There’s a lot of buzz about the blockchain and many business executives are intrigued, confused and alarmed by how quickly this technology has entered into the business consciousness. We’re used to the rapid rate of change in technology industries but at the same time there’s something intimidating about blockchains, which seem to have sprung from nothing into everything in near record time. The good news for the technology executive is that it’s not that hard to understand and to see its business potential. This short primer is not intended as a technical manual but as a business primer for time-constrained executives to get you up to speed in business friendly terms as to what this is and why it’s the next big thing. In this discussion I’m going to focus on Bitcoin (and bitcoins) and in the next part I discuss Ethereum and ether.

Supply side - bitcoins are scarce: Bitcoin is the genesis of the blockchain concept though its founding is riddled in mystery. in 2008 an unknown person or group of individuals going under the pseudonym Satashi Nakamoto published a white paper titled Bitcoin: A Peer to Peer Electronic Cash Payment System. Published right in the middle of the financial crisis it described a decentralised form of digital currency as an alternative to fiat-based government-issued currencies. You can read the paper directly via the link but at its core it describes a peer-to-peer form of electronic payment and verification system that ensured that the same digital bitcoin could not exist in two accounts at the same time. This is a simple concept but it's at the core of the technology. If each bitcoin is unique and cannot be duplicated or copied, and everybody can trust that this applies and can verify it independently, then the scarcity of bitcoins means that the laws of supply and demand will apply and each bitcoin can have a monetary value. Scarcity is the crux of the bitcoin ecosystem - the coins can have value because they are scarce. Many are confused by this and think that value is being created out of 'nothing' and that this means that this is a de facto scam. They are partly right. Value is created out of nothing to be sure, because bitcoins didn't exist before and now they do as a digital construct. In market economics however goods don't have a value that is tied to their functional use alone - they have a value tied to their relative supply and demand. If something is truly scarce, that means that at some level of demand it will have a value. A functional use isn't required for it to be valuable - gold for example has a value that is many times greater than its functional use might imply, as do collectables like art or baseball cards.

Demand side - Bitcoin as a virtual machine: The scarcity of bitcoins means that the supply is limited, but what about the demand? Bitcoin was launched during a tumultuous time in which central banks were dealing with a financial crisis that many believed to be of the banks' own making. Powerful voices claimed that the endless printing of fiat currencies was debasing money and leading to on-going cycles of booms and busts. A digital currency that was limited in supply and not subject to management by a central government or bank was appealing. As early adopters began to explore the technology an amazing thing happened, the first self-contained payment system was formed. It's important to note that when we talk about bitcoin that we're talking about two related but different things. One is bitcoin (non-capitalised) which refers to the digital coins themselves. The other is Bitcoin (capitalised) that refers to the virtual machine on which bitcoin payments are processed. While markets require scarcity for goods to have value, they also require demand - and the demand for bitcoins is tied to the Bitcoin virtual machine and its ability to process transactions quickly, inexpensively and accurately. This is where the brilliance of the concept really shines. The creation of bitcoins requires computing power in a process referred to as mining. People (and now companies) are incentivized to hook up their computer systems to an app that exchanges their computing power for bitcoins that are stored in a digital wallet, and as discussed above these bitcoins have real value. These computers when connected together, all simultaneously mining for bitcoins, form a sort of supercomputer, that I refer to as the Bitcoin Virtual Machine. As each bitcoin is generated, the next bitcoin requires that more processing power be applied before it is released, so that the marginal cost of every new bitcoin issued is higher than the one before. This means that more and more computing power will need to be applied as more and more bitcoins enter circulation - and it is this computing power, paid for solely through the issue of new bitcoins, that processes the transactions and makes the entire system possible. It is a self-contained but massive and distributed virtual computing platform that pays for itself through the generation of its own scarce digital currency. Let's follow the logic: without the mining, there is no virtual machine, without the virtual machine there is no payment processing, without payment processing there's no transactions, without transactions there's no reason to own a bitcoin and so there's no value in holding it. It is an elegant and powerful concept. Beyond the sheer elegance of the system is the fact that there is no central authority or central depository of information. It is a complex, distributed peer-to-peer system that is self-contained, self-funding and functional. This of course has many repercussions and it also provides for many opportunities that we will explore in Part 2.

TL;DR: Bitcoin is a virtual machine focused on transaction processing, powered by millions of individual machines that are paid for by bitcoins that the system generates, and that have value because they are scarce.