Fiat Isn’t A Foreign Car: Introduction to Bitcoin

imagesIn order to understand bitcoin and cryptocurrency (currency that’s somewhere in the cyberworld) you need to understand the concept of money. Have you ever wondered why money has value or how much money there is on earth? If you watched the link to the V-Sauce video, you’d say, “Wow, we can create money,” or “What do you mean money has value just because we say it does?”

In the past, money was concrete. For example, if you had a chunk of gold, it was worth whatever the value of gold was times the weight of your gold. That’s why people bit gold in old Western movies. It wasn’t that they couldn’t eat at the chuck wagon–it was that unscrupulous people would devalue gold by mixing in other metals. Gold is soft. If you bite hard enough, it should leave a tooth mark. I’m not really sure I want your dental records on my wallet, but still.

Paper currency and credit were invented because it’s heavy carrying all those coins. If we agree on the value of the paper I gave you, the that’s a good thing. We can do business without bringing our camel caravan filled with heavy metals.

Today, the value of our money doesn’t rely on every paper dollar having a piece of gold somewhere that it represents. The “gold standard” is dead. There’s a central bank for most countries that prints money. Printing too much money can cause an increase in the amount of money–more spending, but more inflation. Decreasing the money supply increases the value of the money (there is less money, so each unit’s got more value)

There are countries out there with really bad economies, and nations that play with the value of money. Cryptocurrency was invented to get around this. There is no centralized bank, and the money is not fiat money. Fiat money is all the money you have in your wallet–money that some government makes and you believe has value because the government says it does.

What happens to currency if the government collapses? Well, then, many people turn to commodity money. Commodities are goods that are traded on the market–generally foods or resources. These have value based on supply and demand. For example, if a pest wipes out the coffee supply and I own coffee shares, then coffee’s going up in price. If I sell then, I make cash.

“Hey, dummy, I asked you about bitcoin.” 

Oh, sorry. Here’s a little primer. Bitcoin is a decentralized form of money that only exists in electronic form. It’s transferred via the internet using a “P2P” (person to person) protocol. In other words, there’s no centralized bank, government agencies, taxes, or anything like that. It has a floating value. People mine bitcoins by finding them hidden on the internet–to unlock them takes some computer genius and for the average person’s probably not going to be a possibility.

“Can I buy bitcoin?”

Yes. The value is floating–meaning it changes based on market demand. You can therefore invest in bitcoin, hoping to buy low, sell high. The price has been over $1K/btc, but today rests much lower. You can buy bitcoin in exchanges. Only 21M btc will ever exist.

Who thought of this stuff?

Satoshi Nakamoto began working on the concept for bitcoin in 2007. It’s a pseudonym, and he may be one person or a collective group. This timeline gives a great history of the rise of bitcoin into mainstream.

Is bitcoin a good thing?

Depends. If you’re a person in a country with a destabilized currency–a currency with crazy inflation or no consistency–then it may be good. I lived in Russia when the government decided to reissue the ruble. This meant that after a certain date the old currency wouldn’t be accepted. People rushed to spend the money they hid under their mattresses, or trade it at banks (where they had limits to what they could trade in) or mafia kiosks which gave them fractions of the value for the purpose of trading them in. It was devastating.

These people would have liked bitcoin or other cryptocurrencies. People living in China trying to get around government regulations, war-torn countries with crazy inflation, or places with chronically untrustworthy currencies and policies, like Argentina like bitcoin.

“Who doesn’t like bitcoin?” Governments trying to impose regulations, taxes, or trace money do not like bitcoin. Investigators do not like bitcoin because going off the radar means that shady people run to cryptocurrency.

“But I’m not a cartel or mafia boss. Can I use bitcoin, too?”

Yes. You can invest in bitcoin and speculate that the market will go up, especially now that it’s getting harder to mine bitcoin and the supply will be steady. But there is risk–if all of a sudden people decide this is just a fad and there’s no increase in usage, and some key investors say that’s currently the trend (that bitcoin needs more people to use it and more merchants to accept it).

What are the other uses of bitcoin?

Bitcoin is a ledger–a place where online transaction records are kept. The uses could be endless. Even for those who don’t wish to spend it, tech geniuses are seeing the value in developing platforms and ideas that support cryptocurrency. The data trail can be used as a date/time stamp, a transfer of information, or even to certify voting and elections. So, even though you probably can’t and won’t mine bitcoin, it doesn’t mean you won’t develop some technology that will still make you a pretty retirement.

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