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Like it or not Bitcoin has been invented and is on it’s way into your life.
The invention of bitcoin, much like the invention of the automobile will have a profound effect in your daily life in the not so distant future.
I believe that it is very important to have at least a basic understanding about how to use it. You don’t need to understand how it works in order to use and benefit from it. Much in the same way that you don’t need to understand how the internal combustion engine works in order to drive to your local store.
In this article I will discuss the very basics about bitcoin, it will not go into too much detail or dive into it’s technologies.
Points I will cover:
- Very brief overview of what money is
- What is bitcoin
- What problems does bitcoin solve
- What problems does bitcoin create
- How to get bitcoin
- How to secure your bitcoin
- How to spend your bitcoin
- Very brief intro to the Lightning network
What is Money?
This is an extremely huge topic that can be talked about for many hours. I will just be covering what money is in an very broad sense. Primarily what money is to the average everyday person.
Fundamentally money is a way to store value earned from goods and services over time so that later the value can be exchanged back into goods and services.
Example: You spend an hour mowing someone’s lawn they pay you $100. The money that you received represents your time and labor that you spent mowing the lawn. You have basically taken your life’s energy and exchanged it for a piece of paper. It’s kind of like a battery for your life’s energy.
You can now take that piece of paper and exchange it for someone else’s goods and services. So long as the other person agrees that the piece of paper is a fair trade for their life’s energy that they put into those goods and or services they’re selling. Basically they are now trading their life’s energy for your piece of paper, and the cycle repeats.
There are many other aspects to money that are worth exploring. I recommend reading “The Bitcoin Standard” by – Saifedean Ammous as the first three quarters of the book really dives into this topic.
Money can be anything from sea shells to gold and many things in between. In order for something to be considered good or sound money it should have the following properties.
Sound money should be:
- Durable – Not easily transformed or destroyed
- Portable – Easy to possess and move about the world
- Fungible – Each unit should be easily exchangeable (4 quarters = $1)
- Scarce – Not easily obtained
- Divisible – Self explanitory
- Recognizable – One should be able to verify that the money they have is legit
Bitcoin has all these properties.
What is bitcoin?
Bitcoin is a network based digital money.
Bitcoin is a digital money that through the use of extremely clever mathematics, and network effects, possess all the above properties of sound money. Durability, portability, fungibility, scarcity, recognizability, and other unique properties that make it the most sound money ever created.
What Problems does bitcoin solve?
Counterfeiting:
With a digital thing like a picture or mp3 file you can very easily make an exact copy of it and send those copies anywhere across the internet.
Bitcoin on the other hand takes a digital thing and using some clever math tricks and network effects makes it unable to be copied (counterfeited). It is practically impossible to counterfeit bitcoin.
I say practically impossible because it’s not practical to counterfeit bitcoin. It would cost more in energy to counterfeit the bitcoin than the bitcoin would be worth. Much like you could theoretically turn lead into gold using nuclear fission, it would cost more money in processing than the value of gold you would get in return. Therefore impractical.
Trustless secure storage:
Before the invention of networked computers people kept their money in the form of either paper currency or pieces of gold or silver. Then to keep their money safe they had to jump through a bunch of hoops like storing it in a bank, under a mattress, in a safe etc. All of these storage methods had tremendous risks associated with them.
Today people trust their money to a third party banking system which could fail or be seized at any time.
Bitcoin can be secured simply remembering 12 words. (seed phrase to your private keys) Without these 12 magic words no one can take control of your bitcoin. No one, not ever.
Trustless transportation:
Unlike regular forms of money, you do not need to transport bitcoin. Your bitcoin exists on the network everywhere in the world all at the same time. So as long as you can access the network you can access your bitcoin.
If you had $1,000,000 in gold (approx 45 lbs) and you wanted to leave your country with it, you open yourself up to a whole bunch of problems ranging from laws telling you that you can’t take out of your country, to being robbed as you travel with it. Not to mention that carrying 45 lbs of anything on your person can be problematic.
Limited supply
There will be only approx 21 million bitcoin ever in existence. This can never be changed without the majority of the people that are running bitcoin software’s consent. (practically impossible) This scarcity ensures that bitcoin will always retain it’s value.
100% Accountability
Each and every single bitcoin transaction is recorded on a publicly auditable ledger. Each and every person running the bitcoin software can verify that each and every transaction is legitimate on the bitcoin public ledger. You can be assured that your bitcoin rightfully belongs to you and only you. This is practically impossible to do with other money systems.
There are more problems that bitcoin solves. I encourage you to seek out more info (links below)
Problems bitcoin creates
Personal responsibility
Bitcoin forces you to be responsible with your money. If you loose your private keys (think password) then you loose your bitcoin. Much in the same way that if you loose a dollar bill you’ve lost it, actually it’s more like lighting your dollar bill on fire, you’re not getting it back.
Not your keys not your bitcoin
If you do not control your private keys yourself then whomever does, owns your bitcoin and can send it to anyone they wish to. So keep your private keys safe and under your sole control.
Whomever controls the keys is the owner of the bitcoin, period.
Governments may not like you having bitcoin
Governments typically control the money within their respective borders. They cannot control bitcoin, even if they wanted to. It’s truly a money by the people for the people.
No one can take your bitcoin without your consent and no one can stop you from exchanging your bitcoin with anyone else. This makes bitcoin problematic governments. Governments like to be take your money without your consent (IRS witholdings, bank account seizures)
Many governments don’t allow you to take large amounts of money with you when you leave the country. It’s impossible for them to stop you from accessing your bitcoin anywhere in the world.
So you may or may not run into governmental issues if you own bitcoin.
Bitcoin is not private!
Because each and every transaction is publicly viewable to anyone running the bitcoin software, once someone has associated you with a particular bitcoin address it’s trivial for them to figure out where got your bitcoin and where you’re spending your bitcoin.
There are ways to be more private but that’s beyond the scope of this article.
So for now don’t buy things with bitcoin that you don’t want others to know about.
Bitcoin scalability problems.
The way bitcoin works is that transactions get settled to the public ledger about every 10 minutes on average and incur a fee which can get quite expensive. The details regarding this are beyond the scope of this article, but suffice to say this is a problem which is currently being solved with second layer solutions such as the lightning network. More on lightning later.
Dependency on access to the network.
Bitcoin requires access to the bitcoin network typically over the internet. No internet, no bitcoin. No electricity, no bitcoin.
This may seem like a serious flaw with bitcoin, but if bitcoin becomes the standard money used by all people then having access to electricity and internet would be a very high priority for everyone and outages would be short lived.
Having some gold, silver or dirty fiat on hand may not be a bad idea in case of such emergencies.
And more, I encourage you to seek out more info (links below)
How to get bitcoin
Finally the good stuff. How do I get some of this magical internet money.
Just so you know each bitcoin can be divided one hundred million times.
The smallest unit of bitcoin is called a Satoshi or Sat for short, named after bitcoin’s creator Satoshi Nakamoto.
So you can easily purchase small amounts of bitcoin like $20 worth at a time.
As of this writing $20 worth of bitcoins is 44,258 Sats or 0.00044258 bitcoin BTC for short
Buy from an exchange.
There are many ways to get bitcoin but probably the easiest for everyone would be to buy it from an exchange like coinbase (affiliate link – Free $10 in BTC)
Once you have jumped through all of Coinbase’s hoops and purchased bitcoin from them, you still don’t own bitcoin. Remember not your keys not your bitcoin. Coinbase owns the private keys to the bitcoin. This is called a custodial solution as they are in custody of your bitcoin on your behalf. Much like a regular bank has custody of the dollars you deposit into it. They allow you to transfer and trade it but while they have custody of it on their site, they ultimately own the bitcoin you purchased and can steal it from you if they wanted to. So what do you do?
How to secure your bitcoin.
There are many ways that you can take custody of your bitcoin. I’ll only be covering the really easy solutions. I highly recommend learning more about bitcoin security.
Get a bitcoin wallet on your phone or computer.
There are bitcoin wallets for your phone or computer that you can have that allow you to store your bitcoin while controlling your keys.
The one’s that I’ve used are Coinomi, and Jaxx Liberty. Both have desktop as well as mobile wallets.
I don’t really have an opinion regarding them as I’m still trying them out.
Once you have a wallet installed and you have safely secured your magic 12 word seed phrase. Go to your coinbase account and transfer your bitcoin to your wallet. I recommend you send just a few dollars worth to make sure it works. It can take up to 30min for the transfer to take place so be patient. (This is why the lightning protocol was created)
Hardware wallets.
Hardware wallets allow you to securely store your bitcoin keys off line. They are beyond the scope of this.
How to spend your bitcoin
The best way to explain this is through an example transaction.
Alice wants to pay Bob for mowing her lawn. Bob opens up his Jaxx mobile wallet and, taps on his bitcoin wallet then taps the receive button. A QR code pops up and he shows it to Alice.
Meanwhile Alice opens up her Coinomi wallet, taps on bitcoin then taps send. She fills out the amount that she wishes to send denominated either in bitcoin or USD. She then taps the QR code graphic. Coinomi opens the camera app which she points at Bob’s screen and scans his QR code. She then verifies the transaction details and then taps confirm.
In a matter of moments Bob’s wallet will show that Alice has sent him bitcoin. He will not be able to spend it until the transaction is confirmed on the network. This can take 30 min or longer but usually happens within 10 min on average.
Once the transaction is confirmed Alice no longer owns the bitcoin she sent, and Bob is now the new owner of the bitcoin. This transaction is irreversible and final.
A very brief intro to the Lightning network.
This business of waiting for 10 min or longer for a transaction to be confirmed is very problematic and does not scale at all for normal day to day transactions.
It’s fine for things that are not time sensitive but most everyone is impatient these days.
The solution, the bitcoin lightning network.
The lightning network is a separate network built on top of the regular bitcoin network that allows for nearly instantaneous transactions with negligible fees. These transactions sit a layer above the bitcoin protocol and are backed by and guaranteed by bitcoin base layer.
You don’t need to know how it works in order to use it. It’s fast, secure and extremely inexpensive to use. Which solves bitcoin’s biggest problem, scalability.
I plan on covering the lightning network in the future.
There you have it an introduction to bitcoin. There is a ton more to learn about bitcoin should you choose to. I highly advise anyone to dive down the rabbit hole and dig in.
Remember you don’t have to understand it in order to use it. Just like a car all you need to learn is how to drive it. You do not need to know what a spark plug is or whether or not you have a cap and rotor. Just get in and drive.
Resources
Learn about Bitcoin
Bitcoin.org is a good place to start
What Bitcoin Did Podcast by Peter McCormack
Dive deeper into the rabbit hole.
Bitcoin Audible Podcast by Guy Swann
Wallets
- Coinomi
- Jaxx Liberty
- Breez (lightning wallet)
Exchanges