Layman’s Guide: Bitcoin and Cryptocurrency

Summary

The provided content is a guide explaining Bitcoin, cryptocurrency, and the concept of value in relation to scarcity, with a focus on Bitcoin's halving process and its implications for the currency's future.

Abstract

The article "Layman’s Guide: Bitcoin and Cryptocurrency" delves into the nature of Bitcoin as a digital currency, emphasizing its intrinsic value derived from scarcity, much like physical collectibles or commodities. It compares Bitcoin's value maintenance to traditional government-controlled currencies, noting instances where the latter have failed, such as in Venezuela and Zimbabwe. The guide explains that Bitcoin's value is sustained by its capped supply of 21 million coins, a result of the original code, and the ongoing mining process that rewards miners with Bitcoin for solving complex mathematical problems, thereby also securing transactions. The concept of halving, where the reward for mining is periodically halved, is introduced as a mechanism to control the release of new Bitcoin into circulation, ensuring its scarcity and potential long-term value. Although initially intended as a currency, Bitcoin is now predominantly viewed as a commodity for investment, with its use in transactions limited to select companies.

Opinions

The author suggests that understanding the concept of value is crucial for grasping how Bitcoin, a non-physical entity, can hold value.
The article implies that the rarity and limited supply of Bitcoin contribute to its value, drawing a parallel to the high value of a rare, sealed copy of Super Mario Brothers.
It is posited that Bitcoin's decentralized nature, contrasted with centralized currencies like the U.S. dollar, gives control to its users and miners rather than a single governing entity.
The author expresses that Bitcoin's security is maintained by the collective effort of users verifying transactions, which deters malicious attempts to manipulate the currency.
The halving process is presented as a deliberate and effective strategy to ensure the longevity and increasing scarcity, and thus value, of Bitcoin over time.
The article notes a shift in Bitcoin's use from an intended medium of exchange to primarily an investment commodity, with other cryptocurrencies filling the role of everyday transactional currency.

Layman’s Guide: Bitcoin and Cryptocurrency

Everybody has heard the name Bitcoin or the word cryptocurrency, but how many people actually know what they are? What is a Bitcoin? Can you hold it or actually spend it? What does it purchase?

These are all valid questions for somebody who knows nothing about it. Since a Bitcoin is not a physical tangible object it can be difficult to understand how it actually holds value. A coin has value. An automobile has value. So does a can of soda. Bitcoin too has value.

Understanding value is the first step to understanding cryptocurrency. Objects in society are assigned a value based upon how rare they are. Recently a copy of Super Mario Brothers for the original Nintendo sold for upwards of $100,000. While the game was mass produced the copy that sold was also unopened in the original shrink wrap in perfect condition. This makes the value for the object incredibly high since there are almost none like it in existence.

Money is also assigned a value. This is more or less controlled by the governments around the world rather than an open free market. I am not going to dive to deeply into the workings of the all mighty dollar, but so long as the government says it has value and the people trust the government to remain working and stable it will maintain value. For examples of money that have become worthless take a look at Venezuela or Zimbabwe and the hyperinflation they suffered through.

Bitcoin is also a commodity that maintains value due to scarcity. At most there will ever be 21 million Bitcoin in existence. The reason for this is the original code was written to make that a reality. As of 2020 there are roughly 18 million Bitcoin in circulation. The code is designed to run until the year 2140.

This leads to the question why are there so many in circulation when the code will continue to run for another 120 years? This is due to what is referred to as the halving. To understand the halving you must understand the basics of the Bitcoin code.

Bitcoin is created through the process of “mining”. In the physical world many products are garnered through mining them. In the cryptocurrency world mining is similar yet different.

For a computer that is running the process of mining Bitcoin it would be spending it’s energy solving incredibly complex computational math problems. Roughly every 10 minutes or so the algorithm is solved by a computer somewhere in the world. When this happens the computer that solved the problem is awarded Bitcoin.

The other part of this is the security aspect of bitcoin. When these problems are solved it also verifies the legitimacy of the transaction. If there was foul play involved these computations would verify that was the case so that it could be corrected. People sending Bitcoin back and forth between each other is also verified through other users who are awarded a tiny amount of Bitcoin.

This is why Bitcoin is often referred to as a decentralized currency. A centralized currency is when the product and it’s creation is controlled by a single entity. As an example is the U.S. dollar. The dollar is created by the government whenever they feel it is necessary to do so. They can increase or decrease the amount thus controlling the value of it at any point.

Bitcoin is not under the control of a single entity. It has a limited supply that will ever exist and it is the miners and users of it that are in control. If a malicious user ever attempted to create more Bitcoin out of thin air through the code the transaction would be found by the other users and nullified thus keeping the network secure.

The halving is an aspect of the code designed to place limitations of how many Bitcoin can ever exist and how many are released into the world. When the computations are solved the miners are awarded Bitcoin.

At first it was several Bitcoin, but a decade later the amount released is much lower. Bitcoin is designed to halve the amount paid out for the computations ever 4 years or so. Bitcoin halved this year from 12.5 Bitcoin paid out to 6.25 Bitcoin paid out.

This increases the scarcity of the product over time more or less guaranteeing value for the life of the product. At the time of this writing Bitcoin is currently valued at roughly $9,300. Those prices do fluctuate based upon open trading of the product.

The original intent when Bitcoin was created was for it to be used as an actual currency, but that seems to have morphed a decade later. Instead it is generally held as a commodity by investors.

It most certainly can be used to make purchases, although only through select companies. While it was the original intent to be used as money there are many other Cryptocurrencies that are more focused into that area.