Bitcoin and Bitcoins

A Simple Explanation of Bitcoin for Everyone

~ This article was originally written in Dutch (around 2014). This will be reviewed and what has been changed in 10 years ~

What is Bitcoin and what can you do with it?

Bitcoin and the development of cryptocurrencies (the general name for this type of money) will have a huge impact in the future. This impact will extend to businesses, individuals, banks, criminals, traders, governments, tax authorities, and more. To understand the principle of Bitcoin or virtual money, we need to take a look back at the origin of money.

Why and how did money originate?

Introduction to Bitcoin

Bitcoin is virtual money; you can’t touch it yet, it’s intangible. This is different from the money we know, such as dollars, euros, and other international currencies. Bitcoin only becomes tangible when you buy something tangible with it. Essentially, it’s the same as your bank balance where all transactions are done online or via card. You never see the actual money. Cash is being used less and less. Everyone uses cards at the checkout, and most payments are made through the bank.

There have, of course, been forms of virtual money in use for much longer, including all the loyalty points from suppliers (e.g., Albert Heijn, Esso, BP, C1000, etc.) and the so-called Facebook GameCoins. What makes Bitcoin unique is that it is not issued by one central controlling party or a supplier of money, which helps maintain its value. If Facebook goes bankrupt, you lose all your GameCoins. Bitcoin doesn’t have this problem.

Real money is also just virtual money

Real money is actually virtual money as well. Consider the following:

  • Most of the money in the world is held in banks or in non-cash circulation.
  • A small portion is physically in circulation (or represented as such).
  • The process of money transformation started when governments abandoned the gold standard. First, gold was converted into paper money and then, via bank records, it became mostly electronic. Now, a large amount of money is non-cash, and only a small portion is physically in circulation. This small part is known as “cash.” Financial markets have created many constructs where the monetary systems are no longer transparent.

It has become so extreme that it’s comparable to the following scenario: If I turn off the light on my desk, a pebble (meteor) in another solar system changes its orbit. Closer to home: If I turn off the light on my desk tomorrow, my mother calls to say she can’t use her computer anymore.

We should be at least a little critical of the current monetary systems. The current system is not in the hands of the consumer but in those of (central) banks and governments. Recently, we’ve seen that this system is severely tainted by manipulation and greed. If you can’t trust a bank, who should you trust? If the government supports a bank that messed up, should you still trust that government?

In simple terms, the current monetary systems are also just virtual money systems without real value behind them. The simplest test for this is: Everyone withdraws their money from the bank and gets it paid out in the value of precious metals like gold, silver, and platinum. Cashing out in paper money is not meaningful, as governments and central banks can just print more money. Paying out in silver or gold becomes a real problem (they simply don’t have it and can’t buy it on the markets). In short, the current monetary system is just virtual money manipulated by governments and banks. Anywhere large amounts of (virtual) money are present, manipulation and theft are inevitable and fundamental.

Bitcoin

Compared to existing monetary systems (which are also virtual as described above), Bitcoin is not controlled by banks or governments. They can’t print more money or manipulate its value. Transactions occur directly between individuals or businesses without a third party like a bank. This is based on the value users assign to Bitcoin.

Bitcoin is the protocol for recording transactions. Bitcoins are the units of money. Bitcoins follow an exchange rate on the currency market, which fluctuates because it’s a new form of money. People still don’t fully understand it, and various parties are experimenting and speculating with this new form of money. Bitcoin is not managed or issued by a bank.

Supporters and Opponents

Bitcoin has supporters, opponents, evangelists, optimists, and pessimists.

Bitcoin will significantly influence current payment systems, banks, and governments. Many prominent (internet) entrepreneurs support Bitcoin and invest in companies that add value to trade and transactions with Bitcoin. The real value of a currency lies not in the currency itself but in its use and trust.

The Future of Cryptocurrencies

The situation with cryptocurrencies could go even further: Bitcoin is the catalyst and will slowly reveal the entire financial system step by step, especially the corruption and manipulation. This doesn’t mean Bitcoin will be immune to manipulation, corruption, attacks, and more (see, for instance, the views of Andreas Antonopoulos). Currencies that have no real value and lose trust will be the first to be hit. The US dollar is certainly a candidate. Exciting times are ahead, and the financial crisis is far from over. Want to read more about what the US is doing to protect itself against the so-called “mystery man” or “terrorist”?

Take a look around at: http://sgtreport.com/ or Google the name Marc Faber, also known as Dr. Doom.

In Conclusion

Cryptocurrencies are only possible with a free network like the Internet, which allows value exchange without the intervention of banks and controlling or regulatory bodies like governments. The value is locked in a mathematical construction that can only be unlocked by the owner with a personal key. A secured value cannot be cracked by governments because the computing power of all participants protects and safeguards the security.

Manipulation is only possible if Bitcoin cash is created, and more cash is put into circulation than actually exists. Suppose a government buys 1 billion worth of bitcoins and now physically issues this money by guaranteeing the value of the bitcoins but contaminates this by putting more “paper bitcoins” into circulation than it actually has. This is known in jargon as: fraud, adulteration, infection, dilution, or contamination. This argues for a system where no physical money is put into circulation so that it cannot be manipulated. In this day and age, this is no longer fiction. The chance of physical bitcoins becoming a reality is very small because of this.