Bitcoin Explained for JK Rowling and Other Muggles
By Tim Cunningham on The Capital
Magic Internet Money
Do you understand how email works? Do you understand what TCP/IP is or why it is important? How about what the “www” means in your browser? If you do understand these things, have you ever had to try to explain them to your friends or family? Does explaining it even matter? Sure we can go into why is it important for your bank to use HTTPS over HTTP. How HTTP basically broadcasts your bank account number for anyone tech-savvy enough to listen. While HTTPS broadcasts your bank account number in a code that only you and your bank can understand. But thanks to modern technology, the average person doesn’t need to understand how any of this, let’s say magic, works. All you need to know is how to use your browser or how to pick a trustworthy bank and everything else is done for you.
When it comes to this article’s explanation of Bitcoin, I am not going to go in-depth to explain the crypto, the blockchain, or any of these new terms that can be extremely confusing. Instead I am going to go over what problems Bitcoin attempts to solve, why you should care, and why it is very important in today’s complex world. Then, I will explain how you can buy and use it.
It Doesn’t Matter How, It Matters Why
The creator of Bitcoin is unknown. It could be one person, it could be multiple people. It could be Hal Finney, my top suspect on the list of possible creators, but we may never know. All we were given was a name: Satoshi Nakamoto as seen from the whitepaper.
The intention of Bitcoin was very clear from the beginning. Satoshi left a message in the very first block mined way back when all of this was getting started on January 3rd, 2009. The block (don’t worry about this term yet) contained a message to hint about the banking system with the following written in the code:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
Here’s a clip of the article in question. Satoshi was fed up with banks that were too big to fail and that money could be created out of thin air to bailout these politically connected groups. Thus Bitcoin was created as a counter to this notion. The most important aspect of Bitcoin you need to know is that the total maximum supply of Bitcoin will never change. That means the total number of Bitcoin that will ever be created is 21 million and will never be more. That’s the ceiling. Fundamentally, once all the Bitcoin are mined, no one can create more Bitcoin because they want to bailout their friends. Imagine if we knew the exact amount of gold that was available on Earth in all of the gold mines, all of the vaults, and somehow even all the buried treasure in the world. Bitcoin is a lot like gold in that it is a scarce good. Its supply is limited by design to mimic scarcity. Contrast this to the money the world uses every day and its total supply.
This means the value of anyone holding US Dollars in savings goes down and is worth less (not worthless) over time. Debt held in US Dollars also goes down. Don’t worry, I am not going to get into any more of the economics of what the above chart says or any of the politics of if it is good or bad. All I am doing by posting that chart is using it as an example of how the total supply of US Dollars has increased a significant amount in the past year alone. Notice how it fluctuates as well? Where is it going to be next year? Likely more, but how much more? At what rate will it increase? Even Warren Buffet doesn’t know! Here’s Bitcoin’s supply chart below:
Pay close attention to the timeline in that chart. It is mapped out to 2039 which is not even close to how far we can map it! We can make a chart all the way to the last block which will be mined sometime around 2140. The amount of Bitcoin added to the supply goes down over time (every four years). This means anyone “hodling” Bitcoin will likely see the value of the coins increase over time. Imagine being able to predict the Fed like this! This is one of Bitcoin’s advantages and another point I am making here: Bitcoin is predictable.
Bitcoin —A Payment System
Have you ever tried to send money to someone in another country? I have. Back when I was just out of college a buddy of mine took up residence in a country across the world in the city of Abu Dhabi, which is about a half-hour away from Dubai. Being a nerd into Magic the Gathering I wanted some foreign Magic cards so I wanted to send him money to purchase some cards at this local card shop. Unfortunately, there was no easy or trustworthy way that I knew to send money from me, in the United States, to him in the UAE. Thus I had to use a bank wire transfer. The fee for a wire transfer was about $35 from my local bank. My buddy also needed to have his own bank account in the UAE which would accept a wire transfer from the US, and from my particular bank. On top of that, the US government needed to vet the transfer to make sure I was not funding something nefarious— if you catch my drift. Once all of this is initiated, it takes at least three days to clear, but still might be rejected for any number of reasons, either from the banks involved or either of the governments. In the end, I decided, probably like a number of people before me and a number of people after me would also decide, that it just wasn’t worth the hassle. If only there was an easier way.
Easy solution to our problem? Bitcoin. This scenario could have been simply taken care of if we had employed Bitcoin. My buddy could download a Bitcoin wallet, then I would send him some Bitcoin from my own wallet. He receives his funds in 10 minutes. Just as easy as sending an email. This is the second problem Bitcoin solves. Bitcoin does not ask for permission from to send its value to anyone, anywhere in the world. I would not need to ask permission from my bank, my government or my wife to send him Bitcoin… ok, maybe from my wife. Besides her, no one could object!
What kind of money system do you wish to have in the future? Because a digital currency is coming soon, as governments move farther away from cash. Do you want one that is centralized, which can prevent you from having the freedom of using it however you wish, and that has a value which could be debased due to a bad week in the markets? Or do you want a currency that is impossible to debase, is not controlled by anyone, does not prevent anyone from using it, and allows you to be your own bank?
Block? Mining? Blockchain?
So let’s discuss these terms since you’ve made it this far. This will help clear up a little bit of the syntax noise the next time Bitcoin comes up.
To incentivize people to mine Bitcoin, about every 10 minutes a new set amount is created. Although there is a maximum of 21 million Bitcoin, it is created or released in blocks for miners to find. Looking at the image, every single fan on the racks is called a miner. These miners are grouped together to create computer farms like the one pictured. These are used to attempt to solve a complex math problem. The math is so complex, that it is even hard for something like a supercomputer to solve. Every miner in every Bitcoin farm in the world is racing to see which one can solve the math problem the quickest. Whichever miner solves the math first get the prize. The person who is running that particular Bitcoin farm that found the answer first is rewarded like someone who just struck gold. If you equate Bitcoin to gold, you should think of a Bitcoin farm as a gold mine competing with every other gold mine in the world. Every 10 minutes, one of those gold mines finds the gold.
This miner’s reward also generates a block. Think of this block as one new row in a long Excel spreadsheet. This row contains all of the new balance transfers between Bitcoin addresses and their fees. The previous row helps to verify the authenticity of this new row. This new block is linked to the previous blocks (which was linked to the blocks before it as well) to verify its authenticity with more complex math again. This creates the blockchain, which is basically the entire Excel spreadsheet in my example.
There is still one tiny problem that needs to be solved though and it has perplexed mathematicians for a very long time. How do you ensure you are not receiving a duplicate Bitcoin when receiving them? If someone controls this spreadsheet they could just add a few coins here or there right? Instead of one person controlling this ledger, Bitcoin uses a public ledger and everyone has a copy of it that they are constantly updating with every transaction that happens from everyone. When I send you all of my Bitcoin, I tell everyone and then everyone updates their Excel spreadsheets to show my new balance with zero Bitcoin available. If I then tried to spend that same Bitcoin again, everyone would look at their spreadsheets, see my balance no longer has any Bitcoin left, and reject my attempt. We don’t need to make it more complex than that. It is just a giant Excel spreadsheet that everyone is keeping track of and verifying together with extremely complex math. This just touches the surface of how blockchain technology works. You can get into the nitty-gritty if you want, but again, not everyone needs to know how TCP/IP works.
Isn’t It Worthless and Backed by Nothing?
Let’s contrast this question with the US Dollar once again. What backs the dollar? Gold? You may or may not be surprised that the US dollar has not been backed by gold since Nixon (1971). Instead the US Dollar is backed by our economies, our workers, it being the world’s reserve currency, oh, and hellfire missiles.
Bitcoin, on the other hand, received its value when someone decided to trade 2 pizzas for 10,000 Bitcoin. Yes, that’s right, ten thousand Bitcoin. The work needed to create 2 pizzas were placed into the supply of Bitcoin that day. Later, alpaca socks were traded for Bitcoin and that value was added to every Bitcoin. This continued And so on and so forth until people in Kenya and Venezuela are also accepting Bitcoin right now. But without this trade would Bitcoin be where it is today? Why would someone even trade pizza for something that had “no value?” Where would the initial value come from?
Bitcoin is backed by its decentralized hashpower. More buzzwords. Think of the Bitcoin farm photo above. That is just one of many farms worldwide. These farms are using their computer processing power to secure the Bitcoin network. Anyone, including you, can attempt to mine Bitcoin and help secure the network. (Note: a high-end gaming computer would do close to nothing when compared to the mining farms mentioned. You would need $Millions to become profitable at this point if you wanted to be a miner). You do not have to obtain a license to mine or ask for permission from some corporate owners to mine Bitcoin. It is permissionless and trustless meaning anyone can use or mine it, and everything is verified by all. Mining Bitcoin requires hardware and electricity which all have costs associated with each. This increases the money requirements needed for a bad actor to attack Bitcoin. These farms are spread throughout the world which also prevents attacks on one point of failure in the system. A government could seize PayPal’s assets for example. A government would have to stop the entire Internet to make Bitcoin stop working! The Death Star was destroyed because it had a single point of failure. Instead of one Death Star, what if the Empire had dozens of mini-Death Stars across the galaxy? Imagine finding and attempting to destroy them all. This prevents governments, hackers, and other groups that would want to do Bitcoin harm from attacking Bitcoin.
Bitcoin has only become stronger and more secure over time. The more computing power on the network, the greater security, and overall resistance to attack the network becomes.
Where Do You Get Bitcoin
Since I live in the USA, I have personally been using Coinbase to purchase Bitcoin since 2013. They offer an online wallet that you can use to for some small online purchases. Any big or long-term amounts should be sent to your own private wallet that you control yourself. With Bitcoin, you are your own bank but that comes with its own risks which have caused a lot of people to lose their coins. Bitcoin is NOT a “get rich quick” tool or I would be a millionaire by now! No one knows where the price of Bitcoin will be tomorrow. It could solve all the problems it was meant to solve, become the world’s reserve currency and still only be worth a Big Mac/BTC in the end. We just don’t know. So don’t buy Bitcoin just to make money. Buy it to be part of an online revolution set to take the powers of banking and putting them into palms of everyday people!
You can use my affiliate link and receive $10 when you buy $100 or more Bitcoin on Coinbase.
How Do You Send Bitcoin Though?
Remember how I said it is just as easy as sending an email? Your “email address” is the bunch of seemingly random characters in the screenshot below. That is for my personal wallet on Coinbase. If you wanted to send me Bitcoin you would copy the text and put it into the send address with the amount you want to send. Some wallets offer QR scanners that automatically scan that black box thingy and copy/paste it for you on your behalf. You can even write a message!
This wallet address is generator from math based upon your Bitcoin “account number.” Coinbase is able to simplify this process and make it easy for new people to use. Again I must caution though, if you have significant wealth on an exchange, the money is not yours. A common phrase mentioned is “Not your keys, not your coins.” And that is because over the decade, major exchanges have been hacked or gone bankrupt (MtGox) and the customers’ coins lost. You can still hear horror stories about how people lost hundreds of Bitcoin due to the MtGox and other similar events. This is not Bitcoin’s fault but the fault of the exchanges. Some lessons are hard learned. You don’t have to learn them the hard way though.
But it’s too expensive!
I wanted to add this part because Bitcoin is not like a stock where you have to purchase the whole stock or coin to own it. Each Bitcoin is divisible into smaller units known as satoshis. Each satoshi (sats for short) is worth 0.00000001 Bitcoin. Truthfully one Bitcoin should be written like this: 100000000. Much like how computers see zeros and ones, the Bitcoin network sees each Bitcoin broken up like that above. So if you were trading 2.0401 Bitcoin to your friend you would be deducting the number 204,010,000 from your total balance and your friend would add that number to their wallet’s balance. Bitcoin talks in sats rather than full coins. So with a price of $10,000/BTC you can buy one million Satoshi for $100. I’m still “stacking sats” as they say.
And as a final note, no one is giving away free Bitcoin. Every single one of those you see on Twitter and Youtube is a scam. Even if it looks like Elon Musk is doing it.
