I was scrolling through the Twitter feed while holding a slice of homemade pizza on the other hand. The pizza felt heavy when I saw the world’s richest man invested $1.5bn in Bitcoin, something that is declared as a hoax by the veteran investor Warren Buffet. I was not sure whom to put my trust in, especially when I have close to zero ideas about the concept of Cryptocurrency. My traditional understanding of money doesn’t go with Bitcoin. There is no gold standard, no bank to keep track of the transactions, no government to control the flow — which sounds fishy for obvious reasons. But the more I tried to know about Bitcoins, the more it made sense (at least for now). Maybe the readers can follow (or not) as I go along.
What is Bitcoin?
Bitcoin is just a bunch of digital transaction codes containing some information with no physical presence — cryptocurrency as we know it — one of many brands. In 2010, a guy named Lazlo bought 2 pizzas for 10,000 Bitcoins (say, 10,000 lines of codes) — I won’t even calculate how much it is worth in today’s money. Clearly, pizza has not become ridiculously overpriced since then — Bitcoins just became “rare,” and people started to accept it as something of value, much like gold.
How does it work?
Before we understand Bitcoin, we have to understand how actual money works. We do money transactions to buy products or services or something of value. The price goes up when the demand for the product or service is high and vice versa, as there is a fixed supply of money. Traditional central bank keeps count of all the money in their central book/ledger at any given point. No one outside the central bank has access to that book/ledger. People in the country trust the central bank or government with that. The central bank controls the flow of money by printing new money and adjusting the ledger according to the total value creation in the country’s economy. Inflation happens when the central bank mismanages their book/ledger and prints out more money than the total market value that all the products and services have to offer in a country. There is a misconception that central bank prints money based on their gold reserve, but this is not the case since the inception of “fiat money”. I would not go into details here.
First Bitcoin blocks by Satoshi Nakamoto, the guy behind
Bitcoin, on the other hand, has no national boundaries nor any central authority, but a shared network of authorities, a chain of blocks, hence block-chain. Now compare each block with a computer connected with many other blocks on the internet — anyone can access the book/ledger and see all the transactions (unlike central bank books/ledger), thereby ensuring the transparency of transactions. No one can tweak the book/ledger, nor can they print/produce Bitcoins as they wish because each block compares their book/ledger with other blocks in real-time over the internet to ensure all the transactions are updated in all blocks and remain redundant; thus, keeping the total supply of Bitcoins in check. Bitcoin has no national boundary, meaning no country has control over Bitcoin transactions. This is the main reason why it is banned in many countries.
Next part coming with more (e.g. Bitcoin mining)