Bitcoin: A gentle introduction in 2021

Bitcoin

While people refer to bitcoin as a decentralized digital currency, I prefer to view it as an electronic asset, to avoid the questions of which government it supports and who sets the interest rate, which is often a mental block for bitcoin to understand.

As an electronic asset, you can buy, own and send bitcoins to someone else. Currently (September 2015) about 14 million bitcoins have been created, with an increase of 25 bitcoins every ten minutes or so, with an agreed limit of 21 million, the last of which is expected to be created just before 2140.

the transactions from one account to another are recognized around the world within seconds and can generally be considered secure and settled within an hour. It is priced (usually in US dollars, but can be against any currency, as with anything else) and the price is determined by the normal supply and demand forces in the markets where traders trade, such as oil or gold.

What is bitcoin designed for?

A 2008 white paper written under the pseudonym Satoshi Nakamoto introduced the bitcoin concept and design principle behind bitcoin:

There is, for example, the concept of electronic money: money is an advantage for the operator, like money in your pocket that you can spend whenever you want without the permission of a third party.

Before it, there was never electronic money; we store the numbers in the database of a financial institution, such as a bank or Paypal, for which you had to follow the rules for opening and using an account and for which you had to request authorization before you could transfer the money.

Why to use it?

I think of bitcoin as another international currency whose internet is the internet, unlike any geographical location. In other words, if the internet were a country, bitcoin would be the currency. For the first time, we have a digital asset that can be managed by the end-user without registering with an institution.

Bitcoin payments. Bitcoin payments can be made from one person to another, regardless of geographical location or jurisdiction. Payment is relatively fast: the first notification is received within a few seconds and ‘ready’ within an hour. In situations where the normal financial system is inadequate, it can be a useful way to convey value to anyone with access to the internet.

Potential users. Some communities are served by banks due to the costs/benefits of the traditional banking model and the regulatory costs; some international transfers are unreliable or can take many days and use manual and fax processes as part of the plumbing work; some people may want to accept digital money for the sale of digital goods; there may be cases where small payments, in the order of cents, can be useful, which is currently difficult with existing credit card levy structures. There may be other uses we have not yet discovered …

Price volatility. Like other currencies, the price of bitcoin fluctuates. The price of bitcoin is more volatile than many currencies (although volatility decreases), so if you consider your assets in your local currency, owning bitcoin is essentially a bet on the future price of the bitcoin exchange rate. You can see the volatility on the Tradeblock website.

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Like other currencies, you need someone to trade with if you have a currency (for example GBP) and want to convert it into bitcoin. It necessarily has frictions and loads: o disguised as commission; or included in the spreads (the conversion price). Over time, the conversion becomes easier and cheaper as more exchanges are done in more countries.

Keep your cynicism. You might think Bitcoin is ‘fast’ and ‘free’ or ‘cheap’. While this is true if you are strict with bitcoins, it is worth staying cynical and considering the costs associated with ‘active’ and ‘foreign’ bias in sovereign bitcoin returns.

How does it work?

A computer network validates and monitors Bitcoin payments and ensures that they are recorded by adding you to a growing list of all Bitcoin payments.

Keep up to date with payments: the Bitcoin Blockchain

There is a file (or rather, split into several files) called “The Bitcoin Blockchain”, which can be found on thousands of computers around the world, including my laptop at home. If you have read the word “blockchain”, think of “database” or even “list” and you will have the right idea. Read a brief introduction to blockchain technology for a blockchain foundation.

The bitcoin network. Computers that store this file also use software that connects it to other computers that use the same software on the Internet.

 It forms a computer network that is able to communicate with each other and provide information on:

1. new payments (at the time of writing there is about one new bitcoin payment per second, but it comes and goes)

2. Bitcoin Blockchain updates (every ten minutes a new “page” or valid transaction block is confirmed and distributed to all computers in the network)

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