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Where Did Bitcoin Come From?

Have you heard a lot of buzz about bitcoin? In December 2017 I was advised to sell my whole business and begin trading bitcoin since it was much more profitable. At that time one bitcoin was worth about $17,500. However, today that same bitcoin is at $8,100! It lost about a third of its […]

James Shepherd

Apr 24, 2018

Have you heard a lot of buzz about bitcoin? In December 2017 I was advised to sell my whole business and begin trading bitcoin since it was much more profitable. At that time one bitcoin was worth about $17,500. However, today that same bitcoin is at $8,100! It lost about a third of its value in either forty-eight or twenty-four hours. The U.S. currency might have 10% fluctuation over the course of a year. This bitcoin plunge was ridiculous! Understanding terms and technology determines our actions. In this episode get some insight into bitcoin and blockchain. Learn basics of how banks function in our society today.

To understand bitcoin, knowing the function of banks in our society is necessary. Banks are lending institutions, but there are other types of institutions which do lending exclusively. Banks are not necessary for lending. Initially banks were for the purpose of getting cash. Over the course of time, checks became popular. Then credit cards became available. Now the majority of transactions are digital. Money is being digitally moved from place to place through the bank. Thus, the bank is actually a trusted, secure ledger. The following types of transactions take place billions of times a day: “This dollar belongs to Joe. This dollar belongs to Susan. Susan wants to pay one dollar to Joe, so now Susan doesn’t have this dollar. Joe has two dollars; Susan has zero.” There must be a trusted ledger to keep track of all these transactions! If I use my card to pay the restaurant, I can feel confident the money is taken from my account. And the restaurant owner can trust the money to eventually get to his account. That trust is vitally important!

The philosophy presented by bitcoin was, “If we didn’t need a central ledger, money could be moved for free. Banks charge interchange rates and other fees. We will create a ledger system omitting the need for the central bank ledger.” Thus, the blockchain technology was created. Blockchain is awesome. But understand bitcoin and blockchain are two totally different things. Bitcoin is built on top of blockchain.

Compare this to the internet. Consider how much internet is a part of our culture and society. It’s no longer a fad but an integral part of life for most of us. However, if someone builds a website on the internet, it won’t necessarily be a huge success just because internet is doing well. The website is built on top of a core technology. So, the website must also be good to be successful. In spite of millions of new people being on the internet every day, a bad website will fail. This is comparable to the blockchain situation.

In an effort to explain blockchain in a few sentences, please understand this is a massive over-simplification! Basically, blockchain engages millions of ledgers on many different computers and servers rather than a central, trusted ledger. Transactions will be processed by virtue of so many ledgers watching and checking each other. Some banks are even using blockchain to reduce their costs. Although blockchain seems here to stay, bitcoin is not necessarily.

Bitcoin was born from the desire to not only reduce costs or compete with banks but to eliminate them. The fundamental idea was to terminate government involvement with currency. And while doing that to create cryptocurrency which no one can track. Anticipation was that people would love it because there is no cost.

I hope this gives you some insight into bitcoin and blockchain. Don’t miss the next episode to discover why bitcoin is such a mess now. Understanding terms and technology determines our actions.