What is BitCoin

 

Bitcoin is a digital currency that is decentralized,  with a limited total supply. No single person or entity controls it. It was the first of the cryptocurrencies and has grown in price from a fraction of a cent to at this moment of writing over $5,000 USD for a single bitcoin over it’s 8 years of existence.

What makes something valuable

First of all, it is important to mention that the value of anything is just what someone else is willing to pay for it.  That’s all it is.  Many things do not have ‘intrinsic value’ (whatever that may mean).  For instance, Gold, which has been a store of value and traded for thousands of years, is really just a shiny metal.  It is true that in present times it does have a couple of use cases in the modern era but the vast majority of its value comes from peoples perception of it as a store of value.  Value is built up over time as more people believe that something can either be traded to someone at a later date for the same amount or more.  The more people have this belief the more demand for an item and so the higher the price.

Some people have compared Bitcoin to the “Tulip Mania”  that occurred in the Dutch republic in the 17th Century.  In this case people were buying tulip bulbs like mad as they were expecting the price to keep going up.  Of course in the end the prices eventually crashed completely due to it’s nature as it was pure speculation and there was no “intrinsic value”.  Although there may be some similarities as with any asset rising in price substantially, the difference is that Bitcoin does have many very unique features which it possesses and these are only possible due to the creation of the internet and the technologies behind that.

These features are :

  • It is decentralized so no single entity can manipulate it or change the rules at any given moment when it suits them.  The network secures the network through consensus and incentives in place to keep the various nodes (minors) honest.
  • There is a limited supply is allready set which makes deflationary in nature.  Unlike governments whom can print money at will which leads to inflation (lowering the actual worth of any dollars the citizens may hold).
  • It provides a very fast method of exchanging large amounts of value anywhere in the world for a very small transaction fee.
  • It has a certain level of privacy/anonymity
  • You are in complete control of your own Bitcoin.  Without the Private Key (very long password), no-one else may gain access to your funds and there is no central authority that can be ‘tricked’ into giving this out.  You are in effect your own bank.

Bitcoin’s most important feature is that it is decentralized. There is not a single person or institution that controls the network.  Most people whom are into Bitcoin really like this fact, though there are also many whom are used to having someone to fix things up when they make mistakes may find themselves in trouble.

A software developer under the pseudonym of Satoshi Nakamoto first proposed bitcoin.  The idea was to produce a currency independent of any central authority, transferable electronically, with very low transaction fees and fast transfer times.

Bitcoin is created (mined) digitally, by a community of people that anyone can join, using computing power in a distributed network and these are the people whom process transactions and secure the network.  At this stage however you would not have much luck trying this on your laptop and would need to invest in some high end computer hardware to see any sort of profit.

The bitcoin code – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created or ‘mined’. However, these coins can be divided into the smaller fractions down many decimal places.

The software is also open source, meaning that anyone with the programming knowledge can look at the code and make sure that it does what it is meant to, and that there are no hidden malicious code or security issues.  At this point there have likely been many thousands of the worlds best programmers looking through the code and trying to find exploits to profit from, and no one has.

The bitcoin network isn’t controlled by any central authority.  There is no ‘Bitcoin’ head office where they run the servers from.  Every machine that mines bitcoin and processes transactions makes up a part of the network, and they all work together. That means that one central authority can’t change monetary policy and cause a crash or hyper inflation – or decide to simply take bitcoins away from people.  And if some part of the network goes offline for some reason, the money keeps on flowing.

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

The big deal

The big deal is that this is a complete evolution in ‘money’, or wealth storage for humanity.  Without going into details (which could take several books), the problem of a single authority (ie : central banks) having complete power of the unit of exchange that everyone uses in entire countries, is a big problem, and the inefficiencies bad incentives that this causes is truly astounding.  The value of your money disappearing every year through inflation is not a good thing.  It makes people spend money more carelessly, or be in more of a rush to look for places where to invest their money in order to save it.  These facts together cause poorer quality projects to be funded and this is bad for humanity long term in terms of opportunity costs.

In conclusion, Bitcoin is decentralized and has a known, limited supply that is easy to hold, move and send to other parties.  These features have never existed in human history.

 

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