BITCOIN – IN SIMPLE WORDS

I get asked quite often to explain bitcoin, and I felt for knowing and understanding bitcoin you need to understand the basics and not just the transactional aspects of bitcoin. So here is my version of BITCOIN-101.

1-MONEY, BANKING, TRANSACTIONS.

If you know BITCOIN and you are questioning bitcoin, it’s because you have never really thought about how money in general and especially the prevalent banking system works. You do realize that the current banking and money concept, is a man made system formed over a period of time in the last several hundred years.

Money in a form of currency is only useful when its trusted by the people using it and its value is basically based on what people as whole say it is. Lets take for example you add money to your account in the bank, it’s a contract between you and the bank that they will safeguard your money and now the bank owes you some monetary value which maybe higher than the money you put in the bank, and that value is determined by people who trust in the system and collectively agree on the value. Similarly anything monetary, currency, previous metals, or bitcoin becomes currency only when a large group of people agree to it.

Now that we established money and value of it, we as people also like things simple, and convenient and that’s lead to many financial innovations in the last century. But we sometimes don’t notice the high transaction fees bank charge for each such conveniences. Example you use your credit card at a coffee shop, and you are happy that its convenient. But the bank charges the coffee shop for that transaction, and to remain profitable the coffee shop has included that in the price of the coffee, which you are paying for. So to the question in your mind, the answer is YES, banks make a lot of money with transaction fees.

2-BITCOIN BASICS

The premise is simple and amazing. Everyone and anyone across the world is has access to an account with a private key, and every transaction you do is tracked and recorded and publicly available, and this is done on a blockchain which is a decentralized system. Voila! you have a banking system which is a transparent, and without a bank, hence no transaction fee.

I maybe oversimplifying this but for the several billions who don’t have access to banks, all they need is internet and a wallet and they can perform all transactions

The blockchain is the core of BITCOIN and it’s basically several blocks of transactions which have occurred in a given time period. This created a chronological chain of expense and receipts for each member of the bitcoin system, and this is the secret behind prevention of double spending and fraud.

How do I get BITCOINS? You can trade for it or mine it. Trading is exactly what it is, you exchange currency or service in exchange for BITCOIN. Mining is the bit more complex and you must have all heard about it. As I said I will keep it simple, the purpose of mining is to monitor the transactions I mentioned in the previous paragraph and validate them and miners who do this get rewarded with BITCOINS. You can correlate miners to auditors, whom you know of from your day to day business and financial dealings. Now, you must have heard of the rage with mining and GPUs and high electricity cost of the same, yes that’s needed, cause the miners need to solve complex mathematical problems (not entirely) and BITCOIN is rewarded to those who solve it first.

3-THE MIDDLEMAN dilemma

One of they key reasons for Bitcoin’s popularity is that of a decentralized system which has no owner. Compare this with all other systems like banks and payment gateways, they are owned and they exist to make profit hence the transaction fee too made by the middleman.

But there is also an advantage too having the middleman, example if there is fraudulent transaction on your bank account or credit card, you can expect the bank to intervene and help you in the situation. In a bitcoin scenario, whom do you go to? The lack of regulations seems scary. But having said that there are bitcoin apps created for creating a virtual vault for your bitcoin and that allows for notifications and some security.

This middleman dilemma leads to general public questioning the trust worthiness of the system. But with time and continued work from the community I feel this would get sorted and bitcoin will transform our traditional systems.


There are some amazing online resources for you to read and even maybe get started with trading or mining. But I will stop here for now as I wanted to keep it simple and stick to the basics, but happy to discuss more on this as this is an interesting topic and these are interesting times we live in..

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