Bitcoin Whiteboard Tuesday – What is Bitcoin?

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Hello guys and gals, I’m Ariel from 99Bitcoins and welcome to your very first lesson about Bitocin!

In today’s video we’ll be asking the most popular question – the #4 most searched query on Google in 2014 – “What is Bitcoin?

 

This sounds like a simple question but it tends to get some complicated answers. In this video we’ll make sure to cover all the bases but also to keep it simple. If you find anything interesting that I didn’t talk about enough, there’s lots more to read about it if you search for it – I urge you.

The correct answer is “The first decentralized digital currency”, but that’s quite a mouthful. So before we begin to understand this, lets start with a more basic question that most people usually don’t ask themselves: “what is money?”

Money, ultimately, is simply the tool that we use to exchange value. Throughout history we’ve used lots of things as money, from seashells, to precious metals, to salt… The most popular money, historically, has been gold. There’s good reason for this: gold works really well as money. It’s rare – so it’s not worthless, and it’s tangible so if you’re holding it in your hand it’s probably yours. Pretty simple. And this worked for thousands of years, no matter what social institutions exist around you, no matter who the king or government is at that particular time. Gold just worked.

Then came along a new invention: paper money. When you think about it, for someone who uses gold their whole life, paper money is a hard sell. Trust paper instead of metal? Well, paper money actually started out as just a representation of gold. For e.g. the US Dollar was originally just a “gold certificate” which is a piece of paper saying you own some gold that’s sitting in a vault at the treasury. In other words, people never trusted paper money, they trusted the government to hold the gold for them.

Time passed and the US has since abandoned the so-called “gold standard” during the 70’s and today the US Dollar is actually a “fiat” money. “Fiat” is a Latin word for “it shall be” which is another way of saying “forget about gold, let’s all just agree that this paper is worth something, ok?” And that apparently works, because we’re all using fiat money these days and we don’t have to have “hard currency” or “tangible money”. Paper money has some advantages and disadvantages. The biggest disadvantage is that paper is easy to counterfeit, something that’s practically impossible with gold. Almost anyone can simply print paper at home. But there must be advantages that make it worth this trouble, right? Fiat money is actually a form of digitization – that is, we’re dealing with numbers, not metals. This makes money much easier to count, manage and move. In fact, the vast majority of money these days are actually just numbers in computers, believe it or not.

Wait a minute, so if money today is digital, how does that even work? I mean, if I have a file that represents a dollar, what’s to stop me from copying it a million times and having a million dollars? This is called the “double spend problem”. The solution that banks use today is a “centralized” solution – they keep a ledger on their computer which keeps track of who owns what. Everyone has an account and this ledger keeps a tally for each account. We all trust the bank and the bank trusts their computer, and so the solution is centralized on this ledger in this computer. Computer scientists though, weren’t pleased.

Decades later in 2008, an anonymous researcher publishes a paper describing how to solve this problem without a centralized solution – that is, without a bank. He called it “Bitcoin” and went on to describe how you can make a ledger that doesn’t rely on a single particular bank – this is, a decentralized solution. This may sound confusing, or at best like science fiction. How does something work if it’s decentralized? You actually already know the answer to this, you’re using a decentralized solution right now to watch this video: the internet.

Think about it: nobody owns the internet. It’s the most vast and powerful network that humans have ever created – but there is no “Internet, inc.” – so it’s decentralized. Lots of individuals and private companies all build the infrastructure of the internet, across companies and border and even ideologies, and it works – much thanks to profit motives and economic interests. So if the internet decentralizes information technology, how does Bitcoin decentralize money?

At this point many videos would start getting technical and complicated, but we want to keep it simple. In Bitcoin, the coins (or rather the transactions) are all recorded in a ledger. So far, nothing new. The big deal with Bitcoin is that this ledger is public and shared. Not only, it’s also maintained by the public. Thousands of people have a copy of this ledger around the world, and anyone can download and verify this ledger. In Bitcoin, instead of accounts, money is moved between addresses – kind of like email.

Usually people get concerned when they hear about this ledger being public. Isn’t this a privacy problem? Like most privacy issues, it’s complicated. Whatever you may have heard about Bitcoin – it’s not really inherently anonymous or identifiable. We will touch on this in a later video.

OK, maybe it’s not anonymous or something, but isn’t this a security problem? Well, if you think about it, it’s not a security problem. If you think that this public ledger is easy to hack, try to imagine hacking the English language – you can probably hack into Oxford Dictionary computers and change some definitions, but that wouldn’t be a big problem. There are lots of copies of dictionaries all over the world – you can’t fool everyone by hacking only some of the copies. In Bitcoin, the dictionary that helps everyone stay on the same page is the ledger, and this ledger is called the “Blockchain”.

So now that we understand how Bitcoin is digital, and how Bitcoin is decentralized, we can finally say: “Bitcoin is the first decentralized digital currency”.

But what does this all matter? Is Bitcoin going to change the world? That’s a question we’d all like to know, eh? Well, let’s start by considering that Bitcoin is non-geographic. If economies fall or governments change, Bitcoin won’t be affected like fiat currencies. It is also much more internet friendly, which means online commerce can improve. But the biggest winners here are probably the billions of people across Asia and Africa and other places that have an internet connection but have horrible banks.

I mean, with my bank I can shop online and send money across the world even though it’s really slow and quite expensive.  But in Kenya, they use cell phone minutes as money, they buy groceries with air time. In Argentina people are exchanging money in the black market because of inflation that makes it impossible to save money for a rainy day or for retirement. Non-geographic, global money is exactly what these people need – it works even if your government or banks don’t work.

Of course, Bitcoin isn’t only offering an economic alternative, but also a technological alternative. After all, Dollars today are numbers on a computer which represent numbers on a paper which used to represent hard metals, according to laws written hundreds of years ago. Bitcoin was born in the 21st century, which is why it is able to do lots of things that make people call it “smart-money”. For the same reason phones today are called “smartphones”, because they have more features than cellphones from a decade ago. We won’t get into details, but Bitcoin has some advanced features that you don’t get with the old money that we have today (things like colored coins, smart contracts and multisig).

Of course, businesses have started accepting it all around the world, some big names include Microsoft and TigerDirect and a whole bunch of airlines. There are websites to help you find Bitcoin-accepting businesses. In fact, I got my paycheck in Bitcoin for over a year – and there are lots of people offering professional services in exchange for Bitcoin.

The implications for Bitcoin are obviously hard to measure. In reality there is a whole industry, fields of research, and grassroots movements growing – much like there was when executives from AOL and young students were all trying to explain to people what is this “internet thing” back in the ‘90s.

So I hope you’ve enjoyed our very first edition of BWBT and I can’t wait to see you in our next video. If you still have any questions or comments on the video feel free to leave them in the comment section below. Bye for now!

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Ariel Horwitz

Ariel Horwitz is a Bitcoin activist, educator, and consultant. He has been involved with the Israeli Bitcoin Association, The Bitcoin Embassy in Tel Aviv, and has founded AlefBit - the first Bitcoin education website in Hebrew.

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114 Comments

  1. Thank you so much for this wonderful introduction to bitcoin! I was introduced by a friend who told me about doubling bitcoin every 90 days passively so I needed to better understand. Your videos have been super helpful! Based on this I signed up and OMG, it is working! Now I can build my bitcoins. I wait for each of your videos to hit my inbox! Thanks again!

    • Ofir Beigel on

      Hi, the site you are referring to is probably a HYIP (High Yield Investment Program), they are usually scams, I suggest avoiding them and withdrawing your Bitcoins from them as soon as possible.

  2. Hi guys, I’m new to your blog and I’m glad I found it.
    I’m interested in investing so I’ve been doing some research and in doing so I came across “the new bitcoin.” What do you know about this new digital currency?

  3. Hello Ariel. You have a good grasp of what crytocurrency bitcoin is. I have a FB page I called Bitcoin Education and I am trying to pull in all information I gather about bitcoin. Can use your videos and articles in that page at the same time putting your link on my page?

    • Ofir Beigel on

      Hey Lito, this video is also on our YouTube channel. As long as you use the video in whole (including intro and ending) and don’t remove the watermark on the top right you can use if. Just make sure to give us proper credit. Good luck!

  4. Mokgoba - South Africa on

    Thank you for explaining what this new currency is all all. I think that this will work for me as South Africa is in the Junk status. Can’t wait for the next video.

  5. Thanks for the explanation. it was very informative.
    I can’t wait to learn more in your next lecture

  6. Hi I think I have a basic understanding of bitcoin and I thank you for that. I do believe that a universal currency is key to end poverty and the answer to giving ppl living below the poverty line a boost in their financial standing particularly those in third world nations. I would like to know where I can purchase coins and how do I get in in the trading aspect of coins. I feel that if enough ppl start using them and if more companies start accepting them the banks and other institutions will have no choice but to accept them as they will be left holding all this paper money that no one uses anymore. Thanks for your videos.

  7. Nagenda Abraham on

    That’s a nice tutorial… Hope to get more information about how much do i need to start a bit coin account..
    Secondly I would want to earn bit coins by writing articles. Can you connect me to those who could be interested in my services

  8. I can’t seem to figure out how to buy bitcoins I want to use my debit card ideally or even paypal how do I do it cos I’ve tried for weeks

  9. To which degree does Bitcoin stand a chance against governments? The IMF / World Bank clearly dislike the idea behind Bitcoin due to the money’s decentralization and thus loss of power / higher possible transparency levels. As a first result, the SEC recently refused Bitcoin’s access to the ETF. Knowing the power of governments and their desires to keep us all controlled inlcuding macro-economical games, when can we expect Bitcoin to be fully accepted / granted access to the ETF?

    Last but not least, the current price for a bitcoin is a bit confusing, from my point of view. How can 1 Bitcoin already cost more than a 1.000 USD although it is a currency that “does not really” exist yet (Yes, I now one can pay already here and there with it). From an investors point of view, does it makes sense to start trading bitcoins? Because, if Bitcoins truly conquers markets one day, the Bitcoin value needs adjustments.

    Thanks

    • Ofir Beigel on

      Hey Gordon, thank you for writing in. I’ll try to cover most of what you’ve asked.
      Regarding governments, Bitcoin and ETFs – Bitcoin doesn’t need governance. The SEC’s decision is actually not that disturbing in a sense that the SEC just validated what we already know “you can’t regulate Bitcoin”. So basically, we don’t really need an ETF. I mean it would be nice to open the Bitcoin market up to normal investors but even if Bitcoin never gets an ETF approval it doesn’t really matter – it’s not what it was made for.
      Think of Bitcoin like the Internet of money – no one can actually govern or control the Internet. No one can regulate it, and the same goes for Bitcoin.
      I suspect that as Bitcoin gets adopted by more and more people the traditional institutions will start accepting it and perhaps we will even see an ETF coming in the next few years, but the beauty of it is that we’re not dependant on it.
      Regarding the price of Bitcoin – I hate to be the one to break it to you, but the US dollar doesn’t really exist as well :) It’s only worth something because the US government said it did. All currencies that you know of today are some sort of an illusion. They have value because people believe they will be able to trade them for something else (gold included). No currency has any intrinsic value like cattle, or wool or milk – things that can actually help you survive.
      Regarding trading – I’m not sure I understand the question completely. What do you mean by “does it make sense”?

      • It’s only been very recent that I’ve tried to understand the concept of bitcoin….a bit behind the times, I know. I’ve really enjoyed the reading so far but still struggle to make sense of it entirely. Even though paper money is supposed to be a representation of something with real measurable value, governments do have the control, it’s the acceptable way of business & we basically know it’s function in the global market in terms of currency. I go to work & get paid in AUD. I know it’s value, & lack of. How would that convert to bitcoin if bitcoin doesn’t reflect a currency? How many bitcoin would I receive to reflect my usual wage?
        I’m also confused about how taxes can be applied to bitcoin, if at all. My first thoughts are, if there is no fixed value or currency, & not govt regulated, who imposes the tax & what are they basing it on? Where do the taxes go? Here our taxes feed the greed of our govt, who would collect bitcoin tax?

        • Zsofia - 99Bitcoins support on

          Hi Tracey, welcome on board! We are glad you found the site useful. The value of Bitcoin is decided completely on the free market based on demand and supply. Taxation is a good question, it is dependent on each country how they treat digital assets and what is the legal status of Bitcoin. Taxes are imposed by the governments so they collect them.

  10. This was very good. The one thing I can’t get my head around is where does my “money” or digital currency go? To bitcoin heaven, purgatory, or where?? lol Thank you for your excellent website and free information. I very much appreciate the way you explain things.

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