Gold? Stocks? Cash? What is Bitcoin?
The name Bitcoin itself does no favours to people trying to
understand exactly what it is. Upon first glance people naturally
assume it’s a ‘coin’, a currency that you use.
And in some aspects of Bitcoin’s intent and origins, yes it is
indeed a currency. But it’s more than that. Bitcoin is like nothing
else the world has ever seen before. And as such, we shouldn’t
try and compare it to gold, stocks, cash, currency — it’s unique in
so many ways. That’s what we’ll explain to you here.
A good place to start with what exactly Bitcoin is, is to simply
think about it as nothing. Drop any preconceived idea that it’s
like gold, stocks, cash or whatever.
Think about it as simply some lines of computer code. Code with
extremely tight cryptography principles and mathematics, which
make it like no other financial instrument before.
That doesn’t make it hard to use. It actually makes it secure. And
it makes it pure.
But another good place to start with, to understand why it’s so
radically different to anything we’ve seen before, is to understand
the basic concepts of currency that we use today.
Barter was a system of exchange the people used thousands of
years ago.
The basic premise is:
I have an asset that you want, you have an asset I want, and we
exchange said assets in a way we both deem to be fair.
For example, you might have a chicken that lays eggs, and I want
eggs. Conversely I have a cow and you want milk. We come to an
arrangement whereby you give me a dozen eggs I give you four
pints of milk.
Simple. But basic. And in that sense your eggs have ‘currency* to
me and my milk has ‘currency’ to you.
Now as simple as this is, it works. But when it comes to the
exchange of other goods, or the bartering of assets where the
two parties can’t decide on a fair trade, the system basically falls
down.
Bartering was always a system that would fall away in a more
complex world of commerce. And in its place came money.
Now, when you really think about it money is simply a device
that allows ubiquitous trade amongst people who share and hold
different resources. It is by nature a belief system. If I put faith
in that currency as worth something, and we all have that same
fundamental belief system in place, then it’s worth something.
That allows more complex transaction. I might have 20 cows,
you might have 20 chickens, and Bob across the road has 20 pigs.
You want a cow, I want a pig and Bob wants a chicken.
I’m not giving you a cow for your chicken because I don’t want it.
And Bob isn’t giving me a pig for a cow, as he wants your chicken.
So instead our government decides to issue money. So we
exchange this money for those goods. In return for helping us to
facilitate our commerce, the government take a clip from us in
taxes, penalties, or some other means.
How much money I have to give anyone is dependent on the
market value for each of the cow, chicken or pig. I give Bob four
coins for his pig. That’s the price we deem fair. He now has three
coins that he can give to you for your chicken — but perhaps the
agreed worth of the chicken is only two coins. But Bob decides to
get two chickens. Now you have four coins. And as you want my
cow and a cow is worth four coins (like a pig), you give me four
coins for my cow.
It’s a complex transaction made super-simple. But that’s how
money flows around the economy. People buy things, sell things,
goods, services, skills - in exchange for money, which they go on
to use in other parts of an economy.
Let’s stop there for a second.
You see, in the physical world, at its core we have been using
money/cash for hundreds of years to operate commerce. We
work, earn money and then spend it or save it. We spend it
to purchase things we need and things we want. We save it to
purchase things we need and things we want later in the future.
This cycle of money in and out of our hands is what drives
economies and corporations. It’s also what funds governments
as they tax us, fine us, and take money from us to operate and
exercise their will and control.
Now all this money was grand. Until some people decided they
wanted something but didn’t have enough money for it. So along
the way the world also developed this thing called debt. Debt is
an ‘IOU’ to someone to pay them money at a later date. I might
want a pig and two chickens but have just four coins. So I go to
another person with four coins and say, ‘if you give me your four
coins, I’ll give you five coins next week’. Then I have eight coins
to get the pig and two chickens. But I now also have to figure out
how to get those four coins and one extra back to that person by
next week.
If I don’t, they have a right to take my pig (which is worth more
than one coin!) because that’s the deal we struck.
In modem times most people understand debt because the
biggest amount they’ll ever take on is to buy a house.
The reason someone uses debt is because they don’t have enough
money now to buy what they want or need. So they use debt with
the view to pay the money to the person (or institution) lending
it to them at a later date.
The reason someone uses debt is because they don’t have enough
money now to buy what they want or need. So they use debt with
the view to pay the money to the person (or institution) lending
it to them at a later date.
The global financial system we live in has, over time, made it
easier and easier to get debt. So much so that, often, debt is used
to fund debt. And as more debt is issued the value of your money
actually erodes. This is particularly evident when governments
takes on debt.
Now, we could write a whole separate book solely about the
banking and financial system, debt, and the mismanagement of
economies.
We could write far more about how twisted and deceptive
governments are. Books about how the entire financial system
is fuelled with debt and how currency wars are building to the
crescendo of another giant almighty financial catastrophe...or
not.
And we touched on currency wars, political turmoil, the financial
system, debt and its root in the origins of Bitcoin, in Part 1. But the
trail of destruction that it’s all left behind will never be forgotten.
That’s fundamentally why, instead of the money that we use to
circulate within the borders of our home countries, we now have
another option.
With all the debt built up in the world, and central banks printing
more money to fund and fuel this debt, they are eroding the
wealth of everyday citizens like yourself. What started as a basic
concept to enable commerce around the world developed into
this all consuming beast we know as the global financial system.
It’s far too complex, convoluted and corrupt. It’s a broken system
that needs an alternative...and that alternative is now here.
Think about it like this. Are you’re sick of government ripping you
off? Are you sick of banks and giant multinational corporations
ripping you off? Of the political elites and establishment ripping
you off?
Are you sick of this debt addiction from governments that your
great grandkids will be left to pay for?
If you are worried, then the answer is Bitcoin.
Bitcoin in its purest description — from the Satoshi Nakamoto
white paper—is, ‘A purely peer-to-peer version of electronic cash
It allows the transfer of payments from one party to another
without going through a financial institution.
It cuts out intermediaries and middlemen. It allows people to
buy pigs and chickens and cows without a central issuing and
controlling authority.
Its aim is to reduce barriers, cost, and borders of global finance.
It was and is for everyone, to benefit everyone. Not just the elite,
not just the powerful and already wealthy. It’s the libertarian,
anti-establishment, alternative digital financial system.
And (at least to begin with) Bitcoin was also built around
anonymity.
It achieves a level of anonymity because its core code is based
around cryptography, mathematics and encryption. That’s also
worth noting. At the end of the day Bitcoin, or any cryptocurrency
for that matter, is nothing more than computer code — at least
literally.
And to many people the idea that something so intangible can
have tangible value is a difficult concept to overcome. But once
they do, and once they become a part of the belief system that
says Bitcoin is worth something and can be used as a medium
of exchange for goods and services, then it’s inherently worth
something. This is regardless of there being no physical ‘good’
to back it. And besides the money you now use, that’s really only
backed by debt — that’s even more intangible than Bitcoin’s code.
Remember, Bitcoin is unique in that nothing like it has existed
before with the capacity for widespread mass adoption and mass
belief.
Continuing on with the privacy aspect. The way in which Bitcoin
attains its quasi-anonymity is via the use of what is known as
private keys (a form of encryption). In that way, only the holder
of a private key can have access to the corresponding wallet that
the private key opens.
Each wallet also has a public key, which is the address that users
use to make transactions. But privacy can be maintained as the
public keys are unidentifiable to a particular user. And as long
as private keys are kept private, then no third party can access
a wallet.
By using this method of public and private keys, third parties
and counterparties can be removed trom the flow or payments
from one to another.
This enable peers (you and I and anyone else)on the network
to send payments and make transactions. We can do this with
safety and security as the network which records the transactions
‘signs’ these transactions using public keys to verify the transfer
from one ‘wallet’ to another. And this process of singing and
confirming transactions within the network means that the
network is 100% accurate and foolproof.
The network itself becomes the trusted source — but as the
network is distributed amongst the users, everyone is a part of
the inbuilt trust of the network.
In short, with Bitcoin you simply make transactions through its
network, which is known as a ‘blockchain’. In making transactions
through the blockchain from one location to another, no bank,
no government, no third party or intermediaries touches it, sees
it or has anything to do with it. It is completely peer-to-peer, and
it is (mostly) anonymous.
The anonymity of Bitcoin was part of its initial appeal. But this
aspect also drew the ire of authorities and lawmakers. This was
particularly controversial as Bitcoin was the primary payment
method through the deep web and on illegal good sites like The
Silk Road. And sure, to this day it’s still a form of payment for
illegal activity because of this — but so is physical cash.
While the use of public and private keys with Bitcoin allowed the
senders and receivers to remain anonymous (and still does), all
transactions on the blockchain are still a matter of public record.
While the use of public and private keys with Bitcoin allowed the
senders and receivers to remain anonymous (and still does), all
transactions on the blockchain are still a matter of public record.
For example, I can send you 1 Bitcoin from my Bitcoin wallet. All
I need is your public key. All you ever see is my public key. We
can’t access each other’s wallets because neither of us has access
to the other’s private key. All we see is the anonymous public key.
Now, if I don’t know you, then I can’t identify you through your
wallet address. And vice versa.
However, you and I and the blockchain might not know who we’re
dealing with, but the whole blockchain sees that transaction of 1
Bitcoin. It sees how much data is used to make that transaction,
it sees the amount of confirmations — it gets enough info in
the transaction that it can be verified and even traced back to
a particular location or IP address, using some very laborious
tracking techniques.
And this is ultimately where Bitcoin has been proved to be almost
anonymous — but not 100%.
By monitoring the data transfer from one wallet to another,
eventually you can actually identify a wallet and assign it to a
particular user. Of course this is an extremely laborious task for
a casual user to achieve. It requires being able to monitor data
flow from wallets and from IP addresses at any given moment.
Pretty complex stuff.
So for most people, using Bitcoin is still anonymous. But if the
NSA, or GCHQ or Australian Signals Directorate wanted to track
your Bitcoin movements, then they have the resources to likely
be able to confidently identify you. Still, as long as you’re not
doing anything illegal to begin with, then it’s unlikely you’ll ever
appear on the radar of such agencies.
So remember, it’s mostly anonymous and private — but if you’re
a nasty character, or on a wanted list somewhere, watch out!
Of course when it comes to Bitcoin’s anonymity, it’s core purpose,
the ability to exist as a medium of exchange and a store of value
and how it can even exists, we do still need to head back to that
very beginning — to the genesis block of Bitcoin...
In the years since the publishing the Bitcoin white paper, the real
identity of Nakamoto has never been revealed.
In 2016 it was claimed that a man from Sydney, Australia, named
Craig Wright, was in fact the Satoshi Nakamoto. But there has
never been any concrete evidence this is the case. Nonetheless,
Wright is still trying to pursue hundreds of Bitcoin related
patents in what appears to be an ‘intellectual property land grab',
according to Reuters.