BITCOIN AND BLOCKCHAIN - HOW IT WORKS

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Hey what's going on, you're here because you want to know "What is bitcoin?" You've been hearing about Bitcoin and blockchain on the news, you've seen articles about it on the internet. Maybe, a friend or a family member has spoken to you, or asked you about it. And you want to know what it is so that you can explain it to people and understand it yourself and maybe even get in on it.

I'm going to explain this to you over the next couple of minutes. I guarantee that when we're done you will walk away understanding exactly what the whole buzz is about. Let's define what Bitcoin is, it's the first decentralized digital currency. To understand what that is we need to look into the word - currency.

What exactly is a currency? Well, it's the fact or quality of being generally accepted or in use. That means that the money that we use only has value, because we say it has value. Not us in particular as individuals, but as a whole, as a society. Our government prints this money for us and we all accept this as legal tender. We say “Okay, this is viable for trading goods and services and for the repayment of debts.”

Money in and of itself is simply a verifiable record that everyone accepts. In the past this used to be things like seashells or salt, eventually it became gold and that lasted for thousands of years. People used gold as currency and to store value and then it went on to be paper money. Now this is the next stage of that evolution. If you're in the developed world you've already been using digital currency.

The only difference is that this digital currency has been a representative of your paper currency. We're working with an old system and we currently swipe our cards at the store to represent the paper currency that we supposedly have stored at the bank.

That brings us to the question of "What is a blockchain?" Because you can't truly understand Bitcoin if you don't understand the blockchain. To keep it simple, a blockchain is a record of transactions that is broken up into blocks.

Let's suppose we had a hundred transactions and we wanted to break them up into blocks of 20. That would give us five blocks of 20 transactions each and that is exactly how crypto currencies like Bitcoin function. They break up information into pieces and then they close off that information and add it to the previous block of information.

When the next block comes around, let's say it's open for ten minutes. The transactions that occur in those ten minutes get filled into that block. Then that block gets closed off and added to the ones that came before it.

The reason why this is important is because this information is kept secure through cryptography, we generally call it encryption. That means that it takes information and turns it into really long information in comparison to what it used to be, so that it's hard to decipher.

Let's say we take your name and your name is John Doe. If we encrypt that information and instead of it being seven characters, 4 for John and 3 for Doe, it now becomes this long string of 75 characters. Someone would have to have a key to decipher those 75 characters and be able to read them as John Doe.

That's encryption and that's exactly how blockchain protects all of the information within the blocks. The longer the blocks become and the longer the chain becomes, the harder it is to crack this encryption.

The reason why this is so cool is because this isn't kept in one central place. There is no bank that holds this information. Instead it's kept on a network of computers all across the world.

You would have to own more than 51% of those computers, or you would have to have the power to manipulate more than 51% of those computers to have a chance of looking at any of the information in just a few of the blocks within the blockchain.

For most people that's impossible. You just can't get 51% of the computing power from thousands of computers all over the world. That makes it really secure.

So how is this network supported in a way in which computers all over the world process these transactions and keep everything secure? Well, that's something called mining. Each one of those computers that are all across the world connected to the Bitcoin network and processing these transactions belong to someone and they are called miners.

That person or persons who spend the time and energy, (the electricity) to process these transactions for Bitcoin, what's the return on investment for them?

The system is designed so that every time it updates, the ledger is updated. Which is this huge ledger with millions of transactions going all the way back to the very first one. Bitcoin pays out a small commission in Bitcoin to the people who have been mining it (updating the ledger with their computing power). That is why Bitcoin can be a decentralized currency as opposed to how normally money is controlled by a central bank.

In America, it's the Federal Reserve. A private corporation that manages America's money and whenever America wants more money they can just go ahead and print more. Why is this important? Because when you have centralized banking, it means that bankers and governments are the people in control of the currency.

They can tax it, it's susceptible to hyperinflation, if something goes wrong with the economy or if there's a war; there's all these different scenarios that can affect the value of that money because it is controlled in a centralized place.

For instance, in Zimbabwe they had this issue with hyperinflation. The Zimbabwe dollar lost its value because the government was managing the country very poorly. So what ended up happening was a loaf of bread ended up costing $35 million Zimbabwe dollars!

Imagine you go to bed one day and you have $35 million Zimbabwe dollars. You have a lot of money. Then, you wake up the next day and the government's been messing things up all over the place and now all that money can only buy you a loaf of bread...

The reason why that happens is because the government controls the money and as they start to misspend or print too much money or do any other number of things that can affect the economy, the value of your money will fluctuate based on those decisions that the central bank (government) makes for you.

When your money is decentralized it's not controlled by a government or a bank. What ends up happening is you might be in Zimbabwe but if you have Bitcoin, when everybody else wakes up and their Zimbabwe Dollars are no longer worth anything, your Bitcoin's value has not changed.

You might hear "Oh, the price of Bitcoin has gone up, it's astronomical, it's exploding and its so awesome!" that's true. The reason why that happened is because people started to realize it's actual value. They started to try and get more of it and as more people started to get more of it, other people said “Wait a minute, there's a lot of money to be made. Let's invest in this!”

That's called speculation. You end up having people who are buying and selling and the price is going up just like stocks on the stock market. That will eventually stabilize because there's only so much Bitcoin that will ever exist and it's 21 million bitcoins. Just like land, if something is a limited resource over time it will always increase in price.

You might say “Well, what if people just stopped using Bitcoin?" The reality is that even if Bitcoin does go out of fashion, there will be another digital currency or a number of digital currencies that will come along and take its place. In my opinion, I don't see that happening. I think bitcoin is here to stay. It's basically the grand daddy of cryptocurrencies and we're going to continue to see these in our lifetimes going ahead into the future.

One of the other main reasons why this is important, is because a central bank controls the flow of money. So, right now if you write a check or swipe your debit card, they're going to hold that amount of money.

Let's say you're doing a transaction for $10. They're going to hold that $10 and they're going to send it to the merchants bank. Then, it's going to take some time for it to clear and then they will debit that from your account. But, if you only have $9.95 in your account, they’re going to have to cover you on that nickel. Then, since they covered you on that nickel, they have to charge you $35 for an overdraft fee.

This will never happen with Bitcoin and cryptocurrencies. The reason why is there is no central bank there to tax you and to say “hey you know what I'm going to take advantage of you because you've made a miscalculation."

With Bitcoin, you send it as simply as you would send an email. If you don't have the Bitcoin to cover the transaction the transaction doesn't go through. Period. No overdraft fees.

If you try to send Bitcoin right now to someone across the world, in a matter of minutes they'll have the Bitcoin in their account (at least in theory). If I try to send money right now through Western Union to Senegal in Africa, they might receive it. I'm definitely paying for the privilege of sending my money to somebody in another place in the world.

If Senegal has a corrupt government or central bank with taxing fees or they decide they're going to take everybody's money or lock the banks down like Greece and a bunch of other countries have done in the past, well now I just lost my money. These are some of the reasons why a digital currency like Bitcoin is so important and so convenient.

Another thing about blockchain is this, nowadays there's this new thing where people go and hack hospital networks. The hackers tell the hospitals “we have all your medical records, if you don't pay us a certain amount of money we're not going to give them back." You won't know how to treat your patients and people are going to die!"

With blockchain you can protect everyone's information just as if they were transactions on the Bitcoin. In this case it's actually for the purpose of protecting medical information. In that same way in the future you're going to see that we're going to have digital identities that are protected with blockchain. So, it's not going to be so easy for people to come along and steal your identity.

Voter fraud is another good example. There's going to be an elimination of voter fraud because when you vote they're going to know that you voted everywhere in the world that accesses that blockchain of voter information for that particular election.

No more dead people voting. No more people going out and grabbing some dead guy's name and voting in his name. No more guys going and voting at one voting station than driving 20 miles and voting at another voting station. All of that is eliminated and then our votes will be more secure and more trustworthy.

We won't be able to say "Hey, there was a whole bunch of cheating going on!" Because that will have been eliminated with the technology called blockchain.

So, our next question is where can I use Bitcoin? Companies like Microsoft, Expedia.com, Whole Foods, Subway, Dallas Mavericks, Dish Network, Overstock.com, Shopify and Etsy stores. There's a ton of places where you can currently use Bitcoin and as time continues that number is going to increase.

Right now we're really early in terms of how fresh this technology is. You know you're hearing about it all in the news and stuff like that but most people that are hearing about it don't even know what it is. Much less are participating in it.

But give that three or four years, and it'll be mainstream. You'll know that Bitcoin is mainstream when you can ask a little kid on the street "Hey, what's a Bitcoin?" and they can explain it to you. If you ask them what money is they can explain that to you.

Eventually the same thing is going to happen with cryptocurrencies and then it's really going to increase in value and it's also going to be accepted just about everywhere.

If I wanted to go out and buy a Tesla today I can buy it in Bitcoin because they accept Bitcoin. There's a lot of different homes especially in California and more upscale areas that are now only accepting payment through Bitcoin.

You know why? Because they know that if they take their payment in Bitcoin and hold on to it, eventually it's going to be more valuable than what they were just paid. If the buyer gave a hundred bucks and the seller holds on to his Bitcoin for a while it may be worth a thousand someday.

So, our next question is "where can I buy Bitcoin?" The place I always recommend is Coinbase. It's where I first got my start into buying Bitcoin. When you sign up using my referral link you get a free $10 dollars in Bitcoin and so do I. It's really well done for people who are non-technical. For the most part it's like using your typical banking app.

So the takeaways are, blockchain is a revolutionary technology that is changing the world (currency is just the tip of the iceberg). It's still early and anyone who gets involved now will have a serious advantage over others who are going to ignore this for the time to being.

I hope you enjoyed this post and it answered the questions you had about Bitcoin. Be sure to Like, Share and Follow @nextwavecrypto. I'll talk to you soon.

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