The Bitcoin Basics all Articles & YouTube Videos Cover |

The Bitcoin Basics all Articles & YouTube Videos Cover

Author: Mike Klinck, Essays on Blockchain and Cryptocurrency

There are many articles and "explainer" videos out there that give an introduction to Bitcoin, Cryptocurrency and Blockchain.  If you are like I was, after reading or watching, you are left with the feeling: "I still don't get it".  Most of these pieces do, however, provide at least a starting point to understanding the key concepts.  The basics are as follow (with editorial comments sprinkled throughout):

Digital Currency

Bitcoin, and other cryptocurrencies are digital currency.  They are virtual.  They are made of code, and not represented by paper notes, or metal coins (fiat currency).  Many sources point out that digital currencies have been around for a while.  The concept was introduced in a 1983 paper by David Chaum.  A number of digital currencies were created in the 1990's including Digicash and e-gold.

PayPal is considered by some to be a form of digital currency.  In essence, PayPal simply provides a ledger account (or “wallet”) which you can add traditional money to.  You can then use the PayPal system to transfer money to, or receive money from, other PayPal accounts.  Finally, you can withdraw money from your PayPal account.  To me, PayPal is not true digital currency.  You can use the PayPal system to transfer traditional currencies (U.S. Dollars, Japanese Yen), but you are not making use of any alternative currency.  There are no "PayPal Bucks" that stand on their own to be used to purchase goods and services.  At least, not yet.

The Mysterious Satoshi Nakamoto and the "Double Spend" Problem

In 2008, Bitcoin was introduced.  It's invention is credited to Satoshi Nakamoto of Japan.  It is widely believed that "Satoshi Nakamoto" is a pseudonym representing one or more people, likely not even of Japanese origin.

The key feature of Bitcoin is its method of solving the "double spend" problem inherent with other digital currencies.  The double spend problem is this:

If digital currency is just a piece of code, then what is to stop someone from making one or more copies of that code, and then spending the same piece of digital currency multiple times?  Of course traditional currencies face the double spend problem too.  It's called counterfeiting.  Take a one hundred dollar bill, make a copy.  Spend two hundred dollars.  National mints are constantly working to make traditional currency more difficult to counterfeit.  Banks and merchants are constantly working to develop methods of detecting counterfeit currency.  Counterfeiters are constantly working to make better counterfeits.

Digital currencies were especially susceptible to the double spend problem because a copy of a piece of code, and the original piece of code, are indistinguishable.  There is no physical substance you can try to imbue with special properties to make it more difficult to counterfeit.

Bitcoin solved the double spend problem through use of a public decentralized blockchain ledger.

What is Blockchain?

A blockchain is a creation of math and cryptography.  It is a public, sequential, decentralized ledger of transactions.  It is public in that anyone with internet access can access the blockchain.  It is sequential in that transactions are added to the "chain" in sequence.  It is decentralized in that the ledger is not stored in one specific place.  It is resident across a network of devices.

In the case of bitcoin, the blockchain is a record of every bitcoin transaction ever completed.  For each bitcoin transaction, a record including the date of the transfer, the amount of bitcoin transferred and the bitcoin wallets involved in the transaction (the "from" and "to" wallets) is created and added to the chain.  Each record is identified by a "hash", which is basically a transaction ID number.  There are many third-party websites (eg.; that will provide details of any bitcoin transaction if you can provide the hash.

Bitcoin Mining

Mining is an important component of the bitcoin concept.  Bitcoin mining can be done by anyone with appropriate computer hardware and open source software.  Mining is the process by which new bitcoins are “released”.  There will only ever be 21 million bitcoins created, the last of which projected to be released in the year 2140.  There currently have been around 17 million bitcoin released.

A miner uses computer power to verify past bitcoin transactions, or hashes.  The miner is rewarded for successful verifications in newly created bitcoin.  By design, mining rewards are increasingly difficult to earn.  Miners must devote considerable computer power and electricity to earn rewards.  Currently, it takes approximately $4,700 worth of electricity to mine one bitcoin in the United States.

Is Bitcoin Money?

One of the staring points of many introductory discussions of bitcoin is the question of whether bitcoin is really "money" or not.  Invariably, the commonly agreed-to characteristics of money are listed.

Money is a social construct that serves three purposes:

First, money serves the purpose of being a medium of exchange that can be easily traded in a predicable way.  Money offers an improvement over the system of direct barter.  In direct barter, if you want some eggs, you have to find someone with eggs and then get them to agree to take some good or service you have to offer in exchange for some eggs.  The problem – they might not want what you have to offer at the moment.

Second, money serves the purpose of holding value.  In many cases, it is preferable to holding your wealth in the form of some good, especially if that good is perishable, or difficult to secure.

Third, money serves as a dependable unit of account.  Money is a convenient way of keeping track of debts between parties and to quantify values.

Money has four main properties:

  1. Money has to be scarce in order to have value
  2. Money has to be easily portable and transferable
  3. Money has to be durable (non-perishable)
  4. Money has to be divisible (or fungible if you want to sound smart)

So how does bitcoin “stack up” against traditional currencies?

Scarcity?  Check.  Bitcoin has built-in scarcity in that only a finite number of bitcoin will ever be released.  Also, new bitcoins are increasingly harder to create through the mining process.  This is by design.  The mathematical problems a miner is required to solve to “earn” a new bitcoin get increasingly more difficult as time passes.  This requires the miner to use more computing power, and more electricity.  This feature makes it unlikely that disproportionately high numbers of new bitcoin will be released at any given time.  On the scarcity scoreboard, it would seem that bitcoin wins over traditional non-gold-backed currencies.  In the case of the latter, governments are free to print as much new currency as they want.

Portable and transferable?  Check.  Bitcoin is portable on digital wallets that reside on the ubiquitous smart phone.  Bitcoin can also be “cold stored” on paper wallets not connected to the internet.  Bitcoin is easily transferable from wallet to wallet through use of any internet enabled device.  On the transferability point, one of its largest selling features is how inexpensive it is to transfer bitcoin when compared to the transfer of traditional currency through use of expensive intermediaries like banks and EFT service providers.

Durability?  Check – mostly.  Bitcoin is durable in that it has no physical embodiment such as a paper bank note, or a metal coin that can be torn up, soaked, burned, or placed on a railroad track to be flattened.  On the other hand, stories and legends abound of bitcoins lost when their host hard drives or thumb drives are destroyed or thrown away by now ex-girl/boyfriends.  Also, one of the largest knocks against bitcoin is the frequency, and seemingly relative ease, with which they are stolen by hackers.  I myself was a victim of the 2014 Mt. Gox hack (more on that in a future post).

All that being said, I am not sure that these instances really highlight a lack of “durability” of bitcoin, so much as storage and security concerns.  The durability referred to in the context of discussing desirable properties of money, is more to do with its non-perishable nature.  To illustrate, bananas would not score highly on the durability-as-a-desirable-property-of-money scale.  A banana is arguably just as durable as a paper bank note in terms of how difficult it is to destroy (which is to say, not very).  A paper bank note however, will not decay into a slimy mess after a few weeks.  As compared to a banana, a paper bank note would be considered non-perishable.  In this way, a bitcoin is relatively non-perishable, and hence durable in this context.

Divisible? Double-Check.  To be a desirable form of money, the subject must be easily divisible (or fungible to use the latin-derived term - nothing to do with fungus).  For ease of commerce, one must be able to easily “make change” in transactions where the value of the good or service in question does not exactly match the primary denomination of the currency.  Bitcoins are divisible to eight decimal places (0.00000001 BTC).  At the current market price, the smallest denomination of bitcoin is worth $0.000065 USD.  It appears that bitcoin has USD beat in terms of divisibility.

Is Bitcoin a "Bubble with No Value"?

The debate continues as to whether Bitcoin is a bubble with no non-speculative value with frequent references to the Dutch tulip mania of the 1600s.  The main arguments of the Bitcoin detractors are:

  1. Bitcoin is not backed by any government
  2. Bitcoin has no intrinsic value
  3. Only criminals use bitcoin
  4. Bitcoin is too volatile to be of use as currency

Bitcoin is Not Backed by any Government

This point seems theoretically important, but is less relevant given that bitcoin is currently trading above $6,000 USD.  Most if not all market participants are aware that the bitcoin they are trading in is not government-backed.  Many bitcoin-believers point to the non-government nature of bitcoin as a plus.  They welcome a currency not tied to any one government and not subject to the monetary policies of said government.  Of course government actions could damage bitcoin’s current value and become obstacles to its adoption as a mainstream currency.  Governments could easily restrict or outright ban the use of bitcoin through regulation.  Governments such as Algeria, Bolivia and Ecuador have outright banned the cryptocurrency.  In other countries such as Canada, Jordan and India, certain banks have restricted the use of their credit or debit cards from buying or selling bitcoin.

I do not believe that the non-governmental nature of bitcoin means that it cannot be a valuable currency.  The internet itself is non-governmental in nature and its value is indisputable.  Like bitcoin, certain governments do actively regulate use of the internet in their jurisdictions.  Like many things, cryptocurrency will remain a topic of debate over government regulation vs. individual liberties.

Bitcoin has no Intrinsic Value

Paper fiat currency has negligible intrinsic value.  In the case of metal fiat currency, the intrinsic value of the metal may be more significant.  However, we have moved away from valuing metal currency based on the actual weight and composition of the metal itself.  Like paper currency, metal currency is primarily a representation of value.

Before 1971, the US dollar was a least partly tied to the value of gold.  This is no longer true for the United States and further, no other country is on the gold standard at present.  Given the current state of things, neither fiat currency, nor cryptocurrency, have real intrinsic value.  Their values come from a consensus among people who agree to use these currencies in value transactions.

Only Criminals use Bitcoin

The anonymous nature of bitcoin transactions would be appealing to criminals.  The same is true for hand-to-hand cash transactions.  Crypto-nerds point out that bitcoin is not actually anonymous, but pseudo-anonymous.  All bitcoin transactions are recorded as part of the blockchain.  Details recorded include the numerical addresses of the sender’s wallet and the recipient’s wallet.  The anonymity part comes in because bitcoin wallets can be created without the user linking his or her personal information to the wallet.

The bigger point is that criminals are not the only users of bitcoin.  Mainstream retailers, including Expedia, Subway and Shopify, have started accepting bitcoin as a form of payment.  Many investment firms and funds have moved into the cryptocurrency space.  The air of criminality does not appear to be a major impediment.

Bitcoin is too volatile to be of use as a Currency

This is one of the biggest obstacle to the mainstream adoption of bitcoin, in my view.  It is a problem for both purchasers and vendors.  Bitcoin has had many days in 2018 where the intra-day trading range was over $1,000 with wild swings both up and down.  With such volatility, the purchaser is wary about spending bitcoin today that could be worth much more tomorrow.  Conversely, the vendor is wary about accepting bitcoin today that could be worth much less tomorrow.

The volatility in the price of bitcoin is fuelled by speculators.  Speculation plays a big role in the volatility of traditional currencies, but cryptocurrency is unique in that speculative transactions would seem to out-number actual commercial transactions (the purchasing of goods and services).  Intense speculation is to be expected with any new technology.  It’s paradoxical that the speculation as to bitcoin’s future value is actually a hindrance to it’s future value – as a means to complete commercial transactions.


So, those are the basics.  Future posts will dig deeper into more narrow issues being grappled with by cryptocurrency and blockchain developers, users, and regulators.

Disclaimer:  the author believes that the statements of fact are accurate.  Statements of opinion are the author's own.  This content is not intended as financial, investment, legal, or other professional advice.  The reader is cautioned to undertake his or her own due-diligence before making any investments or conducting any business related to cryptocurrency and/or blockchain.

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