Cryptocurrency, ‘crypto’ (noun): a digital asset (thing of value) designed to work as a form of capital (wealth) using cryptography (making something secret) to secure transactions and control creation of additional units of currency. Cryptocurrencies allow for extreme liquidity (rapid exchanges of assets). Bitcoin is the first and most well known of many, many cryptocurrencies.
Here we go! Just by being here, you have taken a critical step towards understanding and investing in cryptocurrencies. As you will soon see, cryptos are revolutionizing not only our personal financial independence but also the way our global economy operates. So get psyched! In this course we will explain the main concepts underlying cryptocurrencies so that you can see through the haze surrounding Bitcoin and take control of your financial future.
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We founded Bitbuddy because we believe in what cryptocurrencies stand for, but we’re frustrated with how inaccessible they are to the general public. Information about cryptocurrencies is scattered across the Internet, generally confusing, and sometimes untrustworthy. We’re here to change that.
Why should I care?
Since its creation in 2009, the value of Bitcoin has risen from fractions of a cent to over $6,000. That’s a huge return, and it’s still increasing! This is unheard of in the financial world. Fortunately for us, the cryptocurrency market is young and expanding fast. Cryptos offer you a way to grow your assets and personally control your investments without the muck of the current financial system. The time to make money is now.
Check out these returns!
This may look like you’ve missed the trend, but trust us, Bitcoin is still in its infancy.
Breaking it Down: An Analogy
Imagine we’re sitting on a park bench enjoying a nice, sunny day. You mention that you are hungry, and I (being a generous and thoughtful benchmate) take out an orange and give it to you.
So, you now have one orange and I no longer do. That was pretty simple, huh?
Let’s analyze what just happened:
I physically handed you my orange. We both know it happened. We were both there, there was only one orange involved, and we both saw it. Because we can see and feel the orange, we don’t need anyone else there to help us make the transaction. We don’t need anyone to sit with us on the bench and confirm that the orange changed hands.
The orange is now yours! I can no longer give you or anyone else that orange because it belongs to you now; I no longer have control over it. You can give the orange to your friend if you want, and then that friend can give it to their friend, and so on. This may seem drawn out, but stay with us!
Our scenario is an analogy for an in-person exchange. Normally you would give me something in return for my orange (hence exchange), but the tangibility of the interaction is the same regardless. We act as parts of in-person exchanges when we buy groceries, gasoline, or a slice of pizza.
Easy!... Hey, wait a second, organizing an in-person exchange for everything is a hassle! What if we want an orange from someone in Brazil? It isn’t feasible to run a global in-person orange exchange, but surely with all the new fangled tech available there’s a better way to do things. Now things get a bit more complicated.
Hypothetically, let's say I want to send you a digital orange (meaning I send you an orange as a file using our computers). We’ve conducted a transaction, but how do you know the digital orange is now yours, and only yours? It’s more complex, right? How do you know that I didn’t send that orange to someone else first or to as many people as I’d like? You’d still get an orange, but so would everyone else, and at the end of the day I’d still have the orange, too!
As you can see, digital exchanges and in-person exchanges are vastly different. Being able to spend the same digital asset multiple times is such a vexing issue that it actually has a name: the double spending problem (because within a digital exchange, one could theoretically spend the same digital asset multiple times). Solving this obstacle has been a breakthrough for computer science, and here’s what the solution looks like...
A ledger is nothing more than an accounting book. If we decide to use a ledger for exchanging oranges, we could create one and say that all transactions will be written in it. When we sat on the park bench earlier, I could have written “I gave you one orange.” There! It’s in the ledger now. If there is ever any dispute about transaction history, we can just check our ledger.
But wait... when things turn digital, how can we use the ledger? Who writes in it, and where is it stored? If one person owns the ledger, how can we trust them to keep track of orange transactions fairly? What’s to stop them from simply fabricating exchanges?
Here’s how we solve it:
Instead of the ledger being given to one person, it is given to every person involved in our exchange. We create a digital orange market open to anyone, and a complete copy of the ledger is kept on every computer involved in exchanging oranges. All of the transactions that have ever happened are in the ledger, and the ledger is continuously updated. No one can cheat it— I can’t send you digital oranges I don’t have because then my ledger wouldn’t sync up with everybody else’s in the system. Everyone with a ledger would know I don’t have enough oranges.
There’s more! Who updates the ledger? Anyone can, and everyone is encouraged to. If you do, your reward is more digital oranges that are created (more on that later) and added to the open orange exchange, in addition to fees paid by those exchanging oranges. Creating more, new digital oranges is what incentivizes people to monitor the ledger!
Our digital orange exchange scenario, in the most basic sense, is how Bitcoin and other cryptocurrencies operate. They use public, digital ledgers to keep track of digital transactions.
Public ledgers are a major breakthrough, and here’s why: using the ledger, the exchange of a digital orange is now just like the exchange of a physical one. Think back to our original scenario: when I handed you my physical orange, I had no oranges left. If I then tried to hand another friend an orange, I couldn’t have, because I had given you my only one. Makes sense. Using digital, public ledgers, the same principle is true. I can’t give out two oranges because everyone with a ledger knows how many oranges I have. If I try to give out more oranges than I have, the ledger will know I’ve overdrawn and my transactions will be invalid. Public ledgers allow digital transactions to be as clear cut as physical ones - but let’s go further.
Physical exchanges are limiting. If I want to sell you a thousand oranges, I better bring a big truck with me. If I want to sell .0001 oranges, I better bring a microscope, too. Using a digital exchange, I can buy or sell one orange, a thousand oranges, a million oranges, or a tiny fraction of an orange without needing to use a physical orange at all! I can send it anywhere around the globe with the click of a button even if you and I are halfway across the world. Digital exchanges allow us to transact globally without being inhibited by physical space. No trucks or microscopes needed.
Here is a video to help reinforce what you just learned. (Coming Soon).
Cryptocurrencies: Just Like Oranges
So, what's the difference between exchanging a digital orange and exchanging Bitcoin? The answer is, not much. In the simplest possible terms, Bitcoin and other cryptocurrencies are digital stores of value. Bitcoin can be used to buy goods and services, just like any fiat currency (the Dollar, the Euro, the Yen, etc.). So what makes Bitcoin so special?
The answer lies in the way that Bitcoin and other cryptos are managed – they are decentralized. This is what makes Bitcoin the first truly global currency – you can pay someone in Russia, New Zealand, or Iceland in Bitcoin with no more trouble than you’ll have paying for your groceries down the street (if the grocery store accepts Bitcoin, which is already true in some places). And by the way, more and more stores are accepting Bitcoin. Bloggers often write about their experiences paying for things exclusively using Bitcoin, and furthermore there is now a special type of debit card (backed by Visa) that allows you to pay for anything with Bitcoin by transferring your Bitcoin to dollars as you make a purchase. Nowadays, if they take Visa, they take crytpos too.
Back to centralization vs. decentralization. When you go to a bank and withdraw a US Dollar, you receive a note issued and controlled by the Federal Reserve. Fiat currency is, by definition, not global. If the Fed decides to print a billion more dollars tomorrow, it may do so without consulting the public. Yikes. As a result, one central authority has complete control over the value and quantity of the notes in circulation.
However, with Bitcoin, no one person or entity has control over the number that exist or over the value of the coin. So where does the value come from?
The Value of Bitcoin
Many people want to understand why Bitcoin holds any value. This makes sense considering that it’s relatively new, and we’re all used to exchanging physical money rather than cryptocurrency. Here’s a thought experiment: pull out (or imagine) a dollar bill. In reality, it is just a dyed piece of cotton with numbers on it.
So why does it have value? Until 1973, the US Dollar was backed by actual, physical gold. Since that is no longer true, our currency is no more than a piece of paper certified by the US government. The dollar derives value from our collective perception of its value and the fact that we accept it as a platform for buying and selling goods and services. If retail stores suddenly stopped accepting cash as a store of value, it would be worthless. We, as a society, believe that a piece of paper with a “100” on it is worth $100 and therefore it is. Take a step back and consider how the value of any currency comes from the people who use it and not the currency itself!
Another note on fiat currency:
In the early 1900’s, a piece of paper with a “100” on it was worth $2,518.56 in today’s money.
That’s a lot of inflation.
Imagine how disappointed a time traveller would be if they brought a $100 bill back from 1910 only to realize that bill is worth far, far less now. The US dollar (or any fiat currency for that matter) is flawed in that it can inflate without limit and is controlled by a central authority.
Cryptocurrencies do not abide by the same rules.
Like the dollar, Bitcoin’s value is derived from public perception. It’s worth whatever we agree it’s worth using an open marketplace (the public trading freely). Unlike the dollar, there are a limited number of Bitcoin available, and that number cannot and will not change. It does not inflate. There will only ever be 21 million Bitcoin in circulation. As demand increases, the value of Bitcoin rises proportionally because of this fixed quantity. When Bitcoin was created in 2009, each coin was worth fractions of a cent because so few people were involved in the market. Bitcoin has increased in demand and gained so much popularity that each Bitcoin is now worth over $6,000. People have made millions of dollars doing nothing more than buying Bitcoin and holding it, and the price is still rising.