What Is Bitcoin

TL;DR

Bitcoin is a software program that allows people and programs to securely transfer money over the Internet without a bank.

It does this by replacing the function of a bank with a network of computers running the Bitcoin software. These computers, known as Bitcoin miners, each maintain a global ledger of transactions that is used to validate, verify and transfer money while ensuring no fraudulent “double spend” transactions are allowed to take place.

Bitcoin allows money to flow through the Internet just as freely as data flows through the Internet today.

Bitcoin is a form of digital currency, created and held electronically. No one controls it and no one owns it; just like no one owns or controls the Internet!

Bitcoins aren’t printed, like dollars or euros – they’re minted by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

It’s the first example of a growing category of value known as cryptocurrency.

What Is Conventional Currency Based On?

Conventional currency used to be based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (i.e. the paper “cash” was simply a receipt for the actual gold on deposit). This is no longer the case unfortunately, and hasn’t been since the 1970s when the Gold Standard was abolished.

Unlike the US or Canadian Dollar, Bitcoin is based on mathematics and backed by energy (specifically the Kilowatt hour).

Around the world, people are using software programs that follow a mathematical formula to mint bitcoins. The mathematical formulas are all public and freely available for anyone to check out, review, and begin using themselves. The Bitcoin software is open source, meaning that anyone can review it to make sure that it does what it is supposed to. Tens of thousands of experts have already reviewed the Bitcoin algorithm since 2009.

What Makes Bitcoin Different From Conventional Currencies?

Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.

However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized and deflationary (i.e. rare, fixed supply, scarce…i.e. like Wayne Gretzky rookie cards). No single institution controls the Bitcoin network, just like no single institution controls the Internet. This puts some people at ease, because it means that a large bank can’t control their money.

Who Created Bitcoin?

A software developer (or collective of developers) called Satoshi Nakamoto initially proposed Bitcoin in 2008 as an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically more or less instantly, and with very low transaction fees.

The bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins will ever be minted. Each individual bitcoin can itself be sub-divided down into 100 million smaller parts called satoshis.

What Determines The Price of Bitcoin?

The price of anything is based on Desirability and Scarcity.

“Without Scarcity, it cannot be Valuable. Without Value, it will not be Desirable” — Daniel Cowx

Unlike the Canadian Dollar; which always buys you less tomorrow than it does today, a bitcoin does the opposite. This is by-design and 100% intentional.  Dollars are Inflationary; Bitcoins are Deflationary.

Consequently, as Bitcoin is deflationary (i.e. scarce and fixed supply), a bitcoin will always buy you more tomorrow than it does today. For this reason, Bitcoin is an ideal store of value!

Why Is Bitcoin So Revolutionary?

1. It’s Decentralized

The bitcoin network isn’t controlled by one central authority.

Nobody Owns Bitcoin, Just Like Nobody Owns The Internet.

Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.

2. It’s Easy To Setup

Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another painful and time consuming task, beset by bureaucracy. However, with Bitcoin, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable, using nothing more than just mathematics. Pretty cool, huh?

3. It’s Pseudo Anonymous

Like any network packet that traverses the Internet, those packets can be easily tracked by law enforcement, ISPs, and Government Agencies using existing technologies that have been readily available for nearly two decades.

We say it is pseudo-anonymous because unlike a traditional bank account, you do not need to provide ID, dates of birth, and other personally identifiable information “up front” in order to open a Bitcoin account.

Instead you simply download a wallet application. This wallet includes mathematical keys that allow you to create and then unlock an unlimited number of virtual bitcoin accounts that you, and you alone, own and control. Like a bearer bond, ownership is asserted exclusively by possession of the mathematical keys that unlock the accounts.

You can send and receive bitcoins to and from these virtual accounts all without providing any ID or any other form of personally identifiable information up-front — as there would be no one to provide it to anyways since no one owns Bitcoin or the Internet.

In this way, for 99% of us, Bitcoin accounts aren’t implicitly by default linked to our names, addresses, dates of birth, or other personally identifying information like your mother’s maiden name. This is a really good thing as this means there are no centralized databases containing said information available for cybercriminals to hack and then steal.

However…

4. All Bitcoin Transactions Are Completely Public

Bitcoin stores details of every single transaction that ever took place in the network in a huge version of a general ledger, called the Blockchain. The blockchain tells all.

If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours…….unless they are a member of law enforcement or the government.

Since law enforcement and government agencies can easily track any type of IP packet as it traverses the Internet, it becomes trivial for these agencies to de-anonymize, investigate, and prosecute bad actors that are using Bitcoin for nefarious purposes.

In this way, Bitcoin is just as safe if not safer than traditional financial networks, but without the time consuming upfront in-branch setup process. That’s a win-win for the good guys.

Honest Bitcoin participants are rewarded with instant signup and can begin using Bitcoin in a matter of seconds. While bad actors and cybercriminals still suffer the same consequences as they would if they committed a crime using a traditional payment network. In fact, if anything, due to Bitcoin’s public Blockchain, it actually makes it much much easier for law enforcement to track down nefarious transactions from bad actors than it would be with a traditional, private, bank-owned payment network that requires multiple search warrants and other cross-border jurisdictional bureaucracy.

Furthermore, since only the identities of the bad actors need to be de-anonymized, this means that there are no centralized databases of our personally identifiable information just waiting to be stolen by cybercriminals.

The bottom line:

Do not believe the media hype. They’re selling stories, not sowing knowledge.

Bitcoin transactions are in no way, shape, or form, anonymous. Period!

In fact, they are completely the opposite.

Bitcoin transactions are 100% public and this is a good thing.

This design allows us to more easily identify, investigate, and penalizing bad actors and cybercriminals while simultaneously lifting the burden of hardship off of the other 99% of us good actors.

5. Transaction Fees Are Low

Your bank may charge you a $25-50 fee for international wire transfers. Bitcoin doesn’t.

6. It’s Fast

You can send value anywhere, at any time, and it will arrive milli-seconds later, and as soon as the Bitcoin Miners processes the payment, it will be “confirmed”…thus making it mathematically guaranteed to be in your possession and only your possession.

7. It’s Non-Repudiable (i.e. No More Chargebacks)

When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.

For retailers, this means it is impossible for fraudsters to perform chargeback fraud.

Furthermore, as a responsible retailer, in the event that a customer accidentally sends you a payment by mistake, or an overpayment, you can just send it back to them, no harm, no foul. Again, this is a win-win for the good guys.

8. No One Creates New Bitcoins.

Bitcoin isn’t physically printed like traditional paper money. Instead, bitcoins are created through a digital minting process (known as bitcoin mining) that is open to the public and that anyone can join.

Bitcoins are minted automatically when they are ‘mined’ by individuals running specialized bitcoin mining hardware that runs off of electricity and mathematics. In this sense, Bitcoin is backed by energy; which is a globally recognized and globally useful unit of account that all citizens of the world understand and value.

Conclusion

Over the coming 5 – 15 years, I predict that Bitcoin will lead to significant revolutionary (not evolutionary) advancements in energy production and energy transformation as electricity-hungry Bitcoin miners, driven by profit-seeking human nature, strive to find more and more efficient means of minting new bitcoins (while simultaneously securing the network).

Since all human beings on earth will benefit from more efficient means of extracting and transforming energy/electricity from the environment, this is a win-win for all of humanity.

…And That’s Why Bitcoin is Awesome! — Daniel Cowx

 

 

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