It's time for you to understand bitcoin.

It's time for you to understand bitcoin.

You've definitely heard the name. You might have even attempted to research it once or twice but were overwhelmed by the complexity. What is bitcoin? Why should I care about it? How is it making people so much money? Today I'm going to answer these questions for you in layman's terms in the hopes that I provide a solid starting point to your understanding of bitcoin. I'm going to keep it very concise, but at the end I'll provide you with further reading if you have more questions.

On the Surface

Bitcoin was the first of many cryptocurrencies, and continues to be the most popular and most valuable. The easiest way to think about bitcoin is as digital money. It's a way for people to send and receive money through the internet. Right now you can download any number of apps that can act as your digital wallet, purchase some bitcoin, and send it to someone else who has done the same thing. You're probably wondering why you would want to do this when you can already do it with regular money. To answer that question we must understand what makes bitcoin different from regular currencies such as the US dollar.

Behind the Scenes

What makes bitcoin unique is that it's not run by any single entity or central authority, such as a government. Nobody controls bitcoin, as it's a network designed to operate itself. The way this is accomplished is by the use of a public ledger known as a blockchain.

Basically, copies of the bitcoin network are distributed across a large number of devices. If a transaction doesn't match up with every other device on the network, it will not go through. It's a foolproof way to verify the legitimacy of everything that goes on in the network.

Everything you see in the diagram below happens behind the scenes once a bitcoin payment is sent. Whether bitcoin is ultimately a success or a failure, I believe the blockchain technology that it has introduced is here to stay - and is already being used for many things outside of finance.

Store of Value

Alright, but how do people make money off of bitcoin? Aside from being a currency used for payments, bitcoin is perhaps even more popular as a store of value. Many people buy bitcoin with the intention of simply holding onto it (like they would stock in a company) in the hopes that the price will go up and make them money.

The price of bitcoin is very volatile, often rising and falling dramatically. This past week the price of one bitcoin surpassed $50,000 for the first time ever. The most likely explanation for this is high demand and overall excitement. It's important to note that the price of bitcoin has gone through a handful of "bubbles" throughout the years, but overall has continued to rise since its 2009 inception.

There's no denying that the volatility of the price prevents it from really thriving as a payment system, but in my opinion, the price of bitcoin will ultimately stabilize as a larger-scale economy grows around it.

In Conclusion

It's not in the nature of this newsletter to bombard you with too much information. There's a lot more to the equation of what makes bitcoin operate and the vast cryptocurrency world that surrounds it. Hopefully I was able to provide you with a better understanding, but chances are you might have a ton of questions. I want to point you in the right direction for the answers:

FAQ - Bitcoin

Thank you for reading. As always, you can support this newsletter by sharing it with a friend or buying me a coffee - thank you to Elizabeth and Phil for making this week's issue possible! Keep an eye on your inbox in the next week for a new issue.