Since the beginning of the creation of Bitcoin in 2009, Bitcoin and various digital currencies have grown in such a way. Today, it is natural to hear people discussing digital currencies.
The Luno Learning Portal is an excellent first step. Here, we collect useful information about the basics of digital currency to help new customers Luno and beginners gain knowledge about the phenomenon of digital currency. Each article can be read separately and each article explains one concept of digital currency. After reading this Learning Portal, you definitely feel more comfortable and better equipped to join in the discussion of digital currencies.
1. What is Bitcoin?
Many people find Bitcoin very confusing when Bitcoin is something that is actually very simple and easy to understand, not as you might imagine. This learning series aims to help everyone to understand the basics about Bitcoin, and over time, we will provide learning opportunities for those who want to know more.
Bitcoin is usually explained by comparing Bitcoin itself with something we already know, but it will make you more confused. Bitcoin is a new technology we've never seen before, so a better way is to look at Bitcoin as a combination of different things that we know:
First, because Bitcoin makes it easy for you to move money, Bitcoin is a payment system, just like a bank transfer or credit card method, but Bitcoin is a bit better.
Secondly, Bitcoin is like gold - this is why many people refer to Bitcoin as 'digital gold' or 'Gold 2.0'. Imagine Bitcoin as gold that serves as money, but Bitcoin is very easy to transfer (transferable).
Thirdly, Bitcoin resembles the Internet because no one person or entity controls it, so anyone can use it as they wish. This is a very unique characteristic.
These three characteristics support each other, and unite in such a way. In-depth details will be explained in the next section. For now, imagine what happens if you put a large pot and throw a credit card, a piece of gold, and a little 'internet' into it - putting it all together - to bring out something new - Bitcoin!
2. Where does Bitcoin come from?
Bitcoin is 'created' by a person or group of people with the name 'Satoshi Nakamoto'. Does anyone really know who he is? While there are many articles and investigations to find out the truth about who he is (or they are), there is not enough evidence to date. Is it important? Not at all. Satoshi designed the entire Bitcoin system with an 'open manner' attitude - meaning it is available for viewing and review by everyone, so there are no hidden secrets, and no influence from the creator. As time went by, many people began to work on these codes so that they were very different from Satoshi's initial draft.
It is important to remember that there is a misconception about Satoshi mentioning that Satoshi created Bitcoin alone. Like other major breakthroughs in science, Satoshi's creation was built by the hands of many people. In recent decades, many leading experts, technicians, and mathematicians have been involved in research on cryptography, systems, and others. Satoshi succeeded in summarizing all these work into a coherent and clear plan and then implementing the plan. If you read Satoshi Whitepaper, you will read references from all the discoveries that drive his success in the creation.
3. Bitcoin as a payment system
How do we transfer money thousands of years ago, when we live in small villages, know and trust each other? We easily barter, as we do with cash now. But when money is transferred online, this will be a bit tricky. Banks and credit card services solve this problem with a 'ledger system' ('cash system') - which stores the account history and shows who owns what.
When John made an online money transfer from one person to another, it was the bank who made the transfer from John to someone else. John can not do it himself because there is a risk he cheats - he can copy (copy) and paste (stick) the digital money (because it's just a number on the computer) and send to two different people. So we trust the bank to send money and make sure only one person receives the money. The bank can cheat, but we believe they are not cheating.
If a transfer takes place at the same bank, it is easy to do. But if the banks are different, this will be a bit tricky because they may have different cash systems and need to be matched. Therefore, they charge a small fee, and usually this transfer takes a little time. When these banks and financial systems come from different countries, things get more complicated: different languages, systems, currencies, and more people need to coordinate and so on, so the cost and time of transfers grow. That is why the current financial system is so complex. The system is a huge mess of cash systems in the world.
Bitcoin changed all that. With what? Bitcoin is a cash system that syncs across the internet, so everyone can access the same cash account in real time regardless of who and where it is. The result? Money can be transferred from one party to another without unnecessary delays and costs. Like when money used to be used, before the world became so big and complicated.
Bitcoin payment system used for what? The answer: whatever you use with regular money: send to friends and family - both local and overseas, buy goods online, receive paychecks, and so on.
4. Bitcoin as digital gold
For centuries, gold has been viewed as a high-value object by many societies in the world. It is important to know that gold itself has no value - gold is just a shiny stone. The value of gold comes from the (somewhat confusing) fact that everyone agrees that gold has a certain value, and therefore gold is considered valuable. The reason why people choose gold over other objects is important to understand - because gold has certain characteristics that make it a better store of value than other objects:
First, gold is rare. That is, the amount of gold is limited (there are only so many golds in the world - if it is too much then everyone can have it and gold will have no value whatsoever). Gold is also soft (gold can be melted and shaped into small units like coins, and more importantly when you change its shape into smaller units, it will not lose its value - unlike diamonds). Gold is also stabli and does not degrade, is easily known and hard to imitate (made counterfeit imitations).
Bitcoin has all the same characteristics as gold. The amount of Bitcoin is limited (there is only a certain amount to be produced), Bitcoin can be broken down into smaller units without losing the value of the unit (1 Bitcoin = 100,000,000 Satoshi - the smallest unit of Bitcoin, the same as cents in Dollars or Pennies in Pounds, we can buy less than one Bitcoin), Bitcoin technology is also stable and will not degrade, nor can it be made fake Bitcoin. Besides, unlike gold, you can move Bitcoin anywhere in the world in minutes, regardless of the amount of Bitcoin. That's why people call Bitcoin a digital gold, but better digital gold.
Bitcoin also has value as a payment system. The more people use Bitcoin for payment, the more valuable the payment system is. Buying Bitcoin is like buying a Visa share, then using that stock to buy a soda at 7-11. Because you pay with your Visa share, the place of Visa is increasingly visa, (payment system) Visa is widespread and more valuable, so Visa share value will become even more valuable (including your own Visa share value!).
Bitcoin values derive from such gold-like characteristics, as well as its function as a payment system like Visa.
5. Bitcoin as the internet
The Internet is the greatest advancement in human history, which has changed the way of life and the workings of the world community. Many people do not realize that the internet that we know today, may never exist because of a number of 'internet rivals' built at the time. There are certain companies that want to connect all the computers in the world to share information, but with their own systems, so people have to pay to access their own 'information superhighway'.
Modern Internet is different, and by design, is an open system that allows everyone to use it at will, and the system is not owned by anyone, so there is no gatekeeper. This leads to something called 'unlicensed innovation' - everyone can try new things without requiring access from a particular gatekeeper. This then brings an explosion of innovation and adoption of the 'open' internet, and is becoming something very large and vast now. This design also indicates that many parts of the internet are 'interoperable' - meaning that the internet I use can connect to the internet used by other people in other countries. This is similar to the use of global language used in the world. Indonesians and Indians will find it hard to communicate, but if they speak English, it will be easier. The internet allows everyone to speak in 'one global language'.
In other words, Bitcoin is similar to the internet. For someone, the internet is not owned by anyone, so anyone can use it at will - no gatekeeper. This is also called 'decentralization'. Bitcoin supports 'unlicensed innovation' that allows many people to build companies and applications on the internet so that the product is growing rapidly. Lastly, Bitcoin is interoperable - meaning like email and the internet, my Bitcoin and Bitcoin all work in the same system, Bitcoin is a global cash transaction, and if viewed from a certain point of view, Bitcoin is the world's first global currency.
6. How is the Bitcoin price determined?
Many people wonder how the Bitcoin price is determined. First of all, know that Bitcoin price action works just like any other currency or object. Let's take an example of how the price of an object is determined - we can use oranges as a parable. What is the price of oranges?
The answer: depends. The first point of determining the price of oranges is by two things: what price is desired by the person who sells it, and what price is wanted by the person who bought it. If John wants to sell oranges for Rp 3,000, - and Sarah is only willing to pay Rp 2,000, - then the deal does not happen. But if they agree with a certain price, for example Rp 2,500, - then the transaction occurs. In the summer, more people want to buy oranges, so the price of oranges rose. Or if there is a flood so the supply of oranges is reduced, but many people want to buy oranges, then the price will also rise.
Bitcoin and other currencies are slightly different from oranges because they are 'homogeneous' - one dollar identical to another dollar, like Bitcoin identical to other Bitcoin. Oranges, on the other hand, may differ depending on size and quality. In other words, it is easier to determine the price of Bitcoin or currency because of its identical properties.
Many people do not realize that other currencies also work exactly like Bitcoin - if you are holding a coin or banknote in your local currency in your hands right now, at the same time there are millions of people who sell and buy your local currency, so even if you feel the price of your currency is stable, actually the price is changing continuously. If you want to redeem your money into another local currency, say for USD, today you will probably pay with 10 pieces of your local currency, but on the next day it could be 11 or 9. Bitcoin works exactly like that - you can imagine it like any other kind of currency than what you have right now.
7. What is the risk of Bitcoin?
Bitcoin is an exciting technology and a new form of money, but this does not mean Bitcoin is free from risks. Keep in mind that there are some similar rules in Bitcoin like traditional money. For example, do not keep your cash under the pillow because it is easily stolen, or do not entrust your money to a stranger.
Bitcoin also has other unique risks: for one person, Bitcoin is a new technology, and although it looks very safe and solid, there is always the possibility of failure. That's also why you should never put 'all your eggs in one basket' and never buy Bitcoin with all your possessions. Bitcoin is more volatile (Bitcoin values can rise and fall in a short space or time) than other currencies, and although Bitcoin is now more stable, Bitcoin is bound to experience many volatile moments in the future.
Remember that Bitcoin transactions look like cash where transactions can not be canceled - so if you send Bitcoin to the wrong person, or your Bitcoin purse is hacked and someone steals your Bitcoin, it's very difficult and even impossible to take it back. Bitcoin is also not protected by any entity, so if you lose your Bitcoin, the service provider or 'Bitcoin' network can not compensate you. That's why you have to use trusted products and service providers to help you, just like when you choose a bank to safeguard your money safely.
Finally, the value of Bitcoin is determined by the number of people or businesses that receive Bitcoin. If Bitcoin develops, it will be very good for Bitcoin, but if fewer people use Bitcoin, this will have a negative impact on the price and use of Bitcoin itself.
In conclusion, Bitcoin is a great potential that is very interesting in changing the world, but make sure you understand the risks that go along with it.