Bitcoin Explained for JK Rowling and Other Muggles

A Bitcoin farm. Source

So let’s discuss these terms since you’ve made it this far. This will help clear up a little bit of the syntax noise the next time Bitcoin comes up.

To incentivize people to mine Bitcoin, about every 10 minutes a new set amount is created. Although there is a maximum of 21 million Bitcoin, it is created or released in blocks for miners to find. Looking at the image, every single fan on the racks is called a miner. These miners are grouped together to create computer farms like the one pictured. These are used to attempt to solve a complex math problem. The math is so complex, that it is even hard for something like a supercomputer to solve. Every miner in every Bitcoin farm in the world is racing to see which one can solve the math problem the quickest. Whichever miner solves the math first get the prize. The person who is running that particular Bitcoin farm that found the answer first is rewarded like someone who just struck gold. If you equate Bitcoin to gold, you should think of a Bitcoin farm as a gold mine competing with every other gold mine in the world. Every 10 minutes, one of those gold mines finds the gold.

This miner’s reward also generates a block. Think of this block as one new row in a long Excel spreadsheet. This row contains all of the new balance transfers between Bitcoin addresses and their fees. The previous row helps to verify the authenticity of this new row. This new block is linked to the previous blocks (which was linked to the blocks before it as well) to verify its authenticity with more complex math again. This creates the blockchain, which is basically the entire Excel spreadsheet in my example.

There is still one tiny problem that needs to be solved though and it has perplexed mathematicians for a very long time. How do you ensure you are not receiving a duplicate Bitcoin when receiving them? If someone controls this spreadsheet they could just add a few coins here or there right? Instead of one person controlling this ledger, Bitcoin uses a public ledger and everyone has a copy of it that they are constantly updating with every transaction that happens from everyone. When I send you all of my Bitcoin, I tell everyone and then everyone updates their Excel spreadsheets to show my new balance with zero Bitcoin available. If I then tried to spend that same Bitcoin again, everyone would look at their spreadsheets, see my balance no longer has any Bitcoin left, and reject my attempt. We don’t need to make it more complex than that. It is just a giant Excel spreadsheet that everyone is keeping track of and verifying together with extremely complex math. This just touches the surface of how blockchain technology works. You can get into the nitty-gritty if you want, but again, not everyone needs to know how TCP/IP works.

Let’s contrast this question with the US Dollar once again. What backs the dollar? Gold? You may or may not be surprised that the US dollar has not been backed by gold since Nixon (1971). Instead the US Dollar is backed by our economies, our workers, it being the world’s reserve currency, oh, and hellfire missiles.

Bitcoin, on the other hand, received its value when someone decided to trade 2 pizzas for 10,000 Bitcoin. Yes, that’s right, ten thousand Bitcoin. The work needed to create 2 pizzas were placed into the supply of Bitcoin that day. Later, alpaca socks were traded for Bitcoin and that value was added to every Bitcoin. This continued And so on and so forth until people in Kenya and Venezuela are also accepting Bitcoin right now. But without this trade would Bitcoin be where it is today? Why would someone even trade pizza for something that had “no value?” Where would the initial value come from?

Bitcoin is backed by its decentralized hashpower. More buzzwords. Think of the Bitcoin farm photo above. That is just one of many farms worldwide. These farms are using their computer processing power to secure the Bitcoin network. Anyone, including you, can attempt to mine Bitcoin and help secure the network. (Note: a high-end gaming computer would do close to nothing when compared to the mining farms mentioned. You would need $Millions to become profitable at this point if you wanted to be a miner). You do not have to obtain a license to mine or ask for permission from some corporate owners to mine Bitcoin. It is permissionless and trustless meaning anyone can use or mine it, and everything is verified by all. Mining Bitcoin requires hardware and electricity which all have costs associated with each. This increases the money requirements needed for a bad actor to attack Bitcoin. These farms are spread throughout the world which also prevents attacks on one point of failure in the system. A government could seize PayPal’s assets for example. A government would have to stop the entire Internet to make Bitcoin stop working! The Death Star was destroyed because it had a single point of failure. Instead of one Death Star, what if the Empire had dozens of mini-Death Stars across the galaxy? Imagine finding and attempting to destroy them all. This prevents governments, hackers, and other groups that would want to do Bitcoin harm from attacking Bitcoin.

The total computational power of Bitcoin as of 5/16/2020. Source

Bitcoin has only become stronger and more secure over time. The more computing power on the network, the greater security, and overall resistance to attack the network becomes.

Since I live in the USA, I have personally been using Coinbase to purchase Bitcoin since 2013. They offer an online wallet that you can use to for some small online purchases. Any big or long-term amounts should be sent to your own private wallet that you control yourself. With Bitcoin, you are your own bank but that comes with its own risks which have caused a lot of people to lose their coins. Bitcoin is NOT a “get rich quick” tool or I would be a millionaire by now! No one knows where the price of Bitcoin will be tomorrow. It could solve all the problems it was meant to solve, become the world’s reserve currency and still only be worth a Big Mac/BTC in the end. We just don’t know. So don’t buy Bitcoin just to make money. Buy it to be part of an online revolution set to take the powers of banking and putting them into palms of everyday people!

You can use my affiliate link and receive $10 when you buy $100 or more Bitcoin on Coinbase.

Remember how I said it is just as easy as sending an email? Your “email address” is the bunch of seemingly random characters in the screenshot below. That is for my personal wallet on Coinbase. If you wanted to send me Bitcoin you would copy the text and put it into the send address with the amount you want to send. Some wallets offer QR scanners that automatically scan that black box thingy and copy/paste it for you on your behalf. You can even write a message!

This wallet address is generator from math based upon your Bitcoin “account number.” Coinbase is able to simplify this process and make it easy for new people to use. Again I must caution though, if you have significant wealth on an exchange, the money is not yours. A common phrase mentioned is “Not your keys, not your coins.” And that is because over the decade, major exchanges have been hacked or gone bankrupt (MtGox) and the customers’ coins lost. You can still hear horror stories about how people lost hundreds of Bitcoin due to the MtGox and other similar events. This is not Bitcoin’s fault but the fault of the exchanges. Some lessons are hard learned. You don’t have to learn them the hard way though.

I wanted to add this part because Bitcoin is not like a stock where you have to purchase the whole stock or coin to own it. Each Bitcoin is divisible into smaller units known as satoshis. Each satoshi (sats for short) is worth 0.00000001 Bitcoin. Truthfully one Bitcoin should be written like this: 100000000. Much like how computers see zeros and ones, the Bitcoin network sees each Bitcoin broken up like that above. So if you were trading 2.0401 Bitcoin to your friend you would be deducting the number 204,010,000 from your total balance and your friend would add that number to their wallet’s balance. Bitcoin talks in sats rather than full coins. So with a price of $10,000/BTC you can buy one million Satoshi for $100. I’m still “stacking sats” as they say.

And as a final note, no one is giving away free Bitcoin. Every single one of those you see on Twitter and Youtube is a scam. Even if it looks like Elon Musk is doing it.

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