Investing, Currencies

How Bitcoin Works, Explained for English Majors.

How Bitcoin Works, Explained for English Majors.

A bitcoin is essentially a large number. A very large number. If you know the number, the bitcoin is yours to spend. If someone else knows the number, they can spend the bitcoin and your money is gone.

Secret Password

So the very large bitcoin number needs to be kept secret. Bitcoin owners call this your private key. We will call it your “secret password”. You can assign your own secret password as long as it has the required number of digits. Most people get a random number assigned as their secret password. The problem is that it is hard to remember. If you forget your secret password, there is no way to recover it. So special care must be given to writing down or save your password somewhere safe, but also somewhere where you have access to it at all times. Remember, you never tell anyone your secret password otherwise they may use it.

The bitcoin program takes the secret password and does a calculation on it resulting in another number, which is unique to your secret password. This other number is your public key. We will call it your “account number”. Anyone can know your account number. In fact, they need to know your account number to send money to you, or to verify that you sent them money. Some people post their account numbers on the web and say "please send me a tip". It is totally safe to give this number to everyone.


Why Should You Care About Bitcoin?

Why Should You Care About Bitcoin?


Bits are computer lingo for ones and zeros, the elementary particles of information. A bitcoin is a coin made out of bits. Suppose you had a gold coin, a 1 ounce Gold Eagle minted by the US Government. Now suppose by some magic, it could be converted into bits, 1s and 0s. This is a good way to think of bitcoins.

They are coins, with all the properties of a coin but they are made of bits and can therefore live on the internet. They can move across a continent in milliseconds. They don't have weight or bulk. You can carry a million bitcoins in your pocket and still run a marathon. They contain their value in themselves. Their value is not determined by any human authority, just like gold. This is not a perfect image of a bitcoin, but it is a good start.

There is a mystery surrounding the creator of bitcoin. Nobody knows who this creator is and nobody can deny that there is definitely the touch of genius involved. Many people are talking about bitcoin. You will be increasing your distance from younger generations if you do not understand what it is and how it can shape the future.

1. Bitcoin is Here to Stay

Mobile Apps come and go. Bitcoin is not a mobile app. Products come and go. Bitcoin is not a product. It's not a brand, not a technology, not a trademark, not a patent. Bitcoin is an elegant solution to a mathematical problem. This is timeless. The Pythagorian Theorem: A^2 + B^2 = C^2 is timeless. It is fad-less and fad-proof.

It is more than a currency. Currencies come and go, usually because the sponsoring government disappears or changes the rules. Bitcoin has no government, so change is unlikely.

It is more than a commodity. Commodities come and go, because uses change or supplies are found. Whale Oil used to be a vital commodity. Natural gas has replaced it. Cotton used to be called King Cotton, the commodity that built the South. Diamonds used to be a symbol of wealth. Now diamonds are made in the lab and are purer, clearer, and more perfect, than the ones that come from the ground. Bitcoin has a fixed supply that never can be changed.

It is more than a payment system. Think of all the computer code that is contained in the computers of J. P. Morgan Chase. Millions of lines of code. Think of all the people who maintain and operate all these bank systems. Now multiply this by all the banks over the world. Did you know that all this could be replaced by two Bitcoin programs? The user program and the processor program. Bitcoin is a global payments system in a box. A small box. It is a disrupter of the banking system, and of the modern mode of commerce.

How is it a disrupter of commerce? Just think of this scenario: A small African nation has a coup. The new dictator decides they need to establish banking relationships with the rest of the world, which they used to have before the war, but all of which is now destroyed. He doesn't have MBAs in Finance from Harvard in his cabinet, so he approaches Deutche Bank, Credit Suisse and the Bank of America.

A few weeks later, a plane load of overdressed bankers wearing Brooks Brothers arrive in the capital city, which has one hotel. They each present a plan that involves building infrastructure, bank branches, and correspondent relationships that cost millions of Euros (or Dollars). This is hard currency they have in short supply. So they also include an easy repayment plan that lasts decades.

Then a bright, young nephew to the dictator says, "Why don't we just run bitcoin? I can download it and have it running in about 30 minutes. We can do it on a laptop. What have we got to lose?" Bitcoin is also a central bank in a box.

2. Bitcoin is Firmly Established and Growing.

What do Tesla, Dell, Microsoft, Subway, Home Depot, Kmart, Sears, Bloomberg,,,, TigerDirect, LOT Polish Airlines all have in common? Here is a list, although not updated, of some of the largest vendors accepting bitcoin.

We don't know the number of actual bitcoin users. One large bitcoin wallet provider has seen a constant increase in the number of users. In fact, the graph, looks identical to an upward sloping line.

More businesses are using it as a means of payment. In 2015, there were 100 thousand businesses accepting bitcoin. Today, 2017, we don’t know how many business there are except to say there are multitudes more. It is difficult to count because there is no central registry, businesses are changing daily, and because there are workarounds. For instance, doesn’t presently accept bitcoins, but one can exchange bitcoins for amazon gift cards.

Approximated $2.3 million are earned daily by bitcoin processors, these are people who lend their computer resources to the global bitcoin network and get paid for processing transactions. They are processing 300,000 bitcoin transactions per day and the average value per day is 400,000 BTC. Or approximately $361,200,000 daily dollar volume.

The bitcoin processing network has been the most powerful computer in the world since 2013. Bigger than any known computer network and some believe bigger than NSA, CIA and KGB computers. It is bigger than 500 googles, and 10,000 banks.

3. Bitcoin is driven by the Rest of the World

Do Americans need bitcoin? Not presently. We are blessed with an efficient banking system, a stable currency and excellent point-of-sale technology. I can use ten different methods to pay at Starbucks. ApplePay, ChasePay being the newest methods. But do not forget that Bitcoin is a world phenomenon.

In other parts of the world it is more necessary. For example:

In 2009, the North Korean people were wiped out by new Won. The government decreed that old Wons were no longer allowed. People were forced to exchange the old Wons for new Wons. Unfortunately, the maximum amount allowed to be exchanged was 300 USD. There were riots in Pyongyang, and many people were killed by the police.

In 2013, Cyprus enacted a one-time 10% tax on savings accounts. Originally, they proposed a 20% tax. Suppose, you just sold your house and had the money siting in the bank waiting to close on your new residence. One student just received money for her tuition, when the government confiscated 10%.

This year, 2016, India recalls 1000 and 500 rupee notes. There are reports of people spending all day waiting in lines at their banks.

Will we ever need it in America? Maybe. Harvard professor and advisor to president Obama, Lawrence Summers is proposing eliminating the 100 dollar bill and the 500 Euro bill. With the November election it is less likely this will happen, however, many powerful government officials still like the idea.

So in conclusion, Bitcoin is a genius mathematical solution that defies categorization, the number of users are growing daily and it is worldwide phenomena led by many countries. If nothing else, Americans should learn about bitcoin for tourism reasons. But I believe bitcoin will soon find ways in the lives of every person.