What is Bitcoin?
On this page, I wrote up a simple FAQ for the beginner, on this very life-changing, and complex new asset. It is not an in-depth look, but will give you an overview, so you can at least know it on the surface. There are people that have studied bitcoin for a decade, and are still learning about it. If you feel like it's like learning a new language, that's because it is. A whole new banking system is emerging, called "Defi", decentralized finance, and it is running parallel to this current (centralized) system.
Centralization, meaning power is given to a small, often non-elect few, leads to major issues. Currently, central bankers are the ones deciding the economic fate for almost 8 billion of us. Their reckless, and often disconnected-from-reality policies, are creating wealth gaps like never seen before. When we fix the money, we really do fix the world.
At the bottom of the writeup, I have included my affiliate link to the Canadian crypto exchange Shakepay, where you can buy bitcoin if you want. When you buy it, we both get $10 each! Absolutely no pressure, just there if you see value in it.
What is bitcoin?
bitcoin is digital money (which uses a lower case b), on an open, censorship resistant, digital monetary system (represented with an upper case B) governed by the Bitcoin protocol. It is a public ledger of every single transaction that goes on on its network, also referred to as the blockchain. It has often been referred to as Gold 2.0 with true scarcity being its major distinguishing factor; there will only ever be 21 million bitcoin. The protocol issues and follows a set of rules set out by its creator Satoshi Nakamoto. It is a decentralized network (no one entity controls it), with everyday people being able to run a node (run the Bitcoin protocol) or mine bitcoin (although extremely costly and not recommended).
2. Who invented bitcoin?
Satoshi Nakamoto is Bitcoins creator, and met the world stage in 2009 just after the Great Financial Crisis. To this day, his identity remains unknown. This was intentional to keep the integrity of the Bitcoin protocol intact with no known CEO or company being able to be jailed, fined, shut down, or tampered with.
3. What does it cost?
The price varies drastically and quickly. It is this crazy price volatility that birthed the term “HODL” (hold on for dear life), as you need real grit to hold on during its price swings. Bitcoin has awarded its most loyal HODLers into millionaires and billionaires. However, the dollar value should not be what one gets caught up on, or in. In a world of quickly dwindling purchasing power, the focus should be on what you are able to buy with your asset, not its dollar value which is extremely deceiving.
As of todays writing, the cost in CDN is roughly $40k per coin. A common misconception is that one needs to be able to buy a whole bitcoin. You do not. Each bitcoin is divisible 100 million times, each unit called a satoshi (“sats”) in honour of its creator. With each bitcoin being divisible by a 100 million times, there is more than enough quadrillions to go around. Buying bitcoin now, is like buying real estate in Manhattan in the 1800s.
4. Where can I buy it?
Any major cryptocurrency exchange supports the buying and selling of bitcoin. Coinbase, Blockfi, Swan Bitcoin, Shakepay, Youhodler, etc. are all examples of exchanges where it can be purchased. However, and is very important to note, if you do not remove your bitcoin or sats off the exchange, they are not technically yours. This is where the phrase, “Not your keys, not your coins” came from. Crypto exchanges now are heavily regulated and insured. The purchase of bitcoin has come a long way since its inception. Other ways to acquire bitcoin are through bitcoin meetups, or mining.
5. What does it do?
Bitcoin allows peer to peer spending without an intermediary, third party, or any trust between the two transacting. The system is not based on trust; I do not need to trust you in order to interact with you. Cryptography uses public and private keys which allow people to send and receive money without a bank or any other entity supporting, allowing or managing the transaction. However, this really is the most sovereign kind of money. You and you alone are responsible for it. There is no 1-800-Bitcoin for you to call if you lose your private keys, send it to someone bad, or worse, send it to the wrong address, and it is lost in the ether forever.
6. Where do I put it and how do I hold it?
Once you have purchased your sats or bitcoin from a crypto exchange, and have gotten comfortable with this initial step, then it is common practice to move your bitcoin off the exchange to either a hot or cold wallet. A hot wallet is one that is still connected to the internet (making hacking or fraud easier), whereas a cold wallet has no internet connection at all. This makes it impermeable to hacking or theft, unless they get a hold of your seed phrase. For those that interact with bitcoin daily, a hot wallet may be important, but still not recommended to keep all your bitcoin on. For those that are saving their bitcoin for multiple years, and do not intend on selling, a cold wallet is a secure and safe way to keep your wealth. Be sure to keep your cold wallet as secure as you would any other legacy financial tool. Keep it in a safe at home, or somewhere secret only you know about. Keep your recovery seed phrase safe and secure as well. NEVER share that seed with anyone, as they could literally take all your wealth.
7. Why is it valuable?
Ah, the multi trillion dollar question. Bitcoin, and bitcoins, greatest feature is its truest scarcity. Until bitcoin came along, gold was the most perfect “money” we had; but even that inflates its supply by 2% a year. Bitcoin does not ever inflate its supply. The entire network would have to agree to devalue its own currency to do so. Which hard working people would generally not consent to. Most of the major financial and economic issues were seeing today are of direct result of a few deciding for many. Somehow, unelected, higher-up officials are deciding that inflating the currency supply is okay. bitcoin can be transferred across borders, literally a $100 million dollars if you had it, by remembering a few words in between your ears. You cannot do that with gold.
8. What makes it valuable?
Bitcoins value comes from its network affect and allowing financial energy to flow where its treated best. Currently, getting yield on investments or monetary instruments is becoming harder and harder. That is why we saw another attention grabbing price jump in bitcoin in December 2020. The Bitcoin network is valued so highly because of the amount of real world money that has gone into securing it. To mine bitcoin, and run the network, takes an incredible amount of energy - namely electricity. If someone wanted to tamper with the transactions recorded in the blockchain, they would have to re-invest that same amount of energy that went into forming the block in the chain. If a transaction is a 100 blocks deep, it would be virtually impossible to undo all of that energy that went into it initially.
If you think the Bitcoin network takes a lot of energy, wait until you hear about the energy use of the Petrodollar system or the legacy banking system.
9. What is proof of work?
Proof of Work (PoW) is how the network knows that some form of real world energy went into that block being minted into the chain. It communicates that whoever confirmed the transactions, did so by following the Bitcoin protocol and paid for the energy used to do so. The hash of any block details the transactions being added to the ledger, the winning number of the previous block (hash), and a random number called a nonce. This information is used for each future block to be built upon. If we change the hash on one block, we alter the hash for the next one in such a drastic way, that we have to redo the PoW. So rather than the Bitcoin network being secured via Proof of Stake (PoS), aka, “I hold the most of it, so believe and trust me” (sound familiar? Just like our current system), it is secured by PoW.
10. How is bitcoin tied to the real world?
The Bitcoin protocol and bitcoin are tied to the real world via the electricity used to mine and run the network. Without this real world tie, the system would arguably have “no value”. This is why when people say it isn’t worth anything, they’re wrong. It is worth all the money that has gone into securing and running it. Not to mention, its true scarcity, meaning that the coins gain power over time (deflationary), as opposed to losing power over time (inflationary). We have all been so conditioned to accept increasing the money supply because we have done it for so long, but it is truly the number one reason for all of the inequality and unrest we are seeing. When we fix the money, we fix everything.
11. Do governments support bitcoin?
Some governments do. Recently, El Salvador has made bitcoin legal tender. Other governments are so terrified of it because it removes their power and control of its citizens. Bitcoin puts the money back in the hands of the people, and takes it away from centralized entities looking to line its pockets with freshly printed money. Of course there are governments that understand that the power dynamics of the monetary system are changing and shifting; some are resistant (they’ll be left behind), and some are embracing it because they’ve been long abused by the current regimes in power. Over the next ten years, we will see changes in the geopolitical landscape that no one would’ve seen coming.
12. Can the government ban bitcoin?
Ask China. They have banned it over 8 times. Ask the United States how The War on Drugs is going? Or their War on Terror? Governments globally cannot ban drug use, prostitution, human trafficking, weapons, or any other moral endeavour, and cracking down on bitcoin (or crypto) would be so difficult, it would prove futile. Given that banning the network is virtually impossible - you’d have to shut down the internet AND electricity to do it - the most they could do is tax any gains on it extremely high, or not allowing you to switch out of your bitcoin position for fiat currency. Although, that may not even be necessary given that many new crypto exchanges allow users to borrow against their bitcoin as a collateralized asset. In the same way people borrow against their homes, bitcoin holders would borrow against their bitcoin.
However, it is important to be aware that the legacy system will put up quite a fight to do everything they can to stop it. It doesn’t mean it will be successful, but it is a risk to be aware of.
13. Do you pay tax on bitcoin?
Yes, as of right now, bitcoin is viewed as property and a speculative asset, so selling it would incur capital gains.
14. Has bitcoin been profitable?
Since bitcoin made its debut, it has returned roughly, 200% a YEAR. There has never been an asset like it.
15. What is the history of bitcoin?
People think this internet money just came out of nowhere in 2008, but that isn’t true. Bitcoin technology, called cryptography, has a rich 40 year history behind it. It is backed by mathematicians, physicists, computer science, and anarchists, who could see the future of major technology being like an all seeing eye. Currently, any bank, social media platform, or government, can shut you out of your money, silence you, or imprison you for doing or saying the wrong things. Cryptography and cryptocurrency remove permission from the third parties and gives it back to individuals. There are roughly 4 billion people who are under repressive, authoritarian, or corrupt regimes. Some of that 4 billion is completely unbanked, meaning they have NO access to the financial system. Bitcoin fixes all of this.
16. Where do bitcoins come from, like who issues them?
Within the Bitcoin network, miners are the ones who bring newly minted bitcoins into existence. It is slightly complex, but essentially, whenever someone solves one of the highly complicated math equations, the miner is rewarded in bitcoin, and those become part of the block reward AND monetary base of the system. The Bitcoin protocol is so perfectly made, that even the most dishonest of humans can use it, and would need to adhere to its rules, or all the money and energy that goes into mining it, is for nothing. If a transaction doesn’t honour the protocol, it isn’t added to the blockchain, and bitcoin isn’t released as a reward.