Bitcoin For Dummies. Peter Kent
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he says, “the total value of money worldwide is $60 trillion dollars, of which a mere $6 trillion is in cash or coins 90 percent of all money is nothing more than entries in a computer server. Money is a faith-based object, whose value is derived by the shared narrative about its worth.”
You can see this for yourself. If you do an Internet search for “money supply” and dig around a little, you’ll find different measures of money supply: M0, M1, M2, and so on. M0 is cash — coins and bills. M1 also includes deposits in checking accounts. M2 includes all that, but also includes savings accounts, mutual funds, and so on. Dig around a little more, and you’ll find that what you think of as money — the coins and bills — actually represents only around 10 percent of all the money in circulation!
So, here’s a quick question for you. What’s the difference between Bitcoin and U.S. dollars, or pounds sterling, or euros? With those fiat currencies, 90 percent of the money is “nothing more than entries in a computer server.” With Bitcoin, it’s 100 percent!
That’s not to say any particular currency — including Bitcoin — will hold peoples’ beliefs forever. What we are trying to do here is explain how something as ephemeral as Bitcoin can be valuable.
Understanding Bitcoin Benefits
Now that you understand how Bitcoin can have value — and clearly it does right now, as millions of people are willing to pay for it — let’s take a look at some of the benefits of Bitcoin, characteristics that set it apart as a form of money.
First, consider the roles that money plays:
Money can act as a medium of exchange. That is, you can use it to buy things. Bitcoin currently doesn’t do well on this account, because it’s not widely accepted, transactions are generally slow and expensive, and most people are still buying and accumulating Bitcoin for speculative purposes, to see if the value will go up.
Money can also be a measure of value or a unit of account. We use it to assign a value to things, from sugar to motor cars. Bitcoin also doesn’t do well in this area at the moment because its price is so volatile.
Money can also act as a store of value, a way to take value you have saved and store it away safely. You should be able to buy Bitcoin and let it store your wealth for you, then retrieve it when you need it. Bitcoin has actually done very well in this way over the long term. Certainly, there are short-term fluctuations, but over the long term, due to significant appreciation in value, it’s acted very well as a store of value.
Here then, are various characteristics and benefits that set Bitcoin apart.
Portability
Money needs to be portable. If you can’t move it around, how can you use it? It may seem that rai stones, from our example earlier in this chapter, were not physically very portable, but in fact their value was definitely portable. The residents of Yap communicated and transferred ownership via word of mouth. Bitcoin is likewise very portable, as you’ll discover in this book. You can transmit it across the Internet to anywhere or anyone in the world at nearly the speed of light.
Verifiability
As you see in Chapter 2, your ownership of Bitcoin is most definitely verifiable. Because an entire copy of the Bitcoin blockchain transaction history lives on each computer running the Bitcoin software, the thousands of nodes on the network must verify each and every transaction and block based on the rules of Bitcoin. These are rules that everybody has to follow or they can’t function within the network. The structure of the Bitcoin blockchain ensures that you can, and in fact must, prove you own your Bitcoin, and have total control over it before you can transfer it (assuming you don’t lose your private keys; see Chapter 2).
Fungibility
An important characteristic of money is that it has to be fungible. That is, one dollar is the same as another, my dollar is just as valuable as your dollar. Like every good form of money, Bitcoin is fungible; every Bitcoin has, in general, the same value as another Bitcoin. (Okay, this isn’t 100 percent true. Some people like to own Bitcoin that cannot be traced back through the blockchain to a particular owner. They are willing to pay a bit of a premium for Bitcoin created and transferred without being subject to the kind of Know Your Client banking rules discussed in Chapter 3.)
Durability
Bitcoin won’t rot if left out in the weather or burn if your house burns down. Bitcoin is just information, pure money without the vulnerable tangible material. As long as the Bitcoin blockchain and Bitcoin network endure, your Bitcoin will remain where it’s always been: in the blockchain. You just have to understand how to protect your access to the blockchain address associated with your Bitcoin, which we discuss in Chapter 5.
Divisibility
Bitcoin can be divided into tiny, tiny parts — one hundred millionths, known as Satoshis. This means you can spend a Bitcoin or any fraction of a Bitcoin. At the current price, the smallest fraction of a Bitcoin is worth about a twentieth of a U.S. cent.
Open access
The Bitcoin network, like the rai stones of the past, is an openly accessible network that cannot be censored. While Bitcoin may not be for everyone, it is for anyone who chooses to use it; no one can limit another’s access to the network.
Final settlement
Monetary networks of the past have achieved settlement well; even in the case of the sunken rai stone, the ledger was updated and settlement occurred — albeit via word of mouth. With Bitcoin, transactions can be mathematically irreversible within six confirmations (explained in Chapter 3), which takes about an hour. Compared to other methods, the Bitcoin network provides fairly fast finalized settlements that cannot be charged back.
Borderless, stateless
Bitcoin is international. Any citizen of any country that has open access to the Internet can own and trade Bitcoin. Even if a country tries to ban Bitcoin, the cryptocurrency will continue elsewhere, and knowledgeable citizens would likely be able to bypass restrictions and hide their tracks. A Bitcoin transaction can even be transferred via ham radio, local mesh networks, and satellites.
Pseudonymous
Bitcoin is not, contrary to popular belief, anonymous. But it is pseudonymous. The blockchain itself has no account names, for instance. Your Bitcoin is not labeled with your name or any identifying information. (You learn how the blockchain works in Chapter 2.) But the blockchain is open to viewing by the public. Anyone can get in and dig around, and trace transactions from one address to another, to another. This means that if information exists identifying your “entry” into the blockchain — for instance, when you buy Bitcoin from an