What is Bitcoin?
Welcome to 99Bitcoins.com.
I’m Nate Martin and I’ll be your guide
through this video series
Bitcoin Whiteboard Tuesday.
We’re going to cover a lot of topics such as
Bitcoin mining, Bitcoin wallets,
how to trade Bitcoin and a lot more.
Today we’re going to start from scratch
and answer the third most searched term
on Google today, what is Bitcoin?
If you’re worried that
we’re going to get too technical
and use a lot of complicated words, don’t.
Here at 99Bitcoins
we translate Bitcoin into plain English
so even if you have
no technical background
you’ll be able to understand everything.
By the end of this course,
you’ll know more about Bitcoin
and how it works
than 99% of the population.
So let’s get started…
Before we talk about Bitcoin
I want to take a moment
and talk about money.
What is money exactly?
At its core, money represents value.
If I do some work for you,
you give me money in exchange for
the value I gave you.
I can then use that money
to get something of value
from someone else in the future.
value has taken many forms
and people used a lot of
different materials to represent money.
Salt, wheat, shells and of course gold
have all been used as
a medium of exchange.
However, in order for something
to represent value
people have to trust that
it is indeed valuable
and will stay valuable
long enough for them to
redeem that value in the future.
Up until a hundred years ago or so
we always trusted in someTHING
to represent money.
However something happened
along the way
and we’ve changed our trust model
from trusting someTHING
to trusting in someONE.
Let me explain.
Over time, people found it
to walk around the world
carrying bars of gold
or other forms of money,
so paper money was invented.
Here’s how it worked:
a bank or government would offer to take
possession of your bar of gold;
let’s say worth $1000,
and in return, that bank would
give you receipt certificates,
which we call bills,
amounting to $1000.
Not only were these pieces of paper
much easier to carry,
but you could spend a dollar
on a cup of coffee
and not have to cut your gold bar
into a thousand pieces.
And if you wanted your gold back,
you simply took $1000 in bills
back to the bank
to redeem them for
the actual form of money,
in this case that gold bar,
whenever you needed…
And so, paper began its use as money
as an instrument of practicality
However as time progressed,
and due to macroeconomic changes,
this bond between the paper receipt
and the gold it stands for was broken.
Now, to explain the path that
led us away from the gold standard
is extremely complex,
but suffice to say that
governments told their people that
the government itself would be liable
for the value of that paper money.
Basically we all said
“let’s just forget about gold
and trade paper instead”.
So people continued to
trade with receipts that are backed by
nothing but the government’s promise.
And why did that continue to work?
Well, because of trust.
Even though there is no actual commodity
backing paper money,
people trusted the government
and that’s how fiat money was created.
Fiat is a Latin word that means “by decree”.
Meaning the dollars, or euros
or any other currency for that matter
have value because
the government orders it to.
It’s what is known as “legal tender” –
coins or banknotes
that must be accepted
if offered as payment.
So the value of today’s money
actually comes from a legal status
given to it by a central authority,
in this case, the government.
And so the trust model has changed,
from trusting someTHING
to trusting someONE,
in this case, the government.
Fiat money has two main drawbacks:
1. It is centralized:
You have a central authority
that controls and issues it.
In this case the government
or central bank.
And two, it is not limited by quantity:
The government or central bank
can print as much as they want
whenever needed and inflate
the money supply on the market.
The problem with printing money is that
because you’re flooding the market
with more money
the value of each dollar drops,
so your own money is worth less.
When you see prices rising
throughout the years
it’s not necessarily that
prices are rising as much as that
the purchasing power of
your money is dropping.
You need more dollars to buy something
that used to “cost less”.
Once fiat money was in place,
the move to digital money
was pretty simple.
We already have a central authority
that issues money,
so why not make money mostly digital
and let that authority
keep track of who owns what.
Today we mainly use credit cards,
wire transfers, Paypal
and others forms of digital money.
The amount of physical money
in the world is almost negligible
and is getting smaller
with each year that passes.
So if money today is digital,
how does that even work?
I mean, if I have a file
that represents a dollar,
what’s to stop me from
copying it a million times
and having a million dollars?
This is called the “double spend problem”.
The solution that banks use today is
a “centralized” solution;
they keep a ledger on their computer
which keeps track of who owns what.
Everyone has an account
and this ledger keeps
a tally for each account.
We all trust the bank
and the bank trusts their computer,
and so the solution is centralized
on this ledger in this computer.
You may not know this,
but there were many attempts to create
alternative forms of digital currencies,
however none were successful
in solving the double spend problem
without a central authority.
Whenever you give a anyone control
over the money supply
you’re giving them enormous power
and this creates three major issues:
The first issue is corruption;
power corrupts, and absolute power
When banks have a mandate
to create money, or value,
they basically control
the flow of value in the world,
which gives them
almost unlimited power.
A small example of how power corrupts
can be seen in the Wells Fargo’s scandal
where employees secretly created
millions of unauthorized
bank and credit card accounts
in order to inflate
the bank’s revenue stream,
without their customers
knowing about it for years.
The second issue of a centralised
system is mismanagement.
If the central authority’s interest
isn’t aligned with the people it controls
there may be a case of
mismanagement of the money.
For example, printing a lot of money
in order to save a certain bank
or institution from collapsing,
as what happened in 2008.
The problem with printing
too much money is that
it causes inflation and basically
erodes the value of the citizen’s money.
One extreme example
for this is Venezuela,
where the government has printed
so much money,
and the value of it
has dropped so much,
that people are no longer counting money
but are weighing it instead.
The last issue is control.
You are basically giving away
all control of your money
to the government or bank.
At any point in time
the government can decide to
freeze your account
and deny you access to your funds.
Even if you use only cold hard cash
the government can cancel
the legal status of your currency
as was done in India a few years back.
This was the state of things until 2009.
Creating an alternative to
the current monetary system
seemed like a lost cause.
But then everything changed….
In October 2008
a document was published online
by a guy calling himself Satoshi Nakamoto.
The document, also called a whitepaper,
suggested a way of creating a system
for a decentralised currency
This system claimed to create
digital money that solves
the double spend problem
without the need for a central authority.
At its core Bitcoin is a transparent ledger
without a central authority,
but what does this confusing phrase
even really mean?
Well, let’s compare Bitcoin to the bank.
Since most money today
is already digital,
the bank basically manages its own ledger
of balances and transactions.
However the bank’s ledger
is not transparent
and it is stored on
the bank’s main computer.
You can’t sneak a peek
into the bank’s ledger,
and only the bank has
complete control over it.
Bitcoin on the other hand
is a transparent ledger.
At any point in time
I can sneak a peek into the ledger
and see all of the transactions
and balances that are taking place.
The only thing you can’t figure out is
who owns these balances
and who is behind each transaction.
This means Bitcoin is pseudo-anonymous;
everything is open,
transparent and trackable
but you still can’t tell
who is sending what to whom.
Let’s explain this with an example.
You can see on your screen
certain rows from Bitcoin’s ledger.
We can see that
a certain Bitcoin address
sent 10,000 Bitcoins
to another Bitcoin address
in May of 2010.
This specific transaction
is the first purchase
that was ever made with Bitcoin
and it was used to buy 2 pizzas
by a guy named Laszlo.
Laszlo published a post back in 2010
asking for someone to sell him 2 pizzas
in exchange for 10,000 Bitcoins.
Well, someone did,
and now the price of these two Pizzas
is worth well over
100 million dollars today.
Bitcoin is also decentralized;
there’s no one computer
that holds the ledger.
With Bitcoin, every computer
that participates in the system
is also keeping a copy of the ledger,
also known as the Blockchain.
So if you want to take down the system
or hack the ledger
you’ll have to take down
thousands of computers
which are keeping a copy
and constantly updating it.
Like most money today,
Bitcoin is also digital.
This means there’s nothing physical
that you can touch in Bitcoin.
There are no actual coins,
there are only rows of
transactions and balances.
When you “own” Bitcoin
it means that you own
the right to access
a specific Bitcoin address record
in the ledger
and send funds from it
to a different address.
So what does all of this mean?
Why is Bitcoin such big news?
Well for the first time since
digital money came into existence
we now have an alternative to
the current system.
Bitcoin is a form of money that
no government or bank can control.
Think about the time before the Internet,
the flow of information was.
Basically if you wanted information
you could get it from a few major players
like the New York Times,
The Washington Post
and others like them.
Today, thanks to the Internet,
information is decentralized
and you can communicate
and consume knowledge
from around the world
with the click of a button.
Bitcoin is the Internet of money
and it’s offering
a decentralized solution to money.
Bitcoin has several advantages
over the current system.
First, it gives you complete control
over your money.
With Bitcoin, you and you alone
can access your funds.
How you actually do this
will be explained in a later video.
No government or bank
can decide to freeze your account
or confiscate your holdings.
Bitcoin also cuts a lot of the middlemen
from the process of transferring money.
This means that in many cases
Bitcoin is cheaper to use than
traditional wire transfers or money orders.
Also, unlike fiat currencies,
Bitcoin was designed to be
digital by nature,
this means you can add additional
layers of programming on top of it
and turn it into “smart money”,
but more on that in later videos.
Finally, Bitcoin opens up
digital commerce to
2.5 billion people around the world
who don’t have access to
the current banking system.
These people are unbanked
because of where they leave
and the reality that they have been born into.
However, today, with a mobile phone
and a click of a button
they can start trading using Bitcoin,
no permission needed.
Today there are several merchants
online and offline that accept Bitcoin.
You can order a flight or book a hotel
with Bitcoin if you like.
There are even Bitcoin debit cards
that allow you to pay at almost
any store with your Bitcoin balance.
However the road toward acceptance
by the majority of the public
is still a long one.
As we continue in this video series,
we will break down exactly
how Bitcoin works and how to use it.
We will learn about Bitcoin mining,
Bitcoin wallets, how to buy Bitcoins
and much more.
The revolution of money began in 2009
and these days we are seeing it
change money as we know it.
You may still have some questions.
If so, just leave them
in the comment section below.
And if you’re watching this video on YouTube
and enjoy what you’ve seen,
don’t forget to hit the like button.
Then, make sure to subscribe
for notifications about new episodes.
Thanks for joining me here at the Whiteboard.
For 99Bitcoins.com, I’m Nate Martin,
and I’ll see you… in a bit.