I was at dinner with friends this week and they asked me to explain bitcoin or cryptocurrency in simple terms in 30 seconds or less. I wasn’t happy with my answer, so I thought I’d try again here. You see, cryptocurrency is a vexing concept for many because it is completely virtual. My 30 second answer is this… crypto is like virtual gold. Gold has value because it is scarce and people are willing to barter with you for it. It is also relatively easy to convert to conventional government-backed fiat currency.
Similar to gold, bitcoin has value because people are willing to trade you money, or goods and services in exchange for it. When the first block of bitcoin was ‘minted’, it was valued because someone was willing to trade something physical in return for the first cryptocurrency. One of the early transactions was exchanging bitcoin for pizza. This put the value of those bitcoin at the market value of the pizza that was provided. As demand grew for bitcoin, its value increased. This is simply the law of supply and demand. If more people want bitcoin than there is bitcoin available, then the bitcoin that is available is worth more! As I write this blog, the value of one bitcoin (BTC) is $39,400. (That’s one expensive pizza)
Bitcoin is usually stored in a digital wallet. It is possible to print out the private and public keys of a bitcoin, but if that paper is lost or destroyed, there is no way to retrieve the bitcoin associated with that account. Think of the keys like your bank account number. Without it, you can’t access your funds. A ledger of all bitcoin transactions is stored in a decentralized network of computers on what is called a blockchain. The blockchain ledger confirms you have the bitcoin you are looking to exchange. You sometimes see news stories of someone losing access to their bitcoin. They have essentially lost their account number, and without it, no one can access it.
Bitcoin offers an alternative to a central bank controlled fiat currency. One advantage is that it can act as a currency in almost any country in the world, and it can be sent to anyone, anywhere in the world, instantly and at very low or no cost. (Traditional currencies can be slow and costly to move across borders!)
To date, bitcoin has often been more of a speculative investment than a currency because of its high volatility and limited acceptance, but it does have many other makings of a good currency. It is secure, scarce and highly divisible. (The smallest unit of a bitcoin is .00000001 bitcoin, or a Satoshi.) More and more businesses are starting to recognize bitcoin as a currency and this will help it become more useful as a currency instead of just an investment.
How does more bitcoin come into existence? Bitcoin is “mined” like gold! My thirty seconds is up for today so I’ll cover mining in next week’s blog. If you’d like to learn more in the meantime, I’d recommend checking out the bitcoin articles @ Investopedia.com.
(and yes, there is Cryptocurrency in my novel, The Quantum Contingent!)
Greg's blog will cover some of the things he learned as well as some of the tech and locations he used in his new novel, The Quantum Contingent.