What is so special about Bitcoin? (And other cryptocurrencies)


Bitcoin was invented in 2009 (just after the financial crisis) by somebody (or a group of people) who goes by Satoshi Nakamoto. Satoshi’s goal was to create “a new electronic cash system” that has no central authority.

He (or she) then abruptly turned over the source code and domains to other people and completely disappeared in 2011. Til this day, still nobody knows who Satoshi Nakamoto is.

What can Bitcoin do?

Bitcoin allows you to be in complete control of your money. No bank or government can seize your bitcoin if you don’t volunteer it. You can now send a million dollars on your phone with the push of a button 24/7. You can also send an extremely small fraction of a Bitcoin.

Imagine a crowded highway of self driving taxis. A taxi in the slow lane wants to change to the fast lane. It would be possible to use cryptocurrency for the slow taxi to pay the fast taxi a tiny fraction of a dollar to allow the slow taxi to cut in. The taxi could also take it’s fare in Bitcoin, and eventually make enough profit to buy another car, and grow it’s fleet. In other words, it could be an enterprise that owns itself. A robot that makes it’s own money.

Also imagine you have solar panels on your roof, and you are making a surplus of energy. Instead of selling this electricity back to the electricity company, you could use that electricity, to power computers that verify the Bitcoin network transactions for money. You could have a small hydro turbine in a stream generating enough electricity to power computers to verify the Bitcoin network, collecting fees in Bitcoin like some kind of a money battery.

Right now there are people around the world doing just that.

Why does it have value?

Why does gold have value? Why does paper money have value?

Money has value because you believe it’s valuable. Your belief in it’s value is what gives it value.

Scarcity or the belief of scarcity is also what gives something value. Water is more important to our lives than gold is, but gold is perceived to be more scarce.

There can only ever be 21 million Bitcoin created. No more. Therefore it has achieved scarcity. (However Bitcoin can be split down to 8 decimal places. For example 0.00000001 BTC.)

Easy to transport. In fact, if you remember your 12 word recovery phrase, you can transport bitcoin it in your memory. I realize this makes no sense yet, but it will soon.

Not controlled by government. Which means if a government collapses, it doesn’t effect the value of your Bitcoin. Also, a government cannot decide to create more Bitcoin out of thin air.

You can use it to pay for things. You can buy a coffee, a home, and even a Lamborghini. 

All of these things give Bitcoin its value. (Be careful not to use Bitcoin as a shorthand for all cryptocurrency, since they all have different properties and uses and therefore different reasons for having value)

How does it work?

When you normally send money online, or through an app, this is what happens behind the scenes:

Jane sends money, the company processes the payment and maintains the record of the ledger. Debit Jan $1. Credit Linda $1.

All transactions are managed by the company’s computers. It also works like this for the services like Venmo, PayPal, Wechat, and Toss.   

If this central authority didn’t exist to verify payments, you would be able to send copies of the money to as many people as you like, similarly to how you can share photos online to all of your friends.

That’s why having something digital and scarce is pretty much impossible. I should say ‘was pretty much impossible.’

The Blockchain

The blockchain is just a fancy name for a new type of digital ledger. The blockchain can be used in place of a company in order to verify transactions. What makes it interesting, is that anyone can download the ledger (blockchain), and watch new Bitcoin transactions happening in real time.

You can donate your computing power in order to verify transactions on the blockchain. The cryptocurrency program will automatically reward you a very small amount of cryptocurrency for doing so.

(cryptocurrency can typically be split into extremely small amounts. 0.00000000000001 for example, which is pretty much like a speck of gold)

Since there are hundreds of thousands of computers verifying transactions, it’s virtually impossible to just make Bitcoin and send money to as many people as you like. (This is called a “double spend”)

When sending Bitcoin (or ZILLA or any other cryptocurrency)

When a person sends Bitcoin, this new transaction information is shared among volunteers on the Internet.

Jane sends money, Bitcoin network computers verify a chunk (a block) of those transactions at a time, then link the blocks together like a chain to other blocks of transactions in chronological order. That’s why it’s called the blockchain.

The computers that are specifically used to verify transactions are called “miners” (this name doesn’t really make sense unfortunately)

If Bitcoin is not run by a company, how is it hosted?

Websites need to be hosted online. Think of it like this: a website is a car, and the hosting service is the parking space. Big sites like Google are have huge “parking spaces” all paid for and managed by Google. It’s centralized.

Bitcoin uses a clever system. When you download the Bitcoin blockchain, you host the protocol. In other words, Bitcoin is the car, but Bitcoin users are lending their parking spaces all around the world. Therefore if Brazil wants to somehow try to “ban Bitcoin” it’s almost impossible since the bitcoin protocol is distributed across the country living on the computers of it’s users. It’s decentralized.

The computers that host the bitcoin protocol are called “nodes”.

Fraud proof?

There are hundreds of thousands of supercomputers verifying transactions on the Bitcoin network. Attempting to ‘create’ BTC or double spend BTC is again virtually impossible since you would have to overcome the computing power of all of those thousands of supercomputers which would cost billions of dollars. Moreover, the Bitcoin protocol will immediately self correct and make the second transaction exponentially more difficult so you would have to spend even more money trying to attack it again.

Before you actually get cryptocurrency, first you have to know how to store and secure it.

Up next, we tell you the difference between the various types of wallets (it’s tricky actually..)

Aug, 17

Up Next

How to evaluate ICOs

I get asked rather often to help with evaluating the viability of ICOs. I should tell you that I participate in ICOs from time to time however I don’t consider it investing.

Dec, 17

What is an ICO

ICO stands for Initial Coin Offering. Despite the name it doesn’t actually have much in common with an Initial Public Offering (IPO). It’s a new way for cryptocurrency companies to raise money.

Oct, 26

How to Get Started in Cryptocurrency

The buzz around cryptocurrencies has been growing steadily since the inception of Bitcoin in 2009, and the growing popularity of other cryptocurrencies and tokens means the fervor is unlikely to die down anytime soon.

Sep, 14

Wallet Types

A cryptocurrency wallet is your first step in order to send and receive cryptocurrencies. You can think of a crypto wallet like an email inbox. There are many types of emails accounts, but most people that I know go with Google, Microsoft, Apple, or other online free email services. 

Aug, 23

What is so special about Bitcoin? (And other cryptocurrencies)

Bitcoin was invented in 2009 (just after the financial crisis) by somebody (or a group of people) who goes by Satoshi Nakamoto. Satoshi’s goal was to create “a new electronic cash system” that has no central authority.

Aug, 17