Okay, we know your family probably thinks they know it all. Let’s face it, everyone’s family does. While we can all agree on this, that doesn’t mean you won’t ever be put on the hot seat and forced to do some explaining. After all, the phrase “what is bitcoin” is still one of the most searched for terms on Google – so people are still asking.
You might know at a high level that bitcoin is a currency that leverages the mathematics of cryptography or a series of digital signatures. This might still not make sense and may even cause your family to wonder just what you have been devoting so much time to over the last little while. Don’t worry, we have you covered. We put together the ultimate explanation of bitcoin for your family.
But before we get into the definition of bitcoin, we have to start with a little bit of context. Like why do we need bitcoin in the first place?
It’s All About The Money
Let’s start at the beginning. Since almost the beginning of time, people have done work in exchange for something of value. While this at one time might have been the direct exchange of goods, say a loaf of bread I worked hard to bake for a dozen eggs that you collected from the chickens you raised. These exchanges began to evolve to be anything worth value, including gold or salt. It didn’t really matter what it was. That is, as long as people believed that the item has value and will continue to hold value until it needs to be exchanged for something else.
While this was a logical, working system it wasn’t flawless. It was impractical to carry a bag of salt around to make purchases or even to use gold to make small purchases like a coffee. This brought to life the need for some sort of fiat or “replacement” money that still held value even if the object itself held no inherent value. However, for people to believe something had value they needed some sort of central authority to confirm that it did.
This is where we get to the government. For us to believe something has value we need to trust that there is some sort of security measure in place that will guarantee that this is true. This third party then becomes liable for the value of the paper and guarantees that it is worth something. It’s a good thing that we do trust the government.
It’s Time For A Change
While it’s true that the government has generally looked out for our best interests, having that much trust in a central authority can have its disadvantages. Consider that the government has total control over the money supply and at any time could tell us that our money is worthless. Not only that, but they also have control over how much of it is in circulation. So in times of uncertainty, the government can just print more of it. The only downside is that that makes each of our dollars worth that much less.
However, even with its issues we still continue to use paper money. But even that isn’t the most efficient. We have since decided that it’s easier to carry around a piece of plastic in the form of a credit card to pay for our things. We can monitor the amount of money we have through online transactions without ever even seeing the value in the paper. With a digital form of value now making its way through the population, many began to think that digital money could become even more well utilized, cutting out the middleman.
Making the Exchange
First things first, when we exchange an item it is pretty easy to tell who has it. When we use our $10 bill to buy soup and a sandwich from the little cafe around the corner it’s gone. We can’t simply take that $10 and use it somewhere else. It has been spent. This isn’t necessarily the case with a cryptocurrency. Let’s say instead of having a $10 bill we had a virtual image of a $10 bill. So when you were buying your sandwich and soup you just sent the cashier that image. Do you see where we’re going with this? We run into a slight problem here.
What if you were being sneaky and made several copies of this $10 so you could spend it on a bunch of other stuff. It would defeat the purpose of working hard to earn something of value. The problem of spending the same money twice creates something called the double-spend problem.
Other digital currencies have previously had a third-party monitor these transactions to ensure this problem doesn’t exist. But that can be expensive and take a lot of time. That’s why a solution for a digital currency with no middle man had to have a way that would confirm transactions of currency were only happening once and nobody was spending the same money twice. This replicates the exchange of physical goods.
The Bitcoin Backstory
Leveraging this public ledger technology, came Bitcoin. This decentralized currency was built to create a “new electronic cash system” that was “completely decentralized with no centralized authority.” For a little bit of background, Bitcoin was invented back in 2009 by Satoshi Nakamoto. A quick google search will show you Satoshi is not a specific person but rather refers to the creator or creators of Bitcoin.
Unlike the bank ledger that only banks can see and update, the Bitcoin ledger is transparent which means anyone can see and interact with it. Of course, we don’t want anyone to see exactly what we are transacting so this is disguised. The really cool thing is that not one computer holds the ledger or as the industry calls it the blockchain. This offers us some security since this means that it is a little harder to take down thousands of computers. We can also rest assured that although the blockchain is public, our information is kept private. This is because owners are anonymous and use encryption keys (basically a random string of letters and numbers) to connect buyers and sellers.
So, mom and dad, all this cool stuff is virtual. That means you don’t actually get a coin. You own an encrypted address that gives you and only you access to your Bitcoins (as long as you safely secure your private keys). The best part is, you have complete control over your money. This means you and you alone can access your funds.
Introducing The Public Ledger
Remember that double spend problem we had brought up earlier? This problem has been solved with something called the blockchain. Bitcoin is the world’s first example of a widely used blockchain.
When you hear people throw around the term blockchain, just know that this refers to a public tracking system. Think of an accounting book of sorts that tracks all of the transactions that occur, with all transactions connected to the very first “origin” block. But now imagine this transaction book is public and online. With this public tracking system, you are able to know exactly how many items exist and which pubic address (no personal info) owns which items. This is posted onto the ledger itself. Since this is posted for the public (and let’s face it, the whole world to see) we don’t have to worry about someone not sending something or someone owning multiples of the same thing. This gives it the same properties as exchanging a physical object.
The best part is since this is digital, I would never have to physically give you anything. So if you were in Italy and I was in Canada we would never have to meet up. I could simply send you the digital version of the money online internet device to internet device for pennies and near instantly.
Bitcoin is currently legal as long as you are using it for good (and by good we mean not doing anything illegal with it). Since there are currently not a lot of laws in place, this could be a potential area the government could impose laws in the future. Currently, cryptocurrency is treated as property and is taxed as such.
Sending and Receiving Crypto
Remember earlier when we mentioned that bitcoin is anonymous. If this is the case how can we exchange bitcoins with each other? Each user receives two keys; a public and a private one. Your public key is similar to your Instagram handle. Anyone can look it up and send Bitcoins to it. Your private key is similar to the password of your Instagram account. Think about how you keep this password secret so only you have access to the contents of your account. By using your private key or your password you can prove that the account belongs to you but you don’t have to share this key. This verification process is done through something called public-key cryptography. But this is just a fancy way to talk about a branch of mathematics.
This means if someone wants to send you Bitcoins, say your parents want to send your own money on your trip abroad all you have to do is give them your public key. While all the members of the blockchain will see the transaction occur they will only see which public keys interacted.
You might think that keeping track of these public and private keys sounds challenging. To store this information, much like you store your money in a wallet, there is a digital wallet to store your addresses. You can store multiple addresses in your wallet so theoretically you could have as many addresses as you want. It just might get complicated managing so many accounts. The one difference, you might want a backup of your wallet kept handy. Just in case.
When we think about mining, we probably are imagining a bunch of people going outside and digging through the dirt until they find some coins. Sad to say, mom and dad, this is far from the case. Bitcoin mining actually involves lots of math, transactions, and record-keeping.
Essentially what your computer does is guess a random number that solves a difficult math equation. The difficulty of each math problem is dependent on how many people are mining at a given time period. These problems are so complicated you will likely need a powerful processor (which is found in a CPU, ASIC, or graphic card). The more powerful your computer the more guesses you can make per second. If you guess correctly, you earn some Bitcoins and you get to write the next block.
Each time a person sends a bitcoin, a transaction is recorded and a group of transactions that need to be solved is called a block. Updating the ledger is usually the job of the banker, but since you guessed correctly this responsibility temporarily falls to you. So just to recap, we could say that mining is just the process of confirming transactions on the blockchain. The difficulty of the mining process is based on the power of the blockchain. The mining difficulty is set so a new block is added every 10 minutes.
Since miners are doing work, it only makes sense they get paid. A portion of their wage is made up of fees from those who buy and sell the currency. However, even more importantly, mining is how more coins come into circulation. This means a miner whose computer solves the math equation first will earn new coins that have yet to be circulated.
A Finite Amount of Bitcoin
To further mitigate inflation, bitcoin has a cap in place for how many coins will exist, EVER. This amount was determined to be 21 million. To slowly reduce the number of bitcoins that can be mined until there are eventually no coins left, bitcoin will have it’s third halving in May 2020. This protocol will cut the number of Bitcoins in half and reduce the rewards. While this is a complex topic, just let your family know that Bitcoin has a finite amount to improve the stability of the currency’s worth.
Investing in Bitcoin
Let’s say you have begun to explain the complicated topic of bitcoin to your family and you have them sold already. If this is the case, they might be asking you questions about taking the plunge and making the investment. There are a couple of risks with any cryptocurrency. First, in your average fiat money, we know that a dollar today will be roughly the same as a dollar tomorrow and we know that it will be the equivalent of a donut at Tim Hortons. With bitcoin, it is very hard for us to say the same. This is because bitcoin is incredibly volatile and can fluctuate thousands of dollars over a few days.
Additionally, we have a more generic fear. That is, there is no government backing this cryptocurrency. This means there really is no one guaranteeing the currency still holds value. While this is a worry, the use of bitcoin amongst millennials is becoming more and more widespread.
Okay, you might be ready to start buying and trading the currency of the future. To do so you will first need to download and install a good Bitcoin wallet and set up the necessary security measures to protect it. Next, you might want to find a trading platform to make the purchase. Coinbase is one of the more popular ones and might be a good place to start. Other platforms include Kraken, CEX.IO or ShapeShift. Once you have these pieces set up you are ready to make your purchase. On these platforms, you can exchange some of your fiat money (whatever it might be) into Bitcoin.
You might be wondering what you can do with these coins. If so, know that you can make tons of purchases with over 100,000 merchants now accepting cryptocurrencies. Some of these include platforms like Expedia to purchase flights or hotels or apps and other software on Microsoft. This is just the start, as some have begun to purchase homes and other large goods. If not, you might decide to hold onto it in case it goes up. There are no transaction fees withholding the cryptocurrency, although you will likely pay for these when you buy and sell the coin.
Remember, Bitcoin is not the only cryptocurrency. There are thousands of currencies available. All can be purchased in a similar manner. But that’s a topic for another day.
The Currency Of The Future
Bitcoin is pretty cool, but cooler than the coin itself is the future implications this could mean for us. What do we mean by that? Many other cryptocurrencies have taken lessons learned from bitcoin and made attempts to make something bigger and better. Since these coins are digital, new additions to programming layers can continue to be added to create even smarter money. Many have also liked that Bitcoin has allowed those who couldn’t ordinarily use banks to transfer money to now use this decentralized currency.
As more and more companies begin to recognize bitcoin as an acceptable currency, the possibilities are endless. Especially as people continue to ask for an explanation and develop an understanding of it. Creative explanations for Bitcoin can even be found on TikTok.
Alright Mom, Dad, Auntie Karen, how did we do?