A simple guide to understanding bitcoin

So we decided to make a simple guide to understanding what people are calling the “the currency of the future”.

What is bitcoin?

It’s a type of currency. Just like the Naira or the Dollar is a currency. Only this time, bitcoin is a different type of currency. It only exists on the Internet. So just like Nigeria’s currency is the Naira, and the United Kingdom’s is the Pound, bitcoin wants to be the currency of the Internet.

But bitcoin is not the only cryptocurrency on the Internet. It’s just the most popular, so we’re going to stick to bitcoin to help us understand. And to understand bitcoin, we have to understand the history of money.

Once upon a Cowry…

Thousands of years ago, someone went to a seashore and found some interesting looking shells. They were small and about the size of a kolanut. Let’s call this person Wankona.

So Wankona picks up this nice looking shells and keeps them, because they aren’t particularly common. One day, Wankona goes to the market to buy Rice. Wankona then tells the Rice seller in this market some thousands of years ago, “hey, wouldn’t it be nice if I paid you with these nice looking shells in my leather pouch?” Rice Seller thinks its a good idea and collects the nice looking shells, or cowries as we call them.

What was just a shell a few moments ago, has now become a means of exchanging goods and services, the cowry by the sea shore has now become money.

So, how is bitcoin different from normal money?

The Naira is printed by the Central Bank of Nigeria. The Central Bank gets to decide what the naira should be valued at most of the time. Sometimes, they let the market forces decide the value, sometimes, they just veto the damn thing even if there might be consequencies.

But with Bitcoin, it’s completely different. Bitcoin is limitless. There’s no limit to how much you can own, or withdraw, or transact at any given time. This is infact, what makes the Bitcoin truly powerful.

Why is a bitcoin so valuable?

At the time of writing this, one bitcoin is worth $5,600. That’s well over ₦2 million. But it wasn’t always this valuable. On December 23, 2016, it was worth just about $900/bitcoin. So why did the value spike up so much?

Let’s go back to Wankona, our cowry friend. Lets say Wankona has 30 cowries. At first, those cowries are worth just about 10 plates of rice. Everyone likes the way the cowries are light, and portable, so everyone wants to trade with the cowries.

The more people seek out the cowries, the more it becomes valuable. It’s a basic law of demand and supply. Economics 101.

The demand for bitcoin has shot up over the past year, and some experts are predicting that one bitcoin might be worth $25,000 in 5 years.

Okay, fine. But how does it work?

The first step is to have a bitcoin wallet. It’s where your money goes into, and comes out as bitcoin. This is what a bitcoin address looks like; 1BoatSLRHtKNngkdXEeobR76b53LETtpyT

Yeah, it looks like jargon, but this bitcoin address can be used to send and receive bitcoins anywhere.

Your bitcoin wallet on the other hand, holds all the information about your bitcoin address, from your transaction history to your account balance.

If all of this feels like jargon, then you can get a Bitcoin client to manage all of it for you. For example, there’s Bitkoin Africa, or Luno. With clients like these, you can easily credit your Bitkoin account, buy, or sell bitcoins.

What if someone pulls the plug?

You mean, what if someone pulls the plug on the Internet? That’s almost impossible. The interesting thing about bitcoin is that it’s peer-to-peer. What this means is that it’s a kind of open-source system, where everyone is connected to the other. At the center of all of this, is a ledger, powered by badass encryption and cryptography. It records every transaction made anywhere in the world on Bitcoin. So no, you won’t be losing your money. Nobody is going to pack their bags one day and disappear like MMM.

What does this mean for the future of money?

So lets say I needed to make payments for a computer in the U.S from Nigeria right now. My bank would try to charge me some commission for the foreign transaction. If I escape my bank, the Federal government is going to restrict me from making payments because I exceeded the limits for transacting in Forex.

With Bitcoin, I can make payments, without worrying about any bank, or any government, or any restrictions. The only thing that matters is my bitcoin and the person receiving it.

So now, what happens when the banks, or government have no power over how I can use my money? They lose all sense of control. The Central Bank then has no way of regulating the money in circulation. And the government, limited powers over the economy.

The system tends to fight back. It’s why China, for example, has banned all sorts of trading in cryptocurrencies. But there are rumours they’re building their own. Something they can have more control over.

The next question is, will the bitcoin bubble burst? Well, here’s what Bill Gates had to say about that, “I think Bitcoin is a techno tour de force.” Or Peter Thiel, Founder of Paypal, “I do think Bitcoin is the first (encrypted money) that has the potential to do something like change the world.”

Are they right or wrong? We’ll have to wait and see. In the meantime, the value of bitcoin would have reason by tomorrow, most likely.

Demand and Supply.