Note: The prices and statistics in this post represent as snapshot in time and may differ from current numbers, as they change frequently.

The idea of Bitcoin is very difficult to explain. In addition to this, there is a lot of misinformation out there. I will do my best to explain it in a simple manner, but be patient. It is very technical, even for a nerd like me.

Bitcoin is a digital currency that can be used anywhere that you have an internet connection. It was created in 2009 by a person or group of people only known by the pseudonym Satoshi Nakamoto. He (i’ll assume Satoshi is a he for now) created bitcoin by publishing the famous white paper and then launching the first network node shortly after.

Before we classify Bitcoin as money, we must first define what money really is. Aristotle defined money as having five properties: Durable, Portable, Fungible, Divisible and Intrinsically Valuable. In the digital world, durable would be equivalent to secure, and I will explain in detail why Bitcoin is secure. Bitcoin can be used anywhere where you have an internet connection, making it portable. The price of $10k (approximate as of the time of this publication) per bitcoin may seem high. However, each Bitcoin is divisible into 100 million parts, known as satoshis. You can transact with a single satoshi which is currently worth about one hundredth of a penny. Bitcoin is also fungible, meaning each satoshi is the same as the next, and can be replaced in kind with any other. Within this post, I hope to show you that a secure, decentralized, peer to peer network that allows users to send money rapidly anywhere in the world has intrinsic value. Another reason for its value is its scarcity. The world population of 7.6 billion people only has 21 million Bitcoin to share. Bitcoin was intentionally designed to be a deflationary currency. A currency that increases in value over time has an incentive for adoption. In contrast, the USD is an inflationary currency, that is designed to lose value over time. If we assume both currencies work as designed, buying BTC (bitcoin) with USD would be a smart move.

The USD (United States Dollar), the Euro and most global currencies are fiat currencies. This means that they are not backed up by any tangible assets, but rather by the government that issued it. The USD is backed by the “full faith and credit” of the U.S. government, which is nothing to scoff at, but is still quite a deviation from the gold standard that we once had.

One thing that Aristotle did not touch on was perceived value. Perceived value dictates real value (price). Money is only worth what everyone collectively agrees that it is worth. Bitcoin price, just like any stock or currency, is determined by the market, or more specifically, by the price at which people agree to buy and sell it. Bitcoin is traded on exchanges, and changes value every minute of the day in relation to other currencies. While this may seem like a bad thing, it is no different from any other currency. Every minute of the day, the dollar is traded on exchanges against a basket of other currencies, and its value is constantly altered. The same is true for stocks and commodities such as gold, although most stock exchanges are only open for 6.5 hours per day. One major difference is that Bitcoin is more volatile than most fiat currencies, commodities and stocks. This is one reason that mainstream adoption has not occurred yet. At ten years old, Bitcoin is very young compared to other currencies. Volatility is to be expected when we have no fair way to assess value. As blockchain technology grows and more people adopt it, the price of bitcoin will become more stable (and much much higher). As with any asset, price stability increases with liquidity. That is why companies with larger market capitalization are often more stable than small caps. That is also one reason why Bitcoin is more stable than altcoins (cryptocurrencies other than bitcoin).

As with any other currency, the idea behind Bitcoin is that it can be used to transact for goods and services. In order for it to have perceived value (and therefore real value) Bitcoin must become accepted by people and merchants. While this has already begun, with both small businesses and large corporations accepting Bitcoin as payment, Bitcoin still has a long way to go. Here’s a list of companies that accept Bitcoin. I’m sure you’ll find some names you’ve heard of. I expect this list to continue to grow.

Many people think of Bitcoin as merely a digital currency. Bitcoin is a digital currency, but it is so much more than that. Bitcoin is a decentralized, peer to peer network, in which money is stored as information (I will go into more detail about what this means). The Bitcoin network is a public ledger containing every Bitcoin transaction that ever occurred. You can use websites like https://blockexplorer.com to view any past Bitcoin transaction. Bitcoin is a cryptocurrency. It is based on cryptography, which is the branch of mathematics that drives internet security protocols such as encryption. Alan Turing famously used cryptanalysis to decipher encrypted messages sent by the German Enigma machine during WW2, helping the allies win the war (check out The Imitation Game).

Trustless peer to peer transactions

A typical online transaction requires a trust. For example, if Damian wants to pay Bob, he needs a third party trust to validate this transaction. If I use a system like PayPal, PayPal is the trusted third party. With Bitcoin, I can send Bob money without requiring any single party to validate the transaction. The bitcoin network is validating the transaction. This means that we no longer need banks, corporations or government to send each other money. The beautiful part is that we can transact with Bitcoin seamlessly across international borders at a low cost.

What is the blockchain?

Blockchain is the underlying technology that Bitcoin runs on. Bitcoin (digital currency) is only one possible application of blockchain. Blockchain is thought to have many applications beyond digital currency, though those applications are still being explored and developed.

Individual transactions are bundled into blocks. Blocks are created sequentially in a chain. The miners agree upon which blocks are discarded, and which blocks are kept and built upon. If someone tries to create a block with fake transactions, miners will discard this block. Miners add blocks to the longest existing chain. In doing so, each miner essentially validates all previous transactions on this chain. The blockchain also serves as the ledger, on which all transactions are recorded.

What is mining?

You may have already heard the term “mining” for Bitcoin. But what does it mean? The founder of Bitcoin, Satoshi Nakamoto (pseudonym), knew that he could not just create a new currency, and own all of it. There would need to be a distribution mechanism. The mechanism he devised for distributing a newly minted currency is called mining. A simple analogy would be to compare it to mining a precious metal. In order to introduce new gold into circulation, it needs to be mined. Mining for gold is difficult. It requires energy and time. The same is true for Bitcoin. People who perceive Bitcoin to have value are likely to mine it. As more Bitcoin is mined, the difficulty of mining increases. This system rewards early adopters who saw Satoshis vision and perceived its true value. At first, people could mine Bitcoin with just their laptops. Unfortunately, the California gold rush is over, and all of the easy to mine Bitcoin has already been mined. In order to mine Bitcoin now (effectively), you need to build or purchase a mining rig that consumes electricity to operate. It is essentially a powerful computer with a single function — mining. The added bonus is that miners are also responsible for validating transactions, and keeping the network secure.

How are transactions validated?

Every transaction that occurs on the Bitcoin network needs to be validated. The verification process has a level of difficulty to help keep the network secure. In order to validate a transaction (mine for Bitcoin), a computer must solve a difficult math problem, known as SHA256 Hashing. The math problem is such that the only way to solve it is by repeatedly guessing numbers and seeing if they work. This means that to solve these problems you need computational power (hash power), time and electricity. This is called Proof of Work (POW). Work is essentially the amount of electricity and computational resources needed to solve the problem. The current hash power of the Bitcoin network currently exceeds 100 million tera-hashes per second or 1 * 10²⁰ hashes (computations) per second. That number is a 1 with twenty zeroooooooooooooooooooos at the end of it. The bitcoin network is actually hundreds of times more powerful than the top 500 supercomputers combined. In order to successfully attack the network, you would need to command 51% of the total network hashing power. The cost of doing this would be astronomical.

As an incentive to secure the network, every time a miner solves a problem and validates a transaction, he is rewarded with a small amount of Bitcoin. This is the reason that there are Bitcoin transaction fees. A Bitcoin miners most important function is to maintain the security of the Bitcoin network. Think of it as defense against hackers and robbers.

What is decentralization?

You may already think of the internet as decentralized. Millions of servers all across the planet are connected to create our internet. While this may seem decentralized, there are actually many centralized points. Centralized points have an inherent weakness. If hackers successfully attack a centralized point, they can bring down an entire network. Many companies will have backups, but this still leads to only to a handful of servers that need to be attacked to take down the network. It seems like there isn’t a month that goes by where you don’t hear of a major corporate hack occurring.

Bitcoin is much different. There are currently over 10,000 full Bitcoin nodes in operation across the world. Each full node has a copy of the bitcoin ledger, which records every bitcoin transaction that ever occurred. There is no way to change this ledger without forking into a new currency.

Another aspect of decentralization is that there is no single entity that controls or operates Bitcoin. Everyone who owns or transacts in Bitcoin is a part of the community and has a say in its network protocol.

If Bitcoin is so secure, why do I keep hearing about it being hacked?

The Bitcoin network itself is extremely secure, and almost impossible to hack. However, the Bitcoin you own is only as secure as the wallet you keep it in. When you hear about Bitcoin getting hacked, it’s actually Bitcoin exchanges that are getting hacked, not the network itself. Exchanges are used to trade dollars for Bitcoin or other currencies. If you keep your Bitcoin on an exchange such as Coinbase, you have created a centralized point of failure again (the problem that Bitcoin set out to solve). The only way to truly keep your Bitcoin secure is to be the keeper of your own private keys. The most secure way to do this is to either use a paper wallet, or a hardware wallet. This would be the equivalent of storing your Bitcoin offline, where hackers cannot get to it. Trezor and Ledger are the leading hardware wallets. Think of it as a pin encrypted USB stick that holds your Bitcoin (this is a simplified explanation). If you lose the usb stick, you can use a backup passphrase to unlock your coin. If you lose both, you have lost your coins forever. An estimated 1 million bitcoins have been lost to date. I recommend the Ledger as the best current storage option.

Why not just use a credit card?

While you may think of a credit card transaction as free, the vendor is actually paying around 3% for that transaction. A $1000 purchase with a credit card would amount to about $30 in transaction fees to the merchant. This cost is typically passed down to the consumer. The current median transaction fee for Bitcoin is about $0.22. However, the more people who join the network and perform transaction, the higher the average fee may become. In December 2017, the median transaction briefly fee spiked to $37. While transaction fees can fluctuate wildly, they should improve and stabilize as scaling options are introduced to the network. For some time, transaction fees will be in a tug of war between the rate of adoption and the speed at which engineers scale the network. The recent reduction in transaction fees has been mostly attributed to the adoption of a software update called Segwit. If you are looking to transact for cheaper, consider using Ethereum instead. The fees are only about $0.02 right now.

Are Bitcoin transactions private?

Yes and No. I would classify them as pseudo-anonymous. As mentioned earlier, every single transaction that occurs is stored on a public ledger. Anyone can see any transaction. The privacy comes from not knowing who the wallets belong to. At some point however, there are ways to connect those wallets to human beings. For example, if you bought your Bitcoin on Coinbase, you probably had to upload an ID. Therefore, any Bitcoin you bought through Coinbase is now tied to your real identity. While your name won’t be publicly broadcast on the blockchain, someone with enough information could make the connection. There are ways around this, such as decentralized exchanges, washing your Bitcoin, using localbitcoins.com or even Bitcoin ATMs. There are also privacy based coins such as Monero or Zcash that use methods of obfuscation to make transactions more anonymous. I won’t get into all that now. What I will say is, if you plan to do something illegal, I don’t recommend using Bitcoin.

But Bitcoin isn’t real money? Who cares about fake internet money, right?

In order to answer this, we have to consider what money actually is. Money is simply a medium of exchange that people accept to have a certain value. US dollars are simply printed cotton fiber paper. Actually upwards of 90% of US dollars only exist digitally. And no, the dollar is not backed up by gold. It has not been backed by gold since 1933. The only thing that gives the dollar its value is people’s belief in it. Sure we have a central government and Federal Reserve Bank to “back it up” but what are they really doing to support its value?

In fact, they are working very hard to devalue our precious dollar. Our government spends much more money than it brings in. Our national deficit for 2019 was approximately $1,109,000,000,000 (1.11 trillion dollars). That’s a trillion dollars spent by the federal government that they didn’t actually have. So where does this money actually come from. Much of it comes from bondholders — people who buy government debt. The rest is created out of thin air by the Federal Reserve (central banks) through quantitative easing and manipulation of interest rates. Regular banks can also increase money supply by using a widely accepted process called fractional reserve banking. The money supply grows by an average 8% every year. As money supply grows, the value of your dollar shrinks. This is called inflation. Even though inflation is perpetuated continuously and purposely by the government, the fed does not have full control over the rate at which inflation occurs.

By contrast, Bitcoin has a finite supply. Bitcoin monetary supply is governed by a set of rules that have been unchanged since its creation. A majority consensus is needed to change the rules that govern Bitcoin. Only 21 million Bitcoin will ever be minted. There are currently about 18 million Bitcoin in circulation. Every 210,000 blocks, approximately every four years, the mining block reward is cut in half and the rate of introduction of new Bitcoin decreases, until it eventually flat lines. The next “halving” will be approximately May of 2020. This is the third halving during bitcoin’s existence, and many predict that it will lead to much prices.

But Damian, scarcity alone does not make something valuable.

This is true. However, the network itself has intrinsic value. In addition to everything I described before, Bitcoin transactions are immutable, secure, fast, and cheap. Of course, fast and cheap transactions are not a guarantee. In order for Bitcoin to succeed, it will need to scale at a fast enough rate to accommodate new user growth. Some of Bitcoin’s competitors can handle a higher transaction volume, but it comes at a cost. Most commonly, either security or decentralization is compromised to achieve higher transaction volumes.

Why isn’t Bitcoin popular yet?

Ease of use — It is still much easier to use US dollars and traditional banking systems than it is to use Bitcoin. If you have limited technical skills, you may find Bitcoin overwhelming at first. Transactions are final. If you send Bitcoin to the wrong address, the chance of you getting it back are slim to none.

Scalability — the Bitcoin network isn’t ready for billions of users. As more users join the network, transaction fees and transaction times increase. Many very smart people are currently working on solutions to these problems. One of such solutions is called the Lightning Network, which is already in operation with about 30,000 open payment channels. That being said, it’s still somewhat of a work in progress, and most average bitcoin users do not have a channel set up to accept payment yet.

New technology — Bitcoin is still a very new technology. It took many years for personal computers and the internet to take off. Mainstream adoption of Bitcoin is going to take time.

Do you want to learn more about Bitcoin?

The best place to get started learning about Bitcoin is Bitcoin.org. There’s a two minute video that probably explains Bitcoin better than this whole article. I highly recommend reading Satoshi Nakamoto’s original whitepaper describing the technical concept and his vision for Bitcoin. Coinmarketcap.com is a good website to look up current and historical prices of cryptocurrencies. Coindesk.com is a good resource for the latest news.

Should I invest in Bitcoin?

In 2013 Bitcoin was worth under $100. It is now worth close to $10,000, representing gains of 10,000% in 6 years. Cryptocurrency now represents a $266 billion market cap. Bitcoin dominates the cryptocurrency market cap, at $185 billion (69% dominance). Buy Bitcoin if you believe in its promise, and its ability to attract new users. New users of Bitcoin are what drives the price higher. With increased interest from institutional investors, and the bitcoin halving coming soon, both sides of the supply/demand equation seemed poised for a positive price move. I personally believe that we are on the verge of the next Bitcoin bull run and that we will see new all time highs in the coming years.

What About Other Cryptocurrencies?

I recommend sticking with bitcoin (BTC) unless you plan to spend countless hours reading technical whitepapers and other resources to make an educated decision. Most other cryptocurrencies (altcoins), whether they originated from an Initial Coin Offering (ICO) or a Bitcoin Fork are either scams or failures. Even coins that were wildly popular turned out to be ponzi schemes. Crypto is still largely unregulated. It’s the Wild Wild West out there, so be careful with how you invest your hard earned money.

How do I buy Bitcoin?

The most trusted website with the simplest user interface is Coinbase. Their fees are high, but if you aren’t technical or into trading, this is the best place to get started. They also own an advanced trading platform called Coinbase Pro which has much lower fees (for experienced traders). Use this referral link to get $10 in free bitcoin when opening an account

Disclosure — I own Bitcoin and several other cryptocurrencies.

Disclaimer — Do your own due diligence. I am not a professional financial adviser. Cryptocurrency is a highly risky asset class to invest in. As with any asset, only invest money you can afford to lose.