Cryptocurrency and Bitcoin for the average Joe (or Joanna)
For the past 4 months, all my friend are commenting: Bitcoin. In some odd way, the conversation gets there. And the discussion starts:
I don’t understand this computer thing!
This is a pyramid scam!
No! I am making money, like legit!
People all the time want to know what is that but really don’t wanna know because is worried that it will be a waste of time….
Well, let me put this in simple words:
Cryptocurrency is a currency that we create (like any others) and it has nothing that backs it (besides credibility) or how much we are willing to pay for it.
This whole thing started with Bitcoin (at least from my research) with the white paper released back in 2008. The idea was to build a peer-to-peer currency using cryptography that would not obey to a central bank. This currency is limited (just like gold is limited by the earth’s reserve) and the is always increasing in value (considering that the demand increases).
Credit: CNN Money
Then there is the processing problem. Do you know how much money you have in the bank and how big is your debt? Well your bank holds that piece of paper (or data) that tells you how many $$$ you have - a ledger (a book or other collection of financial accounts). So, you trust your bank and their servers - but your information is there. So the blockchain technology enters, to control the ledger people rent their processing power to process the transaction. Woah! I went too far too quick now.
Let me simplify it. Sending money from Bank A to Bank B, the agree that your account and got to your landlord’s account. So, both banks have to agree that the transaction happened. This is what blockchain technology and the mining community does. They answer a series of questions (or their computers to be honest) and then once they process that algorithm (the mentioned questions) they add the transaction (kinda block) to the chain, that is circulating in the internet. This means that they tell publically that the money went from A to B. But all of this is indicated publically with letters and numbers - so no one actually know that Joe and sending money to John (his secret boyfriend).
Is it easier now? I hope so. Neeext point: how do people make money with this? There are 3 options:
A) Investing and profiting from the price increase
B) Mining (renting your processing power)
C) All of the above
If you chose C your are right! Let’s use Bitcoin because it is simple.
Credit: youthconnect.in
Imagine you live in Zimbabwe where there is a massive inflation. There is nothing that backs the money besides credibility and trust. Zimbabwean dollar is not a good store of value, so there is a non regulated option Bitcoin. Since the number of people trying to buy Bitcoin is growing and there is a limited number of Bitcoins the price grows, and more and more people wants to buy and it grows more and the price goes up and up. Bitcoin cannot be easily created because like gold it gets more and more difficult to mine.
As things evolve and the technology evolves (do you remember your 2008 phone?) new cryptocurrencies were created with specific goals and voile, this is the market where we are now…
Does it make sense to you?
A quick disclaimer: I am not a financial advisor this is my personal opinion and my average Joe understanding.
For more check here:
https://medium.com/@intenex/cryptocurrency-101-7197684775fd
http://money.cnn.com/infographic/technology/what-is-bitcoin/