eBook by David Board
The beginner’s guide to Bitcoin and Digital Money
It’s time to educate yourself about the Future of World Currencies.
Copyright © 2015 David Board
All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the author except for the use of brief quotations in a book review.
Foreword from the Author
Chapter 1: Bitcoin Explained – The Basics
- A brief introduction to Bitcoin ‘Digital Money’;
- What is Money?
- Most people already use a form of Digital Money without realising it.
- Why is Bitcoin actually worth anything?
Foreword from the Author,
In this book you will learn all the practical information you need to understand and use Bitcoin and other forms of Digital Money.
I also hope to lay-to-rest any negative light that has been shone on Bitcoin by the media over the last couple of years and educate those who are less informed about this technical revolution that is Bitcoin and Digital Currency.
You may have seen main-stream media or social media coverage of Bitcoin showing it in a bad-light due to some unscrupulous individuals or organisations. There have been big news stories over the last couple of years to do with black-market trading through certain websites, stories about websites or exchanges being “hacked” and coins being stolen by unscrupulous individuals. However, Bitcoin is not only used by hackers or criminals, in fact the majority of people who use Bitcoin are normal and law abiding.
Keep in mind that credit card fraud is a big problem throughout the world and stolen credit cards, counterfeit currency etc is used every day by criminals to solicit less-than-moral acts like illegal drug trade, illegal gun sales etc. Any form of money, be it official fiat currency, counterfeit currency, stolen or forged credit cards can be used for these amoral acts, Bitcoin is no less or more perfect than any other currency and should not be viewed as ‘bad’ because a small number of users have decided to use it for those types of acts. Bitcoin is simply a better, easier and cheaper form of currency to use in certain situations.
If “big business” (specifically financially based business like banks and lenders) are against Bitcoin and other Digital Currencies, you can bet it is not because they are looking out for the little guy and I hope by the time you finish reading the next few chapters you will fully comprehend the benefits of using Bitcoin and Digital Currencies.
Governments can regulate Bitcoin Exchanges and can make certain rules for companies to follow, such as paying taxes on sales etc, but they do not have any direct control over the Bitcoin supply as they do with Fiat currency and cannot regulate the trade of Bitcoin between individual users.
Credit Card lenders and payment platforms such as PayPal earn money by charging transaction fees and interest to the end-users. Most vendors or merchants who accept Credit Card payments have to pay transaction fees which are usually passed onto the customers through higher priced goods or services, with Bitcoin there are no additional charges for transactions.
Bank accounts are great, but can be slow and expensive when sending funds, especially when those funds are being sent internationally. In contrast, Bitcoin and other Digital Currencies can be extremely fast to transact between users, geographical location is irrelevant and transactions costs are nominal meaning goods and services are not increased in costs because of added transaction fees or interest.
Before you read further into this book, let me just say that I am not against Fiat Currency. I have a bank account, credit cards and PayPal that I use daily just like you, but I also know that in this world in which we live, this fast-paced, technologically advancing world, something has to step-up as a cheaper, easier and faster option for sending money to other people, overseas, online and in shops. I truly believe that we are on the cusp of big changes where money and payment processing is concerned.
I have attempted to keep this book as non-technical as possible when it comes to explaining certain aspects of Bitcoin and Digital Money. Where technical terms have had to be used, I have tried to explain those terms as simply as possible.
I hope that you enjoy the rest of this book and that you find the information in the coming chapters both educational and useful.
Chapter 1: Bitcoin Explained – The Basics
In this chapter you will learn the basic information required to help you understand Bitcoin ‘Digital Money’: What Bitcoin Is, How Bitcoin Works and Why Bitcoin has a ‘Real World’ Monetary Value. We will also review our existing views on modern money (FIAT).
Once the basics have been covered we will look at the more technical aspects of Bitcoin in further chapters.
A brief introduction to Bitcoin ‘Digital Money’;
• Bitcoin is a currency, used in a Digital format.
• Bitcoin is the first widely adopted form of digital currency accepted all around the world.
• Bitcoin is decentralised, meaning there is no control over the price or total supply of coins by banks or governments.
• Bitcoin can be sent from one individual to another with very little effort and almost no transfer fees or charges, it is as easy as sending an email.
• Bitcoin is fast and secure to use, whether sending funds to someone or paying a bill.
• There is no possibility of ‘Double-Spending’ Bitcoin.
• Bitcoin has a pre-set total number of coins that will ever exist (21 million).
Bitcoin is a digital form of money, meaning you do not have a physical representation of the Bitcoin you are spending. Instead of having a physical representation of the currency, you have a digital code stored in a digital “wallet” or program. This digital wallet can be kept on your computer, smart phone or tablet.
Bitcoin is widely accepted all over the world with many online retailers, travel agents, real-estate agents and a growing number of “Bricks and Mortar” companies, i.e. high-street shops.
Bitcoin is decentralised. By being decentralised there is no one entity “in control” of Bitcoin. The control of Bitcoin is in the hands of the users who use Bitcoin and the vendors who accept Bitcoin as payment.
Sending Bitcoin to other individuals or paying bills is as easy as sending an email. All you need is your own Bitcoin wallet (each wallet has its own address or account number), and the “Address” of the person or company that you want to send funds to. Bitcoin can be transferred to anyone in the world and boarders are irrelevant.
Sending Bitcoin is extremely cheap, especially when compared to other platforms such as banks or online money transfer service platforms. The typical Bitcoin transaction fee is currently less than $0.05 cents (USD). Compare this to an international bank transfer fee which can be anything between $20.00 (USD) to $40.00 (USD) depending on the type of bank account you have and where you are sending funds. Third party online money transfer services generally charge a percentage on the total transaction (with a minimum transaction fee) so if you are sending a large amount you could end up paying a very expensive transaction fee.
Bitcoin payments are fast to send and payments typically take around ten minutes to arrive with the recipient once sent. Compare this to an international money transfer, which typically takes days!
Bitcoin has been developed so that a user cannot ‘Double-Spend’. This simply means that it is not possible for anyone to send the same Bitcoin to more than one person. I.e. Imagine you only have one Bitcoin, you could not send that one Bitcoin to Jack and that same one Bitcoin to Jill, because once you have sent it to Jack you no longer have it to send to Jill.
Bitcoin will have a total supply of 21 million coins. This is pre-set and cannot change due to the coding that Bitcoin works from. This means that Bitcoin is actually considered deflationary as Bitcoin can be lost or destroyed through hardware failure or user error such as forgetting passwords etc. Don’t let that last comment dissuade you however as there are some extremely easy ways to protect yourself against loss, such as keeping a wallet back-up in a secure place, I explain in detail later how to achieve this.
You may be reading all of this information and thinking to yourself this all sounds fine, but why is Bitcoin actually worth anything? In order for me to answer this, we need to break-down what we currently think and know about conventional money.
What is Money?
In order to really understand Bitcoin as a form of Currency, you first need to re-evaluate what you know about the money we use today and how “money” was used historically.
Money is really just a way in which we as society put a value on goods and services. A person could pay for goods or services using any item as long as both parties can agree upon the value of the purchase and the payment method.
Think back to historical times when trading goods, such as furs and spices, where commonplace or more recent history when copper, silver and gold coins were used as a means of payment. The only real reasons that these are no longer used as forms of payment is because the actual “value” of those materials has increased and it would be too difficult to pay for smaller items with those types of payments, i.e. they cannot be broken down easily into smaller denominations and still retain the same overall total value.
Using modern paper money and coins is a far easier solution than semi-precious or precious metals, because it is very easy to take a $1 and break that down into smaller denominations (coins) and still have the same total value.
Historically “Paper notes” actually had a gold-counterpart or gold-reserve, which gave each paper note a set value in gold. You would take your gold to the bank, the bank would issue you a promise or note against the gold you deposit, and then you could spend those notes instead of having to carry actual heavy gold with you everywhere. This is actually how the banking system came about.
Modern money no longer has a gold counter-part or reserve and instead our money supply is printed by our governments through inflation. Basically, we all accept that a $100 note is worth $100 because the government prints and controls the supply and we all agree to the face-value of the notes and coins, this money is called FIAT currency.
For a further example (written by a third party) regarding Money and Fiat Money please see the link below;
Forbes.com “All Money is Fiat Money” article by Pascal-Emmanuel Gobry
With the above information in mind you can now see how, historically, we have gone from trading goods and services for items such as gold, moving onto paper money in the form of gold-backed notes issued by banks. From gold-backed notes the banks and governments have removed the entire gold counter-part from the equation, and now a note is simply “worth” what is printed on it because we as society all agree to the face-value of the notes issued by our governments.
Most people already use a form of Digital Money without realising it.
Bitcoin is not the only form of digital money. Most people receive money via direct bank transfers, for instance an employee of a company is usually paid their wages directly into their bank account and do not always receive physical currency.
When money is in our bank accounts is just a code on a banks computer system. When we use our debit cards to make payment in shops or pay bills etc the code on the banks computers is simply transferred from our accounts to the account for the shop or company we are making payments to.
Based on all of the above information, it is not so hard to understand how and why Bitcoin has amassed a user base of millions of people all around the world, and why Bitcoin has gained value over the years since it was created in 2009.
In our technologically advancing world, Bitcoin is becoming more and more recognised and should be considered a World Currency; a currency without borders, with a value agreed upon by the entire population of businesses and individuals that make up the Bitcoin user-base. The user-base is growing daily and gaining popularity not only with individuals but with big business all around the world.
As I said in my opening foreword, I am not against Fiat Currency. I do not expect modern paper money to simply disappear or stop being used. Using Fiat in a local store is still going to happen and I do not think that will change any time in the near future, however, I do believe that Digital Currencies such as Bitcoin will be as common-place in the coming years as Card Payments are today.
“Money” is simply a way that we put a value on goods and services and make payments; essentially those payments could be transacted using anything, such as a rare gem, a semi-precious metal, Fiat, or a form of Digital Currency such as Bitcoin.
Now that you I have presented “Money” as simply a way to make a transaction, I hope you can understand why Bitcoin is being accepted and used by so many individuals and companies around the world.
Bitcoin is fast to use, secure, direct between users (removing banks from the picture), boarders between countries are irrelevant and transaction fees are almost non-existent.
As well as all of the above, governments have no control over the total supply of Bitcoin, meaning the value of Bitcoin cannot be damaged through inflation such as our existing Fiat currencies that we use today.
Why is Bitcoin actually worth anything?
One of the most frequently asked questions (and arguably one of the most important ones) that I am asked when speaking to people who do not already know or fully understand Bitcoin is;
“Why is Bitcoin actually worth anything? Isn’t it just ‘fake’ internet money?”
I fully understand the scepticism. I too did not grasp the concept of Bitcoin at first. It was several years after Bitcoin first launched that I really took notice of what it actually is. I explain below why Bitcoin is not, “just ‘fake’ internet money” and why something “made up” can, and in fact does have real world monetary value, unfortunately this is not a one-line answer but most of the minor points have been covered in the above sections.
• Bitcoin has value BECAUSE merchants and users are willing to accept it and use it as a form of payment for goods and services.
• Bitcoin has the same value globally, 1 Bitcoin is worth 1 Bitcoin regardless of geographic location, unlike Fiat which is subject to exchange rates and conversion fees.
• Merchants and users can send Bitcoin anywhere in the world quickly, securely and without incurring high fees or charges by third parties or banks.
• Merchants can exchange Bitcoin into their local Fiat currencies at any time.
• By accepting Bitcoin, merchants can lower overheads from credit card machine operators.
• Bitcoin payments are irreversible, this helps to reduce fraud against merchants which can be a big problem in certain parts of the world.
Our current monetary system works because you can go into a store in your country and the merchant accepts your countries official Fiat currency. If one day all of the merchants in your country stopped accepting that currency and instead told you they would only accept the currency of the neighbouring country then the money in your pocket becomes devalued and the other currency increases in value.
By accepting other forms of payment users/merchants/retailers/manufacturers etc give those new forms of payment real value. If a merchant told you they would give you $100 worth of goods or services for a cheap pen that you have, then your pen is ‘worth’ $100 (at least to that person at that time).
In a similar manner to the example above, Bitcoin is being accepted and used as a payment method throughout the world and as a result it has gained real value. By transacting in Bitcoin, users are agreeing to give it value. The same could be said for gold, or even Fiat currency, these items / money have value because they are an accepted form of payment and are “trusted” to hold value (within reason).
Now that we have covered the basics of Bitcoin and you understand what it is and the basics of how it works we can expand on some of the technical points, such as The Block Chain, The Bitcoin Network, Bitcoin Miners, Where Bitcoin comes from (how it’s made) and Network Security against counterfeit transactions.
Chapter 2: Bitcoin Explained – The Technical Points
Chapter 3: Bitcoin Explained – The Practical Parts
Chapter 4: How and Where to Buy and Sell Bitcoin for Fiat Currency
A closing note regarding Bitcoin and an introduction to Alternative Digital Currencies
Chapter 5: Alt-Coins
Chapter 6: Trading Alt-Coins
Closing word from the Author