How to Understand Bitcoinby Alexander on December 3rd, 2014
The first important thing you need to wrap your head around is that it is not money. Or more to the point it is not currency in the same way that pounds sterling is a currency. Holding onto that thought will elevate your understanding beyond someone who has read about it in the newspaper.
It is useful because: Not all value is captured by money:
For the first time ever I am going to explain why I write a blog. I write a blog because I want it to do at least one of the following things for you: I would like it to be interesting, informative and entertaining. Weather you had realized it or not, we are engaged in a social contract.
I am spending my time in the hope I will be compensated by you. I do not expect you to necessarily buy a holiday, but there are a few ways that you can reward my efforts and I would be truly grateful if you did. Please: spend more than two minutes on my site, scroll down the page and spend more than a couple of seconds bellow the “fold” and click a couple of links on this website. Lastly if this is a good blog, please share it with your network via, Facebook, Twitter, and any other social media.
Obviously; I do want you to do all the above, but in the preceding paragraph I am “gaming the system” or at least I think I am. The reason I have asked you to do those things is they are a non-cashed based way that you can compensate me for my efforts. I am rewarded because your activity is seen by a powerful omnipotent being, and that value is stored in its memory. I am of course talking about Google. By not leaving my site too quickly, you improve my Bounce Rate by reducing it. By sharing this page on your Facebook you create an inbound link to this website and improve the Page Ranking. All of that is a store of “value” that shows Google I am a serious human, providing other humans with useful information or services.
This should intern mean I am easier to find. A subset of my readers or the people who find me on Google will become my customers, so that is how I eventually get money.
What Bitcoin is:
Bitcoin has some of the properties of gold. There is a finite amount in existence. There will never be anymore made.
It is mind in the same way gold is mind out of the ground. Bitcoin is released by computers, solving very hard math’s problems. The more bitcoin released, the harder each additional Bitcoin is to relinquish. Unlike gold it is not a heavy metal you can hold in your hand. But it is analogous to gold, in that gold is now a very hard substance to find. In days of old you could probably pick stones of gold up off the ground. Now thousands of tons of dirt has to undergo electrolysis in order to get enough to make a bracelet.
Bitcoin also has some of the properties of a legal contract. It is a ledger. All the computers in the system record every transaction. So If I give you my bitcoin, all the millions of computers using bitcoin know that a specific bitcoin went from my account to yours. It’s like every pound coin in existence having a unique bar code and everyone keeping a record of the movement of every pound coin in circulation. Therefore Bitcoin has some of the properties of hard currency.
Bitcoin has some of the properties of the star rating systems you see on websites such as e-bay and airBnB.
Whilst bitcoin has the properties of all these things, it is not the same as one of these analogs. I have teeth and eat meet. A panther has teeth and eats meet, but sadly I am not a panther.
What “value” can money capture?
The problem is partly to do with the name BitCoin. That is a strong signal that this thing has many of the properties of money. But a more helpful way to start thinking about this is to look at money as though it were another type of star rating system, like the stars for sellers on e-bay. If you are anything like me you probably have a feeling that those 5 red stars are a crass way of communicating some sort of information. It’s not a perfect system, but it is usually good enough to be tolerable.
Lots of things have been used as money in the past, salt, gold, in prison cigarettes. A small bag of salt may get you some cloth.
But money is doing much more than that. Money also sends signals. As the saying goes: if you lend me a tenner, that’s my problem. If you lend me million quid, that’s your problem.
I heard on the news that one of the leaders of ISIS has a 6 million USD bounty on their head. That already tells me that he is too big a fish for me to fry. The fact that there is that much money riding on his capture, and he remains at large, tells me that he is a very powerful and dangerous individual. Play the thought experiment and ask yourself: what size bounty would someone have to have on their head before you would think about having a go at capturing them and turning them into the authorities?
For me it would be somewhere around the 10K mark. Enough that I could get help from other people, and after we split the reward there would still be something to show for our efforts.
Needless to say, I have never, nor am I ever likely to try and collect a bounty. That was just whimsy to show that money does more than act as a medium for exchanging goods and services. It is also an exchange of information.
What is the problem with money?
As a medium for transferring information it’s coarse. Written words are a pretty good way of me transmitting information to you, but even they tend to be quite fuzzy. I can describe an object to you and there is a pretty good chance I can transmit a high percentage of my understanding of what an object looks like from my brain to yours. But it won’t be perfect.
Let’s say I am sending you to meet someone I know but you don’t, in a train station. In the past we would have had a long conversation where I tried to explain to you what this person looked like so you could pick them out. Now I would simply email you a photo. Or I would give one of you the other ones mobile phone number. When you arrived, you would have that conversation where you describe where you are; and then you stick your hand in the air, and the other person says “I see you”.
Neither the JPEG image file nor the mobile phone were specifically invented to enable you to find someone you haven’t met in a crowd. In fact you could say; “that wasn’t a problem. We always managed it before”. What the mobile phone does and the digital image is reduce the “transaction cost”. They make it easier than it used to be by improving the quantity and quality of information available to you.
A legitimate use of Bitcoin:
Proof of work: Your email inbox is full of spam. The reason it is full of spam is that email is very cheap. It costs the spammer nothing to send you an email. Now imagine your inbox placed a charge on every computer that tried to send it an email. In order for you to send me an email, my computer would ask your computer to solve a math’s problem. That would be fine for one human using one machine to send one email. In the time it took you to pound the keys your machine would have done it. But when the Russian Mafia take over a server farm and send millions of emails, to lots of people, in the hope that a fraction of a fraction respond and want to buy some knock off Viagra, well it would be really nice if their server ground to a halt. We have spam filters, but important emails get lost in there. We have email forms that ask you the human to do some simple math problems, but robots can crack those, and the weird text thing you have to copy must be the most annoying thing in the world.
At the moment the solutions we have for this problem are adhoc and clunky. They work most of the time, in the same way the lengthy discussion about hair color, nose length and height will help you find someone in a train station, but my god we could do with the digital photo to help.
The exchange of those little maths problems is where Bitcoin came from: Cryptographers working on that problem developed technology to show “proof of work”. They show that you “mean it”. You are willing to expend effort to get the message through. Imagine I send you a flier in the post about these Wine Rides holidays. Stuck to the back of the flier is a ten pound note. If the flier is useful I trust you to send me the tenner back. If the flier was unhelpful you keep the tenner. If such a system could work, you can see how it would be helpful to both of us. I get information about who I should be writing to and what they want to know about. You only get useful information or ten pounds. Bitcoin or crypto-currencies like that could make this a possibility. Let’s say I send you an email and you do all the things I ask you above. The system could send me my bitcoin back. If you bounce, you get the bitcoin. Everyone is happy. Over time it starts to cost the spammers more.
That is one way it could be used. But it is by no means the only example. The internet is not simply a better fax machine, and digital photos are not a better version of a piece of card board with the words “Ted Andrews” written on it.
Illegitimate uses of Bitcoin
Because it is not issued by the state “wealth” and be taken out of reach of the state, and therefore it could be used to avoid tax. Although at the point you cash in, the tax is payable.
At the moment the vast majority of illicit transactions happen with conventional money. But you could use it to buy guns drugs or sex, though cash is probably still preferred.
How is Bitcoin different from my money held digitally by the bank?
When you pay for something with your card about 3% of your cash goes to the bank not the vendor. This means that larger shops with more power negotiate better rates with the bank.
At the moment the banks are highly conservative. It is not easy for you to write an application in code that would have access to your bank account. There’s very good reasons for this. If you can do it then a Hacker could do it and they may take everything you have.
Blow my mind: what could you do with Bitcoin?
The world has changed. Your computer is just a lump of metal. It is also an infinite block of clay. You can down load Google Sketch up and start designing homes and products now for free, without using any materials at all. Your computer is also a ubiquitous store of all human knowledge. So if an artist now has access to an infinite block of clay and a student has access to the largest library the world has ever known, just think what your PC could do for the shiny metal discs in your wallet.
We aren’t very good at handling money. Have you ever forgotten about something, you put on your credit card, and then you bought something else before a payment cleared? This is because humans don’t have an exact number sense. Numbers are great, they tell us a lot about the universe but we have to work quite hard mentally to use them. Unlike catching a ball or throwing a spear, we don’t just take to maths like a fish to water.
My brother is Diabetic. He just got a blood glucose monitor that sticks in the back of his arm and monitors his blood glucose in real time. At any point in the day he can tap it with a wireless reader and it will show him his blood glucose levels for the whole day. Yes a couple of little needles cross his skin. The machine is doing something his pancreas used to do: In my book that makes him a cyborg.
Now imagine a machine like that wasn’t a receiver but was a transmitter? How could Bitcoin use that? As you put your card in the machine to pay a signal goes to your “bank” (bitcoin repository). Before you are asked for your pin the system sees you are about to go overdrawn: the machine in your arm injects you with a small amount of adrenalin. You start to feel tense and nervous, and get the distinct “feeling” your balance is getting low. Maybe you consciously check your account and see work hasn’t paid you back for those train tickets.
Technology like this could outsource some of the tricky thinking we have to do in our heads at the moment, to machines that can do it much faster.
That example is intended to be as outlandish as possible. It may even put the fear of god into you. But just look at it this way: You could program it so when you get paid a small amount of Viagra like substance goes into your blood stream. If you’re a man you could be sitting with a friend and inexplicably appear to become aroused. Your friend would Say: “dear god: What is wrong with you!” and you could say: “oh don’t worry, that just work. They appear to have paid me for that job I did last week”.
That may seem beyond ridiculous, and you wouldn’t choose that particular hormonal input to give to an intuitive feeling about your money. But now it is not beyond the bounds of possibility.
I still find it hard to see people talking on the phone hands free, walking down the street: they still look crazy to me, but to a teenager that must seem mundane. My point is this: A new frontier, a consolation of possibilities is opening up in front of us. It is like seeing the stars at night for the first time. If that doesn’t impress you what will?
Want to buy a Wine Ride with Bitcoin?
Get in touch and we will see what we can do…..
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