Re: Somebody want to explain to me what "Bitcoin" is and how it can be worth a fucking penny?
Date: December 20, 2017 03:10PM
OK, here's the simplest possible way I can explain Bitcoin.
Largely it is about understanding that in modern terms, "money" is a fiction.
A Bitcoin is a token that some people have agreed to exchange as value, and in particular people will trade you US Dollars for Bitcoin. (There are also some businesses that will take Bitcoin directly.) A Bitcoin has this value simply and only because people have decided in their minds that it does. In that way it is like a US Dollar (which has no intrinsic value, and is "just" a piece of paper, and does not correspond to any particular thing).
People believe in dollars because they think that the US Government will only print dollars under certain circumstances (that is to say, dollars are "artificially scarce"). They believe that the monetary policy of the United States is generally sound and that the United States is not going to disappear. That is what makes Dollars "worth something".
Long ago, Dollars represented something real -- gold bullion -- and people LIKE gold, so that's "worth something". Maybe it would make more sense if your money represented a pile of steel, because you can obviously do a lot more with steel beams, but steel beams are not scarce. Gold is scarce, and people all over like it, so...gold. But in 1971, the United States announced that it would no longer guarantee to exchange dollars into gold from its stockpile in Fort Knox. That turned the dollar into a "fiat currency", which is the modern way that all money works now. "Fiat" means "it is valuable JUST because we SAY it is valuable". In other words, dollars are printed by the U.S. Government, but the U.S. Government will not trade you anything for them or convert them into anything. There isn't gold in Fort Knox for dollars, we're way past that. Dollars are what they are -- just a piece of paper, like "play money". And everyone has agreed that we will use this play money from now on.
Bitcoin is someone coming along and making up their own play money and getting a bunch of people to agree to use it. It is intended to be a currency, just like dollars are a currency.
(Bitcoin is not technically a "fiat" currency, because no Government has decreed it as legal tender. But it is a supply-and-demand currency that is not backed by any physical commodity, which is the main characteristic of money since about 50 years ago.)
People trust dollars because they trust the US Government (e.g. not to just print money randomly). Why does anyone trust Bitcoin? Because: Bitcoins are "scarce", like dollars are scarce. The way that money is "controlled" boils down to one thing: Scarcity. The value of a Dollar is controlled by The rate at which dollars are printed out of thin air by the U.S. Federal Reserve. Print too many, and dollars become worthless. That is called hyperinflation.
So, where do Bitcoins come from? How are they printed? Why are they scarce?
Bitcoin is not controlled by any government, but is instead controlled by a computer program (an "algorithm"). The algorithm is not secret: everyone knows what the algorithm is and how it works. It is entirely understood how and when (sorta) and how many Bitcoins will ever be printed. That makes them predictable, and so markets can assign value to them, just like value is assigned to dollars. Except that unlike a dollar, Bitcoin cannot be directly manipulated by a Government because it is controlled by a predictable algorithm.
While the Bitcoin itself is predictable, the value that people place on Bitcoins is not predictable, because that's just people. When Bitcoin first started in 2010, it was soon worth about one penny. One year later, a Bitcoin was worth $31. This morning, one Bitcoin is about $17,900. (People can own have arbitrary fractions of Bitcoins, by the way.)
Bitcoins aren't really "printed" - there is no physical piece of paper or stamped disc of metal that is a Bitcoin. Instead, there is one gigantic ledger that keeps track of every Bitcoin that has ever been created ("minted"), who owned it, and every Bitcoin (or fraction thereof) that has been transferred from one owner to another. Bitcoins are basically just serial numbers in the ledger.
Bitcoins are "stored" in a "wallet", which is another kind of serial number recorded in the ledger. It is similar to a bank account number and represents an owner. Anyone can look at the ledger and see all the transactions and exactly trace the money. They have to be able to, because the ledger is the only place that this "money" "actually" "exists".
Bitcoin is based on "encryption", which is basically just the application of some difficult arithmetic with certain mathematical properties. This will not be much explained here, but the result is that anyone can prove the truth of the transactions in the Bitcoin ledger, and anyone can prove if they are the owner of a wallet.
Imagine if there was a ledger that accounted for every bit of US money, every single penny, in all of history, from the time it was coined at the mint and every time it changed hands. That's what the Bitcoin ledger is for Bitcoins. Well, you can take a wallet you own and hand the entire thing to someone else, and that's not on the books. But any and all normal "spending" (transfer) of Bitcoin from one wallet to another is recorded. The Bitcoin ledger is gigantic!
The ledger is maintained by any number of people who are running the Bitcoin software on their computers. It is very expensive for anyone to do this. The reason they do it is because the ledger software is the same software that actually creates new Bitcoins! This is called "mining" Bitcoins. All these miner's computers talk to each other and through the miracle of encryption, they mutually prove that nobody is cheating, what Bitcoin exists, and that all the transactions are recorded correctly and what's in all the wallets.
There is monetary policy encoded in the Bitcoin algorithms. One effect is that as more Bitcoins are created ("mined"), it becomes harder and harder to mine more of them. Also, there is a cap on the total number that can ever be mined. After that, miners (keepers of the ledger and therefore the entire Bitcoin system) will not be rewarded with new Bitcoin. Instead, they will survive only on the transaction processing fees that they charge. Some changes have been made in this policy, by all the miners agreeing to it, and more will be made in the future.
If the miners disagree about the rules for Bitcoin, they could start yet another currency that is just exactly like Bitcoin, but with certain rules modified. If they can get other miners to follow them, they will have successfully created another "cryptocurrency" that competes with Bitcoin. This has already happened. For example, "Bitcoin Cash" is a Bitcoin competitor and so is "Etherium".
Cryptocurrencies such as Bitcoin are of great interest to banks, investment houses, and national governments. They all recognize that "value" has been "created" and want to get in on it.
The technology of the ledger is called "blockchain", and people have realized it can be useful for many other things besides cryptocurrencies. Blockchain is a way to have many computers keeping track of many things, and have them all agree. The approach is a little different than the way most databases work and has advantages in some scenarios. Using blockchain does not mean using any cryptocurrency; it's a general-purpose technology of great interest.
The market value of Bitcoin is currently in the $300 Billion neighborhood.
A Bitcoin costs $16,728 at the moment.
There were about 400,000 transactions today.
The numbers were recently higher but the market (that is. people buying) made an adjustment..
Edited 4 time(s). Last edit at 12/20/2017 03:37PM by HoDu.