Big Picture, Financial Planning, Millennials

6 Things You Need To Understand About Bitcoin

  • “Bitcoin is a scam”
  • “Bitcoin is a ponzi scheme, it has no real value”
  • “We don’t need crypto in the US, they will never allow it”

These are the same sentiments I hear about Bitcoin all the time, and they rarely come from those who have taken the effort to learn about it. They’re simply echoing what they’ve heard from others who are anti crypto. To be honest, I don’t care if you believe Bitcoin is the future or not; all I want is for everyone to have a fundamental understanding of what it is so they can decide if it is good for them or not.

Before we get into the 6 things you need to understand about Bitcoin, here’s a quick rundown of what it is. 

  • It was created by Satoshi Nakamoto in 2009
  • It is a form of digital cash 
  • It has no central authority 
  • It uses a peer-to-peer internet network to confirm transactions between users 

Now that you know the basics let’s get into the 6 things you need to know to understand Bitcoin

1. Bitcoin Is Truly Decentralized 

This means that there is no third party involved that controls it. There is no central command, no central data repository, and no management to oversee what Bitcoin does. By having this structure, it leads to no central point of failure. We have all seen how central authorities manage things, it typically does not go well. Bitcoin truly gives power back to the users as they decide what changes are made. 

2. Bitcoin Has A Finite Supply

This is one of the main reasons people love Bitcoin. We have all seen how different governments manage money, they continue to spend more than they bring in from taxes which results in them printing more and more overtime ultimately devaluing it. With BTC, the supply is finite. There will only ever be 21 million in existence and nearly 90% of all the bitcoin that will ever exist is already mined. The remaining 10% will happen from now till about 2140. 

This is such an important concept because we put value on things that are limited. Scarcity matters to us. Think of that 1932 Porsche that only has 5 in existence.  Or that rare ⅓ sports card. We find value in things that are scarce. 

3. Bitcoin Removes The Need For Intermediaries 

With fiat, when we want to send money to each other there has to be a 3rd party like a bank to manage it. With bitcoin, transactions are made directly to each other over the internet. The network confirms and verifies each transaction which removes the middleman. It is one of the reasons bitcoin is so valuable. It essentially gets rid of this inefficiency that we have today. 

4. Bitcoin Is Trustless/Permissionless 

It is referred to as this because no bank is needed to certify the transactions.  The blockchain and the way bitcoin processes transactions enables trust from the trustless consensus. This is where all nodes agree that the transactions took place. 

Also, no one can stop someone else from transferring or using bitcoin, making it permissionless. This is important as we have seen lately that governments can freeze assets and control how you use fiat. 

5. Bitcoin Is Not Exactly Anonymous

People believe that Bitcoin is a way to hide transactions, but it is actually the opposite. All transactions are stored publicly and permanently on the network.  This means that anyone can see the balance and transaction on any address/wallet. The identity of the person may not be revealed, but the address is. 

6. Bitcoin Uses Mining

Users on the network verify transactions through mining.  These miners are crucial because they help decrease the chance of fraud as a majority need to confirm the authenticity of each block before it’s added to the blockchain. To incentivize miners, new Bitcoins are created as a reward for operating the systems to validate transactions.  This is a process known as “proof of work”. Proof of work is very important to Bitcoin and what it is. 

As a reminder here are they key characteristics to know:

1. It is truly decentralized 

2. It has a finite supply

3. It removes the need for intermediaries 

4. It is permissionless 

5. It is not exactly anonymous

6. Bitcoin uses mining for proof of work

Hope this helps you understand Bitcoin a little bit better. If you want to learn more here are two good podcast episodes I have put out that goes into more detail on Bitcoin. 

  1. Why Bitcoin Is Different Than The Rest with Tyrone Ross Jr. 
  2. Crypto 101: Intro To Blockchain, Bitcoin, Ethereum

If you enjoyed reading and are looking for an advisor, here is the link to book your first free meeting with me!

Disclaimer: none of this is advice, it is just for informational purposes. Talk with your financial planner before implementing any of these strategies.