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What is bitcoin? This is the first question people ask when you talk about bitcoin. It is not easy for an average person to understand what is bitcoin or how it works.. Many people get attracted to bitcoin because of the potential to use it to make money than being attracted by the technology.

What is bitcoin? Bitcoin is commodity in a world of its own! It is unigue in so many ways than you can imagine. Don’t compare bitcoin to any other commodities or fiat currencies you know (e.g. the South African Rand). Bitcoin is not a coin like the name says, it is lot more than that!

First, bitcoin is a digital commodity, a digital asset. This means it is intangible, existing and living only on computers. Bitcoin is a digital currency that we can use to pay for goods and services in our daily lives. But, bitcoin is a lot more than that. Bitcoin differs from the other forms of money in so many ways than you would imagine.

I explain this more below.

Most South Africans became aware of bitcoin when it hit the news headlines in December 2017. During that single month the price of a single bitcoin surpassed R300 000.00. In that short period of time bitcoin forced us all to sit back and take note. Everybody was asking around: “what is bitcoin?”.

However, most people lost interest immediately thereafter when bitcoin price started dropping sharply. Only a few remained, intrigued by how a piece of code, a combination of numbers and letters can worth so much! In this post, I will explain what is bitcoin and why everyone should take it serious.

image showing bitcoin price surge in december 2017

What is Bitcoin?

In its simplest form, bitcoin is just lines of computer code! It is a combination of letters and numbers that are created by computers using cryptography. The code exist on a shared public ledger on interconnected computers, called the blockchain.

Bitcoin blockchain, like most other blockchains, is not controlled by any specific person or persons. It is not owned by any company, organisation, or government. For sure, someone created it. But, instead of controlling it for their personal gain they chose to leave it open and allow other people to use it.

The creators only have the amount of access and control on the bitcoin blockchain as does any other interested person. The only advantage they had was that they mined the coin before everybody, when it was a lot easier and cheaper to mine bitcoin. It is important to also note that they spent their time and money on something that could have resulted in a loss.

Background: The Birth of Bitcoin

Bitcoin was created by a person calling himself Satoshi Nakamoto from 2007 to 2008. He released the bitcoin whitepaper on October 31 2008, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.

The following year, on January 3 2009 he launched the bitcoin blockchain. He immediately started mining (see what is bitcoin mining below) the first bitcoin.

What Prompted Nakamoto to Start Bitcoin?

In any form of society, the ability to solve a problem is what makes a new idea to be adopted by many people and succeed. There are a number of social and business challenges that led to the invention of the bitcoin technology.

I call it the bitcoin technology because the blockchain technology started with bitcoin and all others followed later.

Here are some of the reasons that might have led to the invention of bitcoin:

  • Transferring large sums of money from one country to the other can be very expensive, or, in some countries, difficult or impossible.
  • People living in certain countries may be unable to get banking services because of one reason or the other. The most common reason is lack of proper identity documents or lack of permenant residential address. Emmigrant workers in most first-world countries experience this.
  • Governments work hand in hand with banks and can easily monitor and dictate with whom you should or should not spent your money. People in countries with repressive laws know this very well.
  • World economies are not stable. When the economy of a country collapses, more often than not it takes with it the life savings of its inhabitants. It has happened in Greece a few years ago. At the moment it is happening in Venenzuela. In both countries and many other countries people lost their life savings and their homes.

In the case of our South Africa, the biggest threat to the economy at the moment is corruption in high places. If things go on as they do now, I foresee problems.

What is Bitcoin: The Benefits in Brief

 

These are only some of the events that led Satoshi Nakamoto to invent the bitcoin technology. Bitcoin addresses the problem of banking. You don’t need a permanent residential address to have and use a bitcoin wallet on your smartphone or computer. Neither do you need an identity document.

Bitcoin cannot be manipulated by any government or bank. It is not controlled by any government like the fiat money. A classic example of a well-known commodity not controlled by any specific organisation or government is the internet. Anyone with a computer and data connection can access the internet and publicize their opinions without fear of censorship.

Bitcoin is a peer to peer exchange asset. It is from me straight to you without a need for a middle man to validate the authenticity of our transaction. The bitcoin blockchain does that and does it so well! It is able to ensure that every transaction recorded on it is 100% valid.

When the economy experiences hard times, your wealth may suffer. As a result, you may need to protect it. Bitcoin, just like gold, is your best bet! But unlike gold, storing bitcoin is cheaper and more safer.

Because bitcoin is not controlled by governments or any organisation, it cannot be manipulated with ease like the fiat currencies. When bitcoin loses value it would be purely because of the market forces, and not because of government manipulation.

Yes, bitcoin gets affected by world events. As I am writing this (March 2020), the price of bitcoin (and nearly all other crypto assets) is reacting negatively to the outbreak of Corona Virus pandemic.

 

image showing march 2020 bitcoin deep

 

The price of the major cryptocurrencies has come crushing down by nearly half in two to three days. And so did the price of all commodities, including all fiat currencies.

How Different is Bitcoin

I have promised above to explain how does bitcoin differ with other currencies, the fiat currencies in particular. We already have an idea of what is bitcoin. If we are going to compare bitcoin and the fiat currencies we also need to understand what is fiat currency.

The Investopedia website defines fiat money as “… Fiat money is government-issued currency that isn’t backed by a commodity such as gold. Fiat money gives governments’ central banks greater control over the economy because they control how much money is printed”.

From the definition above it is clear that the fiat money is made and controlled by governments. Our money in South Africa, the South African Rand, is a fiat money. Our government decides when and how much money to issue into the economy.

It is important to also note that the rand, like most other fiat monies, is not backed by anything of value. In the past it used to be backed by gold. Then, the words “I promise to pay the bearer on demand at Pretoria fifty rand” used to appear on each and every bank note.

 

image showing zar 50

 

The statement meant that for every bank note there was a proportional amount in gold was held at our central bank, the South African Reserve Bank. This is not the case anymore. Today, our bank notes don’t carry that statement. Why? Because our money is not backed by gold anymore.

 

 

Anything Wrong With It?

 

No, there isn’t. Yes, there is. It depends from which side you look at it. Fact: moving money from the gold standard meant that the government can now print and issue any amount of money into the economy as they see fit!

The problem is, when too much money is printed and pumped into the economy where there is no proportional growth, money which is already in the economy loses value. Money already in the economy is the money in our pockets and our bank accounts! This is our money! This means the money that we have stored in our safes is gradually becoming less and less.

image showing empty pockets

What is Bitcoin Doing About It?

 

Bitcoin has an answer to this problem. The algorithm in the bitcoin cryptography ensures that there will never be more than 21 million bitcoins in existence at any given time. This will NEVER change.

As more and more people adopt and use bitcoin in their daily lives, the money value of each bitcoin increases. What is important is that the total number of bitcoins REMAINS THE SAME. This is a very important characteristic of bitcoin. This is where the value of bitcoin as an investment commodity comes from!

When governments try to solve problems of the economy by printing more money they are interfering with the foundation of the essential problem of the economy, namely the problem of scarcity.

Money is a scarce commodity. More money should follow after more growth. There is a reason all of us should do something everyday to earn money.

image showing south african money

What is Bitcoin Smallest Unit?

 

One of the qualities of money is that money should be divisible. All the fiat currencies are well divisible. Our South African Rand in made up 100 cents and is thus, well divisible. Divisibility makes it easy to use money.

The smallest unit of bitcoin is called satoshi, named after the creator of bitcoin. One bitcoin is made up of 100 million satoshis. This makes bitcoin by far more divisible than any fiat currency.

At the moment, one satoshi is worth less than R0.001. In other words, you can get about 10 satoshis for one South African Cent.

What is Bitcoin Mining?

 

I have already mentioned that the highest number of bitcoins at any given time is 21 million. So far, only just over 18 million bitcoins are already in circulation or in bitcoin wallets. The other 2 million or so still need to be mined in order to be available for use.

What is bitcoin mining? Bitcoin mining is the process of using specialised computers to carry out complex mathematical calculations on the bitcoin blockchain. According the official bitcoin website, the process involves carrying out transactions, securing the bitcoin network, and keeping the network in harmony.

As a reward for servicing the network, the owners of the computers receive bitcoins.

What is Bitcoin: Wrapping up

 

Bitcoin and the whole cryptocurrency technology is a complex phenomenon. It’s no wonder most people find it challenging to undetstand what is bitcoin. But after reading this, I hope you have a better idea of what bitcoin is.

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