Bitcoin: Explain it Like I'm 5

Bitcoin is likely the most misunderstood technology to come out over the last few decades. Bitcoin’s value is not misunderstood because it’s difficult to understand, even though Bitcoin itself is difficult to understand completely. That may sound contradictory; take gold, for example.?

We all know that gold is valuable because it is rare, and difficult to mine. It also has hundreds of real-world uses in electronics and otherwise, and is one of the most durable metals on earth. However, few of us understand the processes and technology behind how gold is mined, or the mechanisms and factors that influence the ever-changing price put on gold.?

Yet, it is widely accepted by the general population that gold is valuable.?

Bitcoin is no different. It is rare (only ~20 million of them exist in a world of nearly 8 billion people), and difficult to mine. Furthermore, it has tons of real-world use cases from accounting to being a full-blow currency and medium of exchange.?

So, what is $BTC? Is it an asset, a technology, a currency, or something else? It’s all of those things and so much more.?

What is Bitcoin??

Bitcoin’s capabilities and inner-workings are so far-reaching that to fully grasp and transcribe this technology could be a life’s project. So please bear with me as I try.?

The first blockchain (and Bitcoin) was created by an anonymous person under the name Satoshi Nakamoto in 2008 amidst the mortgage crisis. Blockchain is essentially an anonymous ledger of transactions. In this case the transactions on the blockchain are made using Bitcoin.?

Bitcoin is a digital asset. Like any other asset, its value varies. It is made up of digital code. It can be held physically on a hard drive (called hardware wallets or cold storage), software-based wallets (called hot storage), or be kept on the digital exchanges where they are traded (like Coinbase).?

The value of a bitcoin varies based on market conditions and other factors, but the ‘price’ put on it moves similar to assets like stock or real estate. When demand outpaces supply and more people buy, the price goes up. When supply outpaces demand and more people are selling, price goes down.?

Bitcoin Mining & The Rules

Similar to commodities like coal, silver, gold, etc, Bitcoin is ‘mined’. Essentially, Bitcoin miners use computers & servers to verify transactions on the Bitcoin network, a shared ledger. Miners solve math equations on this ledger, sort of like piecing together a puzzle. When they successfully verify a transaction (i.e. solve a puzzle), they are rewarded for their contribution to the network in the form of Bitcoin.?

This process of verifying transactions is called proof of work. It is an incredibly valuable mechanism because it shields the network from corruption and verifies that every transaction is whole. For this reason, the Bitcoin network is impossible to attack and has never been hacked. As of this writing, over the last 24 hours there has been $49 BILLION in trading volume without a single hiccup.?

One key factor that has led to Bitcoin’s popularity and hype is its printing cap. Embedded in its hard code, no more Bitcoin can be mined after around the year 2140, whenever the 21st millionth bitcoin is mined. There will never be more than 21 million Bitcoins. Compare this with the U.S. dollar, which can be printed infinitely, and you can understand why Bitcoin is seen as a hedge against inflation. It’s another reason that Bitcoin is seen by many to be the ‘future of money’.?

A currency with capped supply that is completely decentralized and cannot be manipulated by any single party is the Austrian Economists’ dream come true. This has never been possible in the past as all currencies by their very nature are centralized; a party, made up of people, is required to print the currency. The issue, as mentioned in the previous piece of this series, is that people are flawed and will print money to their own benefit and to the detriment of others. They will break their own rules. We saw this in the mid-1900’s with the United States printing currency beyond their gold reserves.?

Bitcoin’s ‘printing’ is capped by hard-coded rules that cannot be broken, and the printing is decentralized as anybody across the world can mine this currency.?

More than a Currency

The key misunderstanding with Bitcoin is that it's more than the price put on it (which is currently $663 Billion, around the same size as Argentina’s economy). Bitcoin is a blueprint for how currencies should look in a world where we, and those who govern us stay true to our highest values.?

To believe in Bitcoin is to believe in freedom. Freedom from government overspending & oversight. Freedom from the money printing and banking institutions that steal from us through inflation and manipulating interest rates. Financial freedom.?

Bitcoin embodies truth, integrity, accountability and transparency for all.?

This higher meaning is the reason for Bitcoin’s cult following. Many see $BTC as a way out of our current system that’s been so corrupted by dishonest influencers and bureaucrats. If it weren't for this base of Bitcoin Maximalists, the currency wouldn't hold the market cap that it does today, and definitely wouldn’t be the household name that it currently is. Like any successful product, early adopters are a necessary piece of mainstream appeal. So, while Bitcoin’s massive market cap has garnered mainstream attention, this attention has been built on a base of people who see bitcoin as more than its dollar equivalent.?

Closing

Before finishing, I need to state clearly that this piece is in no way financial advice. I own and continue to buy Bitcoin and other cryptocurrencies. That does not mean that you should do the same; any investment comes with inherent risks and the risk of loss of principal.?

Whether you decide to purchase $BTC or not, I believe it's important to understand what it is and why it has developed to become one of the world’s most valuable assets. Bitcoin’s value highlights many of the issues with the world economy and our currency systems. It’s also not going anywhere, so if you’re going to continue hearing about it for the rest of your life (likely), you may as well have a basic understanding of what it is.?

Stay tuned for part 3 of the series next week.?

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