Have you heard about Bitcoin but have no idea what it is?
I have written this article with you in mind as, like you, I have been unaware of what Bitcoin was.
While it is easy to find out what Bitcoin is, it is not easy to find about its benefits and disadvantages.
My key goal is giving you the pros and the cons of Bitcoin so that you can evaluate your investment.
- The more practical way to learn What is Bitcoin
- Money and the government
- Money and the banks
- How Bitcoin works
- The speculation of Bitcoin
This is no financial advise, all the content and the ideas present in this page and all the other pages of the website do not guarantee financial success and may lead to a loss of your money. You should always do your own due diligence before trading or seek professional advise.
Some of the links available in this page may generate a commission for the author.
The more practical way to learn What is Bitcoin
I am sure that you know that Bitcoin is worth a lot of money nowadays and people use it for buying several things.
At the end of the story that you are about to read you will know exactly what Bitcoin is.
Most importantly you will have a better idea of whether you want to have anything to do with it.
Before money existed, humans traded things of value between each other.
Money is a mere invention to exchange things of value in a practical way.
Imagine if you had a gold bar and needed to pay for a coffee.
The government commands us to accept money as a form of payment for things of value that we want to exchange.
Money is trust
We can define money with the word ‘trust’ as we all accept that a worthless piece of paper is worth something.
Did you know that the money in your bank or the money that you hide under your mattress could become worthless?
Think if nobody would accept money and would ask you for something else instead?
All your money would be just a bunch of paper that would have no purpose.
Guess who has the power to decide whether your money can lose all (or part of) its value?
The More Practical Way To Learn What Is Bitcoin
- Don’t worry, no techno-babble in this article!
- Money exists to make exchanges more practical.
- Money has value only because the government decided so (and has the power to decide that it’s worth nothing).
- Money is trust towards your government and the fact that you can use it in exchange of things of value.
Money and the government
Things change, powers shift between countries…
We don’t know what solutions our governments will adopt in the event that our country will be at risk.
Coronavirus is testing the world economy and many countries are printing money.
If you knew that printing money is not good but don’t know why, here’s why:
Inflation is the sustained increase of prices.
Seen from another angle, inflation is the diminishment of your buying power.
To know how catastrophic inflation could be, you can check hyperinflation in Venezuela.
If you are still seeing money as something that you can trust, here’s another thing that can happen to your money:
Your government could abruptly decide that your money would no longer be valid.
It has happened in India with some banknotes, and if you read the link you would notice it is not nice.
Money and the government
If we live in a first world country and believe that we will always be the wealthy ones, we should be aware that things may change.
Inflation is a real thing and happened in several countries, one recent example is Venezuela, their money is now worth nothing.
The government may decide that some banknotes are no longer going to be valid, like in India, where it caused serious problems.
Money and the banks
If you think that after the government you are in charge with your money, here come the banks!
I need to talk about banks because they manage your payments and Bitcoin is about payments as well.
When you pay someone in person it is nearly impossible to use the same banknote to buy the same product twice…
Unless you are smarter than the merchant…
When paying online it is not as simple though…
Spending the same money for different purchases is also known as ‘double spending’.
The bank’s solution to Double Spending
To make sure that you are not double spending your money, your banks hold your ledger into their systems.
They check the amount of your money and do all the subtractions and additions on their computer.
In other words the banks add and remove money from your account on your own ledger.
Your ledger is not available directly to you because it is on a system that doesn’t belong to you.
Here’s why money can be called trust.
You trust the government not to mess with your money and then the bank to manage your ledger correctly.
This is what they mean when they refer to centralized money.
One centralized institution has absolute control over your money.
Ever wondered why rich people have lots of gold?
Wonder no more…
Gold is valuable and is not controlled by the government.
Money and the banks
- You are not the one in charge after the government…
- Banks manage your ledger and they don’t give you access to it, they only show you what they have calculated for you.
- Banks manage your money that way so that they can prevent you from ‘double spending’ your money.
- Spending the same money for different purchases is called ‘double spending’.
How Bitcoin works
At the beginning of this century, someone thought to have found a way to prevent double spending using non government money.
The name of this person is Satoshi Nakamoto.
The name is a mere alias and nobody knows his identity or whether Satoshi is a person or a group of people.
I want to specify that we don’t know if Bitcoin is going to be the effective alternative to centralized money…
It only looks promising.
Unlike for the banks, Bitcoin’s ledger is public, yet almost impossible to counterfeit.
In jargon, the name of the ledger is BlockChain, which has this name because it is in fact a chain made of blocks.
Each block stores the information of many transactions and connects with other blocks.
Imagine a paper ledger where you can access to movements of money and each page is equivalent to a block.
The peculiarity of the BlockChain is that every transaction is public!
Everyone can see how much money moves and what account it moves in/from.
What nobody can see is the name of the owner of the accounts, making the BlockChain ‘pseudo anonymous’.
The BlockChain spreads through a network of users called ‘Bitcoin Network’.
The Bitcoin Network
The Bitcoin network is exactly a network of computers and everyone can be part of it, including me and you.
Each computer in the network is called ‘Node’.
There are different types of nodes, but we will focus on the ‘Full Nodes’ only as they are related to the BlockChain.
Every full node has installed the whole BlockChain.
The BlockChain is constantly synchronized with every full node connected.
This makes it possible to have identical copies of it on every single computer in the network.
BlockChain vs Bank’s ledger
While I am not stating that any banks would purposely manipulate any client’s ledgers on their end.
I can have concerns about:
- Bugs affecting my ledger.
- Hackers compromising my ledger.
With the BlockChain this is extremely difficult:
- Every change needs validation by other nodes.
- If I want to alter my wallet by adding 10 Bitcoins to my account, I may manipulate the ledger on my computer.
- Other Nodes will notice the difference and will start checking the origin of my Bitcoins.
- Because they come from nowhere, my transaction would not be validated.
- Not only would I not be richer, but I would also be banished (at least temporary) from the network.
In order to succeed in my attempt, I should be able to:
- hack every single node in the Bitcoin Network
- Inject the same transaction on each…
This is almost impossible to achieve.
Bitcoin vs Government Money
People define Bitcoin as ‘decentralized‘ because:
- It doesn’t belong to any institution.
- Its owners and adopters determine its value.
Being decentralized may have its own benefits, but it doesn’t necessarily have to.
What would happen with inflation and demonetization if Bitcoin was the currency in Venezuela and India?
Bitcoin vs Inflation
Bitcoin was born to be non inflationary because there is a maximum amount of Bitcoin that can exist.
Supposedly it will not be created above that threshold.
We can debate on the fact that at the moment Bitcoin is still being ‘printed’, but there will be a day when it will no longer be.
This would possibly have avoided the hyperinflation and the economic crisis in Venezuela.
Bitcoin vs Demonetization
If you haven’t checked the article about demonetization in India, here’s a very short explanation:
The Indian government wanted to remove some old banknotes and made them invalid from a future date.
The given time was too short and due to the lack of time/resources, the flux of people exchanging their banknote was unmanageable.
The demonetization had no bad intentions, but was not well organized.
What we need to take away here is that the government has the power to demonetize your money.
Unfortunately in this case Bitcoin would not make the difference.
The government can confiscate Bitcoin as easily as they can demonetize your money.
How Bitcoin works
- Bitcoin aims to avoiding governments and banks being involved with your money.
- Bitcoin was invented by Satoshi Nakamoto.
- Bitcoin tries to solve the problem above by having a public ledger installed on each computer that takes part of the Bitcoin Network.
- Each computer is also called a Node.
- Bitcoin’s ledger is called BlockChain.
- Each Node with the ledger installed is called Full Node.
- Each transaction of Bitcoins must be validated by multiple nodes, to ensure that nobody cheats.
- Cheating would require hacking each computer in the network.
The speculation of Bitcoin
If you decide to become a Bitcoin investor, my only advice is to always invest money that you can afford to lose.
There is no guarantee that it will either exist in 10 years or would have a greater value.
Bitcoin is a good asset to speculate from, by trading it and only temporarily hold it.
Personally I am a Bitcoin investor and I don’t trade it, but I am aware of the risks.
Bitcoin is becoming more popular every day and it is getting easier to use to pay merchants.
There are also debit cards and ATMs that work with Bitcoin.
This doesn’t make it immune to laws and actions against it from the governments of the world.
There is no guarantee that Bitcoin will increase in price over time or that it will continue to exist.
Due to the electricity needed by miners, Bitcoin has problems with its impact to the environment.
Like for every investment it is up to you if you decide to believe in it or not.
If you are interested in speculating this market I invite you to join me on YouTube of Facebook.
I will try to tell you when it is time to buy or sell Bitcoin without losing money.
Furthermore, if you are interested in becoming a professional trader, you may start reading the mini course that I wrote for you.