tangible, things that you can touch. If you own gold, artwork, real estate, land, machinery, or buildings then you own physical assets.
Financial instruments, or assets, are typically nonphysical (you don’t count investment properties here, they are really a physical asset).
They get their value typically from contractual claims. If you own bank deposits, bonds, or stocks then you own financial assets.
And then there are intellectual instruments, or assets. Like financial assets, intellectual assets are by nature nonphysical. They can be connected to a physical representation or subsequent manifestation of the intellect behind them.
Intellectual assets are things like patents, trademarks, and copyrights. These are connected to the real world through what they represent as being Intellectual Property (IP).
So now that you know what these more established and widely accepted assets are, let’s turn to this newer class of assets called a digital asset.
Cryptocurrencies are digital assets. Like other assets, you own your digital assets and you can convert them to cash or generate income from them.
In other words, you can profit from your digital assets.
Here’s the main difference between traditional assets and digital assets. You store digital assets typically at the most fundamental level in a binary format. That’s just a fancy way of saying they’re computer files.
In fact, you probably already own some digital assets.
If you store music, videos, or photographic files on your personal device or computer, then you own digital assets.
But there’s more to it than that. Some digital assets are financial in nature too; think digital assets you own the copyrights for.
Cryptocurrencies are a newer asset class. They haven’t been around for centuries like precious metals and other traditional assets.
The oldest and most popular of the cryptocurrency is Bitcoin.
Who invented Bitcoin?
The original Bitcoin code was written in 2009 by a person (or people – no one really knows for sure) under the pseudonym of Satoshi Nakamoto.
Satoshi remains anonymous and is a bit of a mystery. We still don’t know if Satoshi is an individual, or a collective.
For the purposes of this article, that really doesn’t matter, but we do dive deeper into that in other articles on this site. What you need to know is that Satoshi launched the Bitcoin blockchain in 2009, that’s just under a decade ago.
Given the recency of Bitcoin, it’s no surprise that people haven’t widely embraced it as financial assets just yet. However, I find that curious when you consider that many people will buy loyalty points and miles in certain programs.
On that point, if you’ve ever used loyalty points, gift cards, mobile minutes, or airline miles then you have used a form of a digital asset.
The exciting thing is that cryptocurrencies are increasingly becoming recognised as being in the same category as, and similar to traditional financial assets, stocks, and bonds.
I can’t wait to see what tomorrow’s world will bring.
How is Bitcoin used?
Now that we have had a bit of a look at the detail behind what is Bitcoin, let’s move onto the next part of the explanation of this innovation.
Let’s take a closer look at the medium of exchange function of Bitcoin.
As a digital asset originally designed to work as a medium of exchange, Bitcoin enables peer to peer (person to person) payments. These payments require no intermediary, that means there is no need for a bank to sit in the middle of the two people transacting.
A medium of exchange is some form of an ‘instrument’ that is used to facilitate the sale, purchase, or trade of goods and services between parties.
Brilliant presentation from @NickSzabo4 on social scalability— Stephen Cole (@sthenc) March 2, 2018
“Every time a money becomes more a medium of censorship, it becomes less a medium of exchange.”#BlockstackBerlin pic.twitter.com/JaOTNK1Xxm
The instrument has most recently been a commodity like gold or a currency like the U.S. Dollar.
Historically, people have used salt, cowry shells, and even glass beads as mediums of exchange.
As you can see, there’s no universally accepted standard for what makes something a medium of exchange, but they do share some common traits.
They must be valuable, durable, portable, divisible into smaller units, recognisable, and resistant to counterfeiting to name a few.
Now, let’s go over each of those. We’ll use a U.S. Dollar as an example.
Let’s take the first trait, valuable. Value is one of those essentially contested concepts. That just means people have different views of what makes something valuable. What has value to you may not have value to me, and vice versa.
What gives the dollar value?
The dollar is valuable because people believe it is valuable, this is based upon confidence. I think we can all agree on that.
The next trait is durability. Compared to fish or fruit that has a limited shelf life, currency printed on paper or plastic, and coins minted from metals are much more durable. It isn’t going to rot or deteriorate at anywhere near the same rate.
Modern notes and coins are small and lightweight. You can carry them around in your pocket and that makes them portable.
You can also divide notes and coins into smaller units, or even combine them into bigger units. For example, we add together pennies, dimes, quarters, and half dollars to make a dollar. So yes, they are divisible.
They are also easily recognisable. You definitely know one when you see it.
What gives Bitcoin value?
Bitcoin is the oldest and most popular crypto out there. Some would argue that it has the Lindy Effect on its side.
Like the Dollar, Bitcoin has value because people give it value. This is largely a result of how bitcoin is created (mined) and how the blockchain works.
We know that millions of people around the world give Bitcoin value, and that number is growing every day.
In 2011 there were just 406 Bitcoin wallets in the entire world.
Today, in 2018, there are nearly 30 million and more than 100,000 retailers across the world who accept Bitcoin, including Microsoft, Overstock, and Tesla. From an adoption perspective, that’s very interesting.
Bitcoin is also accessible. You can buy and sell them on online exchanges.
Bitcoin isn’t physical like a note or a metal coin, so you can’t carry it like cash, but that doesn’t mean it’s not portable.
Remember, Bitcoin is digital so you can store access to it on your computer or smartphone and send it anywhere in the world online.
You can also store access to your Bitcoin on a portable device, like a flash drive or a hardware wallet, and you can carry it around in your pocket.
You can even memorise your access code, called a seed phrase, and go anywhere without having anything physical.
Is Bitcoin divisible?
Sure. Bitcoin is so precise that it can be divided into incredibly small units called “Satoshis.”
A Satoshi is one hundred-millionth of a single bitcoin, that’s a decimal point followed by eight places which looks like this; 0.00000001. That’s one Satoshi.
It takes one hundred million Satoshi’s to make a full bitcoin!
Could a Satoshi become divisible too if needed?
It’s completely possible that a Satoshi is broken down into further smaller fractions if the economic need arises, and consensus on the network is achieved to bring this about.
Are Bitcoins recognisable?
You may recognise the symbol for Bitcoin by now, which is popularly represented as ‘₿’.
To be more accurate in answering this question, that’s not really the way you identify specific cryptocurrencies.
As much as they may have a symbol that you recognise, you need to make sure you are using the correct blockchain.
For example, Bitcoin Cash was forked from Bitcoin and now operates on it’s own blockchain completely separate from Bitcoin.
A fork is like a branch from a tree. Some branches can fall off the tree and not have any form of connection to their original source over time.
Knowing which blockchain you are on is key. Using a service like BlockChain.com you can check the address of the different wallets on the explorer.
The prefix of a Bitcoin address is what will paint the clearest picture. Bitcoin addresses normally start with a “1” or a “3”.
The prefix of a Bitcoin Cash address also helps with distinguishing where you are at. A Bitcoin Cash address normally starts with a “q” or a “p”.
Personally, I’m not a Bitcoin Cash (BCH) fan.
The move made by Roger Ver in the early days to keep using Bitcoin.com and then sell Bitcoin Cash to people who may have thought they were buying Bitcoin (branded as Bitcoin Core to add to the perceived confusion) did leave a bit of a bad taste in my mouth.
To be clear, Bitcoin (BTC) is not Bitcoin Cash (BCH). Bitcoin Cash is not Bitcoin. You can’t send BTC to a BCH address, and vice versa. They have different supply ratios, and different inherent values.
It’s like saying that cars and trains are the same thing. They run on different networks. It’s like saying wheels make them the same thing. They don’t.
The verifiable and recognisable characteristics of Bitcoin makes it a much safer asset in my opinion than others.
You don’t need special equipment to assay it like you do with precious metals. The fingerprint is clear and immutable in the code.
Each Bitcoin transaction has its own unique hash (think of that as a transaction record) that you can see on the blockchain.
Transactions confirmed on the network are unable to be removed from the blockchain and are secure.
What is the purpose of cryptography?
The goal of cryptography, generally speaking, is to prevent unwanted third parties from reading private messages.
Cryptography isn’t new, it’s been around for thousands of years in one form or another. For instance, the ancient Greeks used scytale cipher to encrypt military secrets.
During World War II the United States used the Navajo language to protect sensitive information.
But today, technology has made encryption even stronger. Examples include; computer passwords and credit cards with digital chips.
Cryptocurrencies use an even more sophisticated encryption method called a secure hash algorithm (SHA).
An algorithm is a mathematical formula used to solve a problem. These formulas can be very long and complex, making them hard for computers to decipher, and virtually impossible for humans.
These are very long and very complex, and that makes them extremely difficult to crack. In the case of Bitcoin, the algorithm provides mathematical proof of a cryptocurrency transaction.
This prevents counterfeiting and fraud.
Now that we have gone over the basics of cryptocurrencies and what Bitcoin is, you now know that they are digital assets designed to work as a medium of exchange.
They also use cryptography and algorithms to send secure transactions over an online ledger called the blockchain.
The blockchain is the underlying technology used by cryptocurrencies today. To truly understand the power of cryptocurrencies, you need to know what the blockchain is and what it is capable of.