A guide to Bitcoin basics from someone who is not trying to sell you anything.
Ok, so I’ve been getting enough questions about it, “Should I invest in bitcoin?” etc., that I thought I should do a deeper dive.
I’m doing this for my own benefit as much as yours. It’s one thing to understand something. But when you explain it to others, that’s when it really drops in.
There’s a bit too it, so I’m going to roll this out over the next week or so. Keep an eye out for it.
This is what I’ll be sharing with you:
- This week, I’ll give you a basic over-view of Bitcoin and the Block-chain so we’re all up to speed and on the same page.
- Next week, I’ll make the bullish case for Bitcoin. Not that that’s necessarily my position, but I’ll try get away from my own biases by making the argument for why Bitcoin is a great investment.
- Finally, I’ll put on my sceptic’s hat and look at why I’m still wary about Bitcoin – this is closer to my actual position. But I’ll take it to extremes for entertainment’s sake.
- BONUS – just for a bonus, I’ll tell you what I think this says about market dynamics, and where I’m personally looking at making money in this whole story.
So it’s win-win. I get to develop my thinking around Bitcoin, and you get to see it through the eyes of a savvy investor with time on his hands… and most importantly, hear about it from someone not trying to sell you one way or the other.
There’s value in that right?
And just in case you’ve been living under a rock, this is what Bitcoin has been doing. Since launching in 2009 where each coin cost next to nothing, each Bitcoin is now worth $4,258.
If you were in the game for the whole ride that’s over a 4,000% gain in a matter of years.
This chart also doesn’t really do it justice, but it can be quite volatile day to day. Very volatile in fact. Keep that in mind, but I’ll come back to it.
Ok, so let’s go back to the beginning. If you’re struggling to get your head around it, you’re in good company.Seriously, when I started researching this piece, I was surprised at how difficult it was to get a handle on it.
There’s two reasons for that.
First, punch “Bitcoin” into Google and a massive tidal wave of bullshit starts bearing down on you. It’s easy to make professional looking content these days, and every millennial and their dog is trying to suck you into their sales funnel by giving you “the Basics of Bitcoin”.
And most of this, as you’d expect, is garbage. There’s a few familiar lines that get trotted out – disruptive technology, the end of centralised money… etc., but most people seem to have very little idea about what this things actually mean in theory, let alone in practice.
It’s not too hard to get a functional understanding of the technology, but as for implications… there’s a lot of hand-wavy hype, but not a lot of solid logic on offer.
That’s my impression.
And that doesn’t mean that Bitcoin isn’t awesome. You can’t judge a product by its sale-staff. It just means that if you’ve been feeling a bit baffled, there’s good reason for it.
The other reason is that is that humans are ‘metaphor thinkers’. That is, the most common way to understand something is to compare it to something similar that we already understand.
So imagine you’ve never encountered the concept of a Zebra. But you know what a horse is. It is very easy to give you a handle on what a Zebra is because I can tell you that it’s like a horse, just with black and white stripes.
There’s a lot of metaphors being bandied about for Bitcoin and the block-chain, but it’s hard to piece them all together.
Like, Bitcoin is like money. Block-chain is like a layer on top of the internet. Block-chain is a new way of building trust into the social fabric, like government, but without the guns.
All of these things are true, but put them together and the picture you get is more confusing that clarifying.
It’s like saying, this is a widget. It’s like a toaster, but it also clears conflicts in your social calendar. And it’s able to administer social football clubs.
(There’s a metaphor about metaphors. I’m so meta.)
Ok, point being, it’s not easy to get a handle on. Much harder than I thought it was going to be.
(And I’m still not entirely certain I’ve nailed it, so feel free to help me out here.)
Ok, so let’s get into it (remembering I’m aiming to give you a functional understanding, not a perfect understanding.)
The first thing we need to do is separate ‘block-chain’ from Bitcoin.
Block-chain is the technology that powers the whole show. Bitcoin is one expression of that technology but there are thousands. There’s a lot of dreaming yet to be done.
Block-chain is a decentralised trust network. It operates peer-to-peer, computer-to-computer, not through a centralised control system. If you’re across peer-to-peer content sharing platforms like Napster or BitTorrent, then you’re off to a good start.
So imagine I buy a house of you today. The title changes hands and the change of ownership is registered with the governing titles office. That body holds all the information and vouches for its integrity.
In a peer-to-peer model however, there is no central body. Rather, there is a “distributed ledger” that lives on the computers of everyone participating in the system, all at once.
What block-chain does, and why it’s such a revolution, is that it has come up with a way to ensure that this distributed ledger only records authorised transactions. That is, I just can’t open up the ledger that lives on my computer, give myself the title to the Sydney Harbour Bridge, and see that update spread across the system.
Trust does not come from the word of a central body. It comes from the integrity of the system itself.
There’s a lot more to say about how it does that, and it’s pretty amazing, but I don’t think we need to go there to get a handle on Bitcoin. If you understand that it is distributed, not centralised, and that it is a vehicle for trust, where people know that they can depend on information held in the block-chain, then we’re off and running.
Bitcoin is a ‘crypto-currency’ a form of money that is cryptographically protected. It is powered by the block-chain. There are many “cryptos” out there these days, but Bitcoin was the first.
Unlike our digital money, which is a digital representation of hard currency, Bitcoin has no hard or real-world form. Other than that, it works like money. You can exchange it for goods and services.
There is an account – a ledger of who owns how many Bitcoins, and you guessed it, that ledger is distributed. There is no central body that keeps track of who has how many Bitcoins. Rather, that information lives on all computers at once.
There is a clearly defined limit to how many Bitcoins are in circulation. There were 16 million at inception in 2009. There will be 21 million when minting ceases in 2140.
(Contrast this with Australian dollars, where the quantity is largely a matter of government whim.)
Bitcoin transactions are not free – despite what some shiny teenager on the internet might tell you. There are Bitcoin ‘miners’ (not sure why they called them miners..?) who process transactions and update the “block”. Currently the miners are incentivised by being rewarded with new coins, but there is also effectively an auction market for transactions.
That is, miners get to decide which transactions to process first. You get to decide what transaction fee will be attached to your transaction. The miner effectively takes the highest bidder, and processes that transaction first.
Miners need these fees because maintaining the block is hard work. It requires large amounts of computing power running round the clock, and regular hardware upgrades. Computer power is increasing, but so is the complexity of the block.
So a Bitcoin transaction may cost you less in fees than a credit card transaction. However, it may also cost you more. It depends.
THERE YOU HAVE IT
Ok, that’s it. A little dry I know, but we need to get on the same page before I can share my thoughts about what makes it awesome, and what makes it dangerous.
Stay tuned. UP NEXT, I’ll get you all hyped and fluffed and thinking that maybe you should mortgage your house and throw it into Bitcoin. I’m calling that WHY BITCOIN IS AWESOME.
What did I miss?