What is Bitcoin? This is an excellent question, and I personally had a hard time understanding the concept. Bitcoin is one of the most searched terms on the internet. Clearly, there is interest here. Let’s start by explaining what money is as opposed to Bitcoin. Money has value and was backed by a “thing” like gold. Obviously, it wasn’t realistic to walk around with bars of gold for payment of goods and services. So they created paper in place of the gold bars. Now we trust the government to back the paper money, which requires trust. We trust that the government holds this value. This is called FIAT MONEY. The definition of Fiat Money is that it is a currency that has value because the government orders it to. This is called “legal tender,” and stores and merchants must accept it as payment.
There are two drawbacks to fiat money…
- Fiat Money is centralized.
The government, in this case, is the central authority and has full control of fiat money. - No limit by quantity.
The government essentially can print as much money as they want, whenever they want. The problem this poses is by flooding the market with more “printed” money, the value of each dollar has dropped. Now your fiat money has less wort, the prices of things will rise.
What is Bitcoin
DIGITAL MONEY
In today’s world, we mainly use credit cards and online payments like PayPal and Venmo. Hence, my children barely know what a checkbook is or how to use it! My children are in their 20’s, and they use cash very little as well. Banks have made it difficult to get a checking account with all the fees and expect to keep a certain balance, etc. Credit Unions are typically more acceptable and don’t have as many rules and fees, but they still do. Many of the younger generations only know how to use Paypal, Venmo, and other types of digital currency. Credit cards now offer checking and savings account. So, there are many other ways we use already that do not involve checks or cash.
So why use Bitcoin if we are already using digital money? Part of the reason is there is a major flaw in centralized money. The government owns centralized money. Basically, the bank has all control of transactions made, forcing us to trust them as they trust their ledger stored on their computers. No one but the bank and/or the government has access to look at these transactions. This is where corruption comes in.
CORRUPTION
When power lands in the wrong hand’s situations like the Wells Fargo scandal happen where employees were creating thousands of fake accounts, inflating the revenue stream, this went on for years before customers knew what was happening. They literally have the power to control the value of money. If everyone were honest and there was no corruption, this method works. However, decentralized currency works very differently. It is not controlled by one person, bank or government. It is controlled by everyone who uses it. The problem with both methods of currency is DOUBLE SPENDING. There is always a concern digital money could be spent twice. Or paper money could be printed without there actually being an asset to back it up. This causes inflation and lowers the value of our money.
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In a centralized system, you give the government and bank all control of your money. At any time, they can freeze or deny you access to your own money. The government even has the right to cancel the legal status of paper money make it worthless. This is extreme but has happened in India.
DECENTRALIZED CURRENCY
To sum up, attempts by many to create a decentralized currency system were on the rise, but no one could figure out the double-spending issue. That is with no specific authority. A whitepaper was published in 2008 by someone calling themself Satoshi Nakamoto. In this white paper, Satoshi Nakamoto suggests a method of decentralized currency system using Bitcoin. This system claims to solve the double-spending issue with no central authority requirement.
CRYPTOCURRENCY
What is Cryptocurrency?
Cryptocurrency is a type of payment used for online services, goods, or products. Many businesses have their own type of currency, for example, tokens. You can trade these tokens for specific services or goods. Think of it this way, when you go to an arcade or gaming facility, often you must buy “tokens” to operate the games you want to play. If you have tokens left at the end of your stay, you can keep them for the next time you visit that game place. Cryptocurrency works similarly, except the products and services you can obtain are much broader than only playing video games at the game place you visited. Essentially you can purchase cryptocurrency with real currency.
Why Use Cryptocurrency?
You are probably wondering why you would want to buy a bunch of arcade tokens with your hard-earned cash, right?! This is exactly what I thought when I first learned about it. Basically, cryptocurrency is decentralized. What this means is no one central authority controls cryptocurrency. Today, our typical FIAT Money.
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What is FIAT money?
FIAT money is the currency the government issues. In the United States, we use paper money they print and control. When paper money was first introduced, each dollar was backed by a commodity such as gold. Today, the government can print money with no backing causing supply and demand issues. As a result, our hard-earned dollars could be less than what they should be worth. This causes hyperinflation. Cryptocurrency is a decentralized internet-based medium. Financial transactions are conducted using cryptographical functions. You are probably wondering now how these transactions are made and how secure is it?
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Types of Cryptocurrency
Before discussing what Blockchain is, let’s talk about the several types of Cryptocurrency. Here is a list of common crypto.
- Bitcoin (BTC)
- Litecoin (LTC)
- Ethereum (ETH)
- Bitcoin Cash (BCH)
- Ethereum Classic (ETC)
As discussed, a few of the main cryptocurrencies to give you an idea. Next, learn about blockchain.
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What is Blockchain?
Blockchain is an ingenious invention, to say the least. Blockchain has no central authority. It is a democratized system. There is no cost to carry out a transaction. Once a transaction is initiated, a block is created in the chain. This block is verified by millions of distributed computers on the internet. Furthermore, it is virtually impossible to falsify a record because it would compromise the entire blockchain.
There is a lot to know about cryptocurrency. Take baby steps and learn the most you can. There is a ton of information on the internet. Indeed try it out and see how it compliments your life and future lifestyle.
- Decentralized and not controlled by one “central” authority
- Keeps track of the cryptocurrency
- No human errors
- Transactions are only accepted if every computer connected validates
- Hosted by millions of computers
- Public and easy to verify
- No single point of failure
- It cannot be corrupted or embezzled
What is Bitcoin
This is a lot of information. To close, there is a lot to know about bitcoin. It’s a fascinating new currency that is growing exponentially. As a result, many are making a lot of bitcoin and are able to use it for just about any product or service offered today. Take this all in and do a little research on your own. Decide what investments are best for you and your family.