Bitcoin for Everyone

Lesson 1: What is Bitcoin?

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Welcome to Bitcoin for Everyone, an original Coin Academy course designed to provide an introduction to the worlds most popular alternative currency, Bitcoin.

This course is divided into a series of lessons. There are 8 lessons in this particular course. The first lesson, this lesson, is called What is Bitcoin?, the second, a brief history of Bitcoin, the third, How you use Bitcon, the fourth, Investing in Bitcoin, the fifth is entitled Understanding the Risks, the sixth Before you Buy your first Bitcoin, the seventh, How to Obtain Bitcoin and the final lesson, How to get your Money out of Bitcoin.

Now it’s good if you can go through these in order but its not 100% necessary if you want to skip around to different topics that are of the most interesting to you, feel free to do so. But lets go ahead and get started with the 1st lesson, which answers the most common question we hear. That is, what is Bitcoin?

A short definition, Bitcoin is a Digital Currency. Now that’s a very simplistic definition but it captures the essence of what makes Bitcoin unique, that is, there is no physical counter part for Bitcoin. There is not piece of paper, there is no scrap metal that represents the currency, instead its a string of numbers that reside somewhere on a computer, there’s nothing for you to lock away in a bank account, put in a physical wallet etc, it is virtual, it is digital.

Specifically, Bitcoin is a Cryptocurrency and it was created for uses in alternative to traditional national currencies, often referred to as “fiat” currencies. Now I know that term introduces a new idea, Cryptocurrency, so lets define that.

A cyrptocurrency is a type of digital currency that uses cryptography to facilitate transactions providing an avenue for creating new units of the currency. Both of those characteristics apply to Bitcoin and are part of what makes Bitcoin special.

One of the other key attributes of Bitcoin is that there is no central bank, it is de-centralized. There’s no central governing body; instead, there’s a peer-to-peer network of stakeholders spread all over the world. This is extremely important because it means we don’t have a bank making national decisions in a local governments best interest, instead its more egalitarian in that sense.

The stakeholders themselves are distributed around the world, they all have interest in Bitcoin, they all have an interest in maintaining the integrity of the Bitcoin network, and we’re also extremely constrained by the algorithms and the mathematical formulas that are used to create Bitcoin. Those can’t be affected or modified by the stakeholders so it retains quite a bit of autonomy.

Transactions are processed in the Bitcoin network by computers around the world they’re all networked together and they’re all running Bitcoin software, you know in contrast if there was a central bank or monetary authority, they would handling processing the transactions they would each have their own ledger they would be maintaining. In the case of Bitcoin there are ledgers that are distributed around that world that are synchronized and this is how transactions are processed and updated and how we’re protected from people double-spending Bitcons.

Bitcoins are known as, Bitcoins. Bitcoin, the singular refers to the entire system in terms of the currency symbol that you’ll see on forex exchanges you’ll see if represented as “XBT” often times in articles about Bitcoin or outside of the Forex exchanges its represented as “BTC.” You’ll also see this symbol, or variations of this symbol this means Bitcoin.

To put all this in a nutshell, if you just wanna get your head around it quickly, its virtual money. And the beauty of this virtual money is that you can buy things with it, and you can buy it with and exchange it for physical currency.

The other question we hear all time are, how are Bitcoins created? Now this is through a process that’s known as mining. This is one of the more technical topics related to Bitcoin and we’re not gonna dive into the technical aspects of it, but the short version is, Bitcoins are given out as a reward for validating transactions and updating the ledger.

Now this means that the network of people running the Bitcoin software all over the world, actually are rewarded for running the software for validating the transactions and updating the ledger giving them all a stake in maintaining it, making sure that the ledgers are updated properly and transactions are validated in timely fashion. It’s extremely competitive; it also means that miners are an essential part of the ecosystem. They earn new Bitcoins for their work. At least they will up to the point that Bitcoin ceases to be produced.

That brings us to our next topic that is the creation of Bitcoins, and the fact that it’s strictly controlled. Unlike a national currency, a fiat currency where the government may authorize the printing of new notes at any time therefore diluting the value of the monetary supply, this can never happen with Bitcoin. Bitcoin creation is controlled by the algorithms that relate to the underlying structure of Bitcoin. This means we know how many Bitcoins are in existence at any moment in time, we know when the next Bitcoins will be created. They’re created about every 10 minutes. We know exactly how many will be created in total across the entire life of the Bitcoin creation process, there’s a cap on the total number, and then after that cap is reached, no more will be created.

Now that cap is not gonna be reached until the middle of the next century, so it isn’t something that bothers us right now. But this whole idea that the supply is controlled and we have certainty on the supply is one of the key attributes of Bitcoin because what it means is that Bitcoin is largely isolated from inflationary currency factors. And what I’m talking about here is the dilution of the value of the money supply due to the printing of new money.

One of the questions we hear all the time is, is Bitcoin real or is just a bubble? And we see this speculated on widely in the press. Well everyone has their opinion about this, let just look at some numbers; the numbers tend to tells a more objective opinion about things.

First how many Bitcoins are in circulation? Well at the time this was recorded [August 25, 2014]  there were 13,198,475 Bitcoins in circulation. Now this will change by the time you watch this because again, they are created every 10 minutes. The current valuation of a single Bitcoin in US Dollars is $508.12. This means the total market cap for the Bitcoin money supply is $6.7 Billion dollars, a significant sum. More over, in the last 24 hours, 69,681 Bitcoins changed hands, that means out 24-Hour Turn over was $35.4 million dollars. Significant numbers. Change in value over the last 12 months, Bitcoin has increased in value 370%. Now hold on to your hats, over the last 24 months, its over just slightly 1000%.

Lets put this in perspective. The Bitcoin money supply is currently the 5th largest in the world. Its significantly larger then the 6th largest which is the United Kingdom and its just slightly smaller then 4th largest which is Japan, and at current growth rates it will be the 3rd largest money supply by mid-2015. Now when we’re talking about supply here we’re talking about M1, we’re not talking about credit cards or other sorts of debt instruments.

Lets wrap up this lesson by looking at popular Bitcoin myths and hopefully skewering a few of these. We hear these all the time; we see them in the press. The first, Bitcoin is primarily used for illegal transactions. Well Bitcoin is certainly used for illegal transactions but so is real money, in fact one of the attributes you want in the money supply is that it can be used regardless of what’s being bought and sold. If you couldn’t use Bitcoin for illegal transactions it wouldn’t be much good neither would the US Dollar, neither would the Euro but is it primarily used for illegal transactions? No, I would say not. In fact I would say right now it’s primarily used by Forex traders and by investors. I think the confusion here comes from the Silk Road situation. There was online exchange known as Silk Road, which traded in all sorts of nefarious goods, and a lot of the transactions on Silk Road occurred because of the anonymity aspect of Bitcoin. Silk road was taken down, the owners were busted and a large number of Bitcoins where seized. This is where the press came from on this. That Bitcoin was later auctioned off by the US government for a tidy profit. But is it primarily used for illegal transactions? No its not.

Next myth, Bitcoin went bankrupt and lots of people lost their money. Well we know where this comes from; this is confusion from the Mt. Gox incident. Mt. Gox was a currency exchange based in the Japan at the time it was the largest Bitcoin exchange in the world. There was a theft at Mt. Gox and Bitcoin were lost. As a result of the theft, Mt. Gox went bankrupt causing further loss.

People get confused about this because they thing somehow Mt. Gox and Bitcoin are interchangeable. Well they aren’t. Mt. Gox is like a bank, if a bank was robbed and subsequently went bankrupt and became insolvent, we wouldn’t blame on the US Dollar, and you should blame the Mount Gox on Bitcoin.

Next, Bitcoin is a Ponzi scheme. Well I think the real problem here is the definition of Ponzi scheme. People mishap that for something to be Ponzi scheme there has to be someone at the top who’s benefiting from it. That’s not possible because Bitcoin uses a de-centralized peer-to-peer structure there is no one at the top everyone’s an equal stake older in that sense.

Next, it’s hard to buy and sell Bitcoin. Well I have to admit for somebody that’s new to it, its difficult but its not impossible, certainly once you under the basic concepts and you have the right tools its not hard at all, in fact its very very simple, its very easy. I think its getting easier and easier.

And the finally myth, this is one that’s just cropped up recently. Bitcoin was created by the CIA. I honestly don’t know where this one comes from other then just the general conspiracy theorists tendency to blame everything on the CIA. If it was created by the CIA, and we don’t know whom the original creators of Bitcoin were, frankly, but we should thank them. But it makes no sense because it is an open source software system, anyone can see the code, anyone can work with it, anyone can download it, put it on their computer and use it. It really doesn’t serve any benefit for it to have been created by the CIA. It strikes me as nothing short of impossible.

That’s it for Lesson One. Join us for Lesson Two where we’re going to take a look at the Brief History of Bitcoin. Thank you.