The following is an excerpt from The Bitcoin Primer: Risks, Opportunities, And Possibilities, my new book on global digital currency Bitcoin.
I’m an early adopter of the technology, having become interested back in October 2012 when I had major Bitcoin angel investor Roger Ver on my podcast.
What is Bitcoin? What’s so novel about it?
Bitcoin is a peer to peer decentralized digital currency. It makes use of advanced elliptic curve mathematics and cryptography, as well as a globally replicated public ledger called the Blockchain.
There are several things Bitcoin accomplishes that was previously not possible with e-currency.
OK. What are those things?
Bitcoin makes it impossible (or near impossible) for double-spend transactions to occur — in other words, when money leaves your possession, it is no longer yours. This was a huge challenge with digital currency because when you send a friend a music file, for example, how do you make it so that the file no longer exists on your computer? When transacting in a digital currency, it is imperative that the money leave your hands and go to the receiving party’s — a user must not be able to spend their money more than once. This is part of the reason why Bitcoin is often described by the press as “digital cash” — the bearer has complete control of it, and permanently loses that control when they give it to another party. Transactions are irreversible.
Bitcoin also provides near instantaneous (within 10 to 30 minutes) undeniable confirmation that your money has been received or sent. No worrying about bounced checks.
Bitcoin also is impossible to counterfeit; a cash transaction or a transaction in gold could contain counterfeit bills or fake gold. There is no such thing as a fake Bitcoin.
Furthermore, there is no prolonged settlement period. Once the transaction is confirmed by an acceptable number of nodes across the network, that money is truly yours.
And finally, since all transactions are listed in a global public ledger known as the Blockchain, Bitcoin provides an invaluable defense against “big hat, no cattle” bullshitters. In other words, if you’re planning to do business with someone who claims to have X amount of money — rather than going on their word, or the kind of watch they wear or car they drive, or their credit history, etc. that individual can simply provide a public address for you to view their balance. Within seconds you know if the party has the money or not.
Bitcoin has no intrinsic value, why are people accepting it as currency?
Nothing in the physical universe has “intrinsic” value. Gold is a metal that humans have decided has transactional value due to its scarcity and interesting physical properties (doesn’t oxidize, nice and heavy, looks pretty, good conductor of electricity). The US dollar is a piece of paper or digital ones and zeros backed only by the “faith and credit” of the US government — in the public’s trust that the government can repay its debts and make good on any obligations.
When people claim Bitcoin has no intrinsic value, what they are usually trying to say is: “I don’t like Bitcoin.”
And it’s fine to have a personal preference on something, so long as you acknowledge that your personal belief does not coincide with the currency’s actual value.
Bitcoin has value because people are willing to buy and sell it at a certain price. That market is liquid thanks to a number of exchanges. As of writing this, one coin sells for more than $1,100. Bitcoin is also accepted by an ever growing number of businesses and workers as a form of payment.
I hear horror stories in the media about people’s coins being stolen, lost, etc. I thought this thing was secure?
Bitcoin is truly digital cash. If you were to leave a backpack filled with cash in the mall food court, and then if that backpack were to be taken by some stranger, it would no longer be yours. Similarly, if you were to put a million dollars under your kitchen floorboards and your home burned down, you would no longer have that money.
Whoever holds the private keys to a wallet’s coins controls those coins. When the private keys are lost or destroyed, that money is lost.
Well that doesn’t sound fun. Remind me why this is a good thing?
There is no central authority, no company or government in charge. When you buy something with a credit card, if you are not satisfied (the product doesn’t arrive as promised, for example) you can appeal to the card company and initiate a possible chargeback. This provides a layer of comfort for consumers, and that comfort is financed by high merchant transaction fees (as much as 2 to 3 percent of the total amount) as well as things like annual fees, high interest rates, etc. The bank needs to pay for the support costs as well as its financial liability (chargeback costs, unauthorized transactions, identity theft, and so forth). Also, the bank needs to pay marketing costs to remain profitable.
With Bitcoin, as with email, there is no company in charge. It is a global protocol for sending and receiving money. Transaction costs over the Bitcoin network are a tiny fraction of existing bank transaction fees. The irreversible nature of Bitcoin lowers costs since merchants bear no risk of chargebacks or fraudulent transactions.
Didn’t early adopters get a lot of coins with relative ease? How is that fair? How is that different from a ‘pyramid scheme’?
Yes, miners (those who run software on their computers to help keep the Bitcoin network operating) generate coins over time — at the beginning, these coins were produced with relative ease, and over time less and less coins are produced and the process becomes more difficult. Similarly, early adopters were able to purchase coins for as little as $0.01.
It’s worth noting that Bitcoin wasn’t always the golden standard of e-currency. As recently as May 2010, 10,000 coins could maybe buy you a pizza. And miners were regarded by many as gullible morons, giving away valuable computing resources in exchange for “fake Internet money” no one accepted or cared about.
It’s only natural, then, that those who took the risk of creating or owning Bitcoin early on in the process should see a return on their “investment.”
Many of these individuals did not hoard the coins, but rather used them to buy things online, or sold them at prices far below today’s market value. (When something cost you $0.01, a $10 price seems attractive.)
There is evidence that ownership of the coins is less concentrated than it was toward the beginning. Also, anyone could become a miner or buy the coins. It wasn’t a closed club of insiders — it’s just that most of the public didn’t believe in the idea.
Can you explain how this is fair? Some people still have a lot more than others.
Bitcoin is mathematically pure and anyone can read the source code that makes the system operate. It isn’t proprietary and no person or entity can inflate the market by creating new coins out of thin air (as a central bank would do). The creation of Bitcoin follows a mathematical “schedule” and will top out at 21 million coins by the middle of the next century. This scarcity ensures that an individual’s purchasing power and stored value is not diluted by a politician’s decision to print more currency (that’s the idea, at least). No one can decide to print more Bitcoins.
Will early adopters become rich?
Based on my research, it is certainly possible that very early adopters will become billionaires — if Bitcoin becomes the global standard for digital transactions in the same way that email became the global standard for digital communications, such an outcome is not ridiculous. It is also possible that early adopters will lose up to 100% of their “investment” if Bitcoin becomes compromised in a critical way or if the public’s interest rapidly switches to an as-yet-unknown alternative protocol.
This is part of an FAQ from an e-booklet I wrote about Bitcoin. Aside from the rest of the FAQ, the booklet discusses the origins of Bitcoin, best practices for business owners and freelancers to accept Bitcoin successfully, where to buy/sell coins safely, as well as a wide range of security considerations — how to store your coins safely, create offline paper backups, prevent theft, etc. Read a free sample on Amazon’s Kindle Store.