Introduction to Bitcoin for Beginners

What is Bitcoin? Bitcoin is the world’s first successfully implemented digital currency system separate from the modern financial system. What do we mean by successfully implemented? Well there were actually several iterations of attempts at creating a digital currency that came before bitcoin. You had E-gold, WebMoney, Liberty Reserve, and Perfect Money, just to name a few. The key points that bitcoin and blockchain technology solve are:

1. Freedom to use funds and Financial independence
   -you no longer require the use of a third party to send and receive money or value
2. Monetary sovereignty and Financial Security
   -you are no longer required to trust or use a third party to securely store your funds or savings nor rely on currency value to maintain purchasing power
3. Transparency and Accountability

(1) Bitcoin is a decentralized digital currency that allows peer to peer transactions without the need of a third party or intermediary. You can think of how modern digital currency works when you pay online with a credit card. This credit card is issued by some third party institution that basically handles the transaction and can charge a fee or potentially close you out of your account if they don’t like what you are doing with your money. The fee is normally not notice by you at a supermarket but if you are a merchant (who accepts paypal, credit card, or any other form of digital payments) you know all too well and if you are a consumer who has shopped at a farmers market before you will know that they directly pass this fee on to you. For instance, you might ask to buy strawberries which are $10 a basket but if you pay with credit they charge you more to offset that fee. When you go to a supermarket however they mark everything up to accommodate those using digital payment platforms like credit or debit. Even if you want to send money to a friend, you have the option of writing a check, which could take days to clear, or meeting them in person and giving them cash. There is currently very little in the way of options when it comes to transferring value peer to peer. Another issue with traditional finance is that the companies can choose to shut you down if they don’t like how you’re spending your money. For instance, if you try to buy bitcoin with a credit card or you try to buy something from a small business website they may limit or stop the order for suspected fraud. Even worse still, if you are an activist in a corrupt authoritarian regime then the government can demand that your service providers freeze you out and not allow you to spend the money in your account. Bitcoin enables freedom of your use of your own personal funds, you no longer need to rely on a third party to approve your transactions or the government to permit it. So bitcoin allows you to directly pay someone else straight from your bank account, or in this case your bitcoin wallet, without being subject to corporate or governmental limitations or corruption.

(2) Additionally, right now if you live in an oppressive regime or other authoritarian system of government then they can freeze your bank accounts and lock your funds. As we are seeing in Nigeria now, with protestors of government corruption having their bank funds frozen. Bitcoin wallets are fully owned and operated by you the user so no one can freeze your funds if they don’t like you or what you are doing. The only person with access to your bitcoin funds is the one who holds the private keys and if you manage your own bitcoin wallet then you are the only person who has access and control. Additionally, since bitcoin is a limited supply digital currency there is a fixed amount that will ever be in existence. Therefore it cannot be inflated away by government mismanagement or outright corruption that can lead to hyperinflation which hurts the people who cannot save. As a quick aside, hyperinflation is when the value of your national or local currency is decreased so much so that saving becomes impossible. Imagine you have $10 in the bank account which can buy a gallon of milk today. But then tomorrow so much money has been added to the system (by the government) that the same gallon of milk costs $20, in this situation you physically cannot save money because all the money you put away is devalued to the point of being worthless within a week, month, or year. Normally we do not notice these increases in price from the devaluation of currency over long periods of time but when it occurs over a short period of time (such as in hyperinflation) it is much more noticeable. The benefit of bitcoin, not only is that your money is stored safely away from banks and institutions that may go bankrupt (like Lehman Brothers) or steal your funds (Wells Fargo https://www.thestreet.com/markets/wells-fargo-wfc-was-stealing-from-customers-rep-sean-duffy-says-13844026) but also that your money is stored in an asset with a fixed limited supply so it cannot be inflated away in the case where you do live in a country with government mismanagement or outright corruption leading to hyperinflation.

(3) So now that you have some idea of what bitcoin is let’s talk about the blockchain, the backbone of bitcoin. The blockchain can be thought of as a digital ledger, a kind of record book of all the previous transactions that have occurred and tracks which wallets have how much money. This ledger is fully transparent so everyone can see wallets and know how much each holds. However, the owner of the wallet is pseudo anonymous as they are only identified by the wallets individual unique identifier. This also adds to security because no one can go back and fudge the ledger, everyone has a copy and it becomes incredibly obvious when someone has tried to tamper with the records to give themselves more funds than they should have. In this instance transparency leads to significant network security and consequentially, accountability. So this digital ledger, the blockchain, has a record of all the transactions and in order to send a transaction you need to have some bitcoin in your digital bank account (called a bitcoin wallet) which you can then announce you are sending somewhere and digitally sign it with your unique signature code associated with your wallet. This way no one can come along and take bitcoin out of your wallet because the blockchain must have a signed and approved transaction from YOU in order to do anything with the funds in YOUR wallet. Other people can still send money to you but they cannot take anything from your wallet without your digital signature. This enables transparency of who is sending what money and how much money each wallet holds on top of adding accountability for bitcoin and the network as a whole because everyone holds their own copy of the ledger and it is incredibly easy to detect and prevent fraud.

So now, you should have some idea of what bitcoin is and what some of the benefits are for this new system of value store and value transfer. You understand the independence bitcoin provides, allowing users to transfer value without the needing to rely on a third party such as a bank or digital payments system like paypal or a credit/debit card. You also get that bitcoin allows people to store and secure value without needing to rely on and trust a third party such as a potentially corrupt government or banking system. And finally you understand that bitcoin enables security and transparency through the use of a digital ledger that is immutable/unchangeable and incorruptible. In a future article I will discuss in more detail how this differs from the traditional financial system and why it is creating such a splash in the technology and finance space.