By definition, “money” is “a medium of exchange”. But exchange between who? The “who” is a population of people who agree that it will be the medium. The official money in India is called the rupee. If I were to travel to India, when I arrived at the airport I would exchange some of my U.S. dollars for rupees. Anywhere I traveled in India, my rupees could be spent. The entire population of India accepts the rupee as the medium of exchange. When I return home I might have some rupees left in my wallet. There’s not much that I could do with them. I am no longer amongst the population where they are accepted. With luck I can give them to a friend planning on traveling to India.
In the money world, dollars and rupees are a type of money called fiat money. By deinitionless fiat money is intrinsically valueless money used as money because of a government decree. “Fiat” is a latin word meaning “let it be done”. Dollars are the fiat money of the U.S.A. and rupees are the fiat money of India. Neither the paper that dollars are printed on, no the paper that rupees are printed on have intrinsic value.
Bitcoin is different. It’s not issued by a government and it is not fiat money. It can and should be printed on paper. The paper itself has no value but the pair of keys do. They are real bitcoin. Bitcoin, or any cryptocurrency, can only be successful if there is a population that accepts it as currency. Theoretically, Bitcoin can be spent anywhere in the world that people will accept it. An international currency. Let’s look at a few other characteristics of BitCoin.
Bitcoin cannot be counterfeited (but there are numerous SCAMS). It is made by the science of cryptography. Like paper money, it can be printed on paper. Not special paper, just plain copy paper. If you do that it can be lost or stolen like any other paper money. But if we are cautious, the science of cryptography will come to our rescue.
I have read an watched a number of tutorials that try to explain cryptographic keys with analogies to special boxes and special keys. I will also use an analogy but it is something that you already use and understand. It is your email address. You have an account at Google, Microsoft or somewhere else and your email looks like MaryX12@gmail.com or HarryP@hotmail.com. You also have a password. So Mary’s email comes to her Google account and goes to her inbox. Anybody can send Mary an email but only Mary can open and read it with her password. Now substitute Mary’s email address with the words Mary’s Public Key and substitute Mary’s password with Mary’s Private Key. Pretty simple isn’t it?
Harry has a checking account at Midtown Bank. The bank has issued Harry with paper checks. On each check there are numbers identifying the bank and Harry’s account number. Harry gives his account number to people he expects money from. He uses his checks to pay bills and debts. His checks might be lost but without his personal signature they cannot be used. Now substitute the reprinted numbers on the checks with Harry’s Public Key and Harry’s signature with Harry’s Private Key. Midtown Bank keeps a ledger showing all of Harry’s transactions, i.e. his deposits and withdrawals. Let’s substitute the word ledger with the word blockchain.
Harry was also issued a debit card with his account. Harry gave the card a PIN number unknown to anyone but himself. The debit card is another Public Key. The PIN number is a Private Key. Simple isn’t it?
A piece of Bitcoin currency is a pair of two very big numbers. They are summarized in a scanable QR code. One code is a Public Key. Anyone can put Bitcoin into it. Only the owner of the paired Private Key can take Bitcoin out of it. The bank with the ledger of transactions is the blockchain. It’s not a brick and mortar bank, it’s a virtual bank residing on computers around the world. It is funded by a “mining fee” for each entry made into the ledger.
As stated earlier a cryptocurrency will only work if it has a population of users. Several years ago there was an operation on the internet called Silk Road. It was on the dark web meaning that you couldn’t find it with a web browser. You had to know it’s IP number and use an anonymous browser. The site was used by drug dealers and others involved with trafficking in illegal merchandise. Eventually it was infiltrated and shut down. But, while in business all trading was done with Bitcoin. No government backed money was involved and international trade was possible. The point being that it was an acceptable currency among a population, criminal as it was.
The idea caught on and today there are a growing number of businesses that will accept Bitcoin as payment. Continued acceptance is essential for continued success.
If you are current with the news you know that Bitcoin has many competitors and the cash value of various coins is making HUGE swings up and down. For some of the new coins a few individuals have become extremely rich (on paper). What’s happening?
The original BitCoin blockchain was invented by software engineer who goes by the ficticious name of Satoshi Nakamoto. Mr. Nakamoto chooses to be unknown for good reason. It is estimated that he holds about 5% of all the coin in circulation. He has become very wealthy because of his invention. By being unknown he avoids all the sticky tax questions on he obtaind his wealh. The smallest fraction of a BitCoin that canbe traded is .00000001 BTC. In honor of Mr. Nakamoto tht amount is called 1 satoshi. The very important thing that Mr. Nakamoto invented is not the Bitcoin but is the blockchain ledger.
Mr. Nakamoto was thinking about how gold works as a medium of exchange. If gold was plentiful then it would hve little intrinsic value. It would be a metal to make costume jewelry. So he set the maximum number of coins that could be in the blockchain to 21 million. And like gold, Bitcoin could be mined. Mining is not easy. Essentially, one has to use a computer to take guesses at private keys that have no owner. If such a key is found it can be entered into the ledger with a reward to the miner. As moe coins are found the reward goes down. As I write this in early 2018, about 12 million coins are in circulaton leaving 9 million to be mined. The computer required for mining is large. The electricity required is usually more expensive than the fiat value of the bitcoin. At this time most mining is being done in a few provinces of China where the government subsides the cost of electricity. It is estimated that it will take 20 years for all of the coin to be mined. Mathematically inclined readers can learn more about how blockchain works on YouTube.
Blockchain is open source software and is not hard to copy and not hard to change the original Bitcoin blockchain rules. This is how new coins, collectively called altcoins, come into being. There are literally hundreds. A popular one is called Etherium. The target population of Etherium is companies dealing with large international contracts. Etherium seems to be a good idea and its coin quickly became popular. The magic of cryptocurrecy is that you don’t have to be a member of the taget population to own some Etherium! Remember, cryptocurrency has no intrinsic value. It’s success depends upon its popularity. Money people use a term called marketcap. This is simply the number of shares of stock traded multiplied by its price. Similarly, we can measur the popularity of a coin by multiplying the amount traded by its fiat value. At this time, Etherium is second only to Bitcoin. Third place varies. As I write this Ripple is occupying the position.
For a moment let’s return to dollars and rupees. If you are in the USA I might ask you if you want to invest in rupees? You woud answer “Why?”. But if you were planning a trip to India you might be willing to exchange some dollars for rupees. Now suppose you are in a country with a potentially unstable government. Its currency is its peso. A citizen of that country might be wize to exchange his pesos for dollars, euros or rupees. The dollars, euros and rupees are all popular amongst large populations. At this time, in the short term, cryptocurrencies are not very stable. As a short term investment they are quite risky. There future depends on them actually being used as a popular currency. Then stability will follow. Do you believe that this will happen? If not, stop here. You now know what Bitcoin is and how it works. Otherwise read on and learn how to acquire Bitcoin.
Only a handful of the hundreds of cryptocoins can be bought with dollars or euros. All the rest can be exchanged. In the U.S. most people are buying from coinbase.com. This exchange is popular because they will accept small amounts of money. They will charge you the mining fee plus a transaction fee of 4% with a $1 minimum. So $25 of coin will cost you $1 plus the mining fee. CAUTION: mining fees increase with transaction activity. The interest in cryptocurrency is very high at this time and so are the mining fees. You can buy Bitcoin, Etherium, Litecoin and Bitcoin Cash from coinbase at this time. There is no charge for an account at coinbase but there is a 2 factor authentication procedure to verify the debit/credit card that you plan to use and you must submit an image of a photo ID and also a “selfie”.
Although published, this post will be soon updated with information on how to enter the cryptocurrency world and how to use a coin wallet.