Crypto w/ Lelon

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CWL 2 - Like… What is Bitcoin?
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CWL 2 - Like… What is Bitcoin?

You’re reading Crypto w/ Lelon: high-signal, low-cognitive load newsletter about crypto, finance, and investing.

Joshua Lelon
Jul 1, 2021
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CWL 2 - Like… What is Bitcoin?
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“So what actually is a Bitcoin?”

I’m writing this for anyone who has asked some variation of that question. I want you to be able to nod your head and say, “OK, I kind of get it.”

Let’s get to it.

If you’re like me, Cashless-Josh, it’s been a while since you’ve held a dollar in your hand. I use credit/debit cards and apps on my phone. My wallet hasn’t held one in months.

We’re approaching a future where dollars are like “Terms Of Service” agreements: they’re in the background keeping everything running and everyone acknowledges their existence, but few have actually seen one. 

I might soon field questions from my children like, “What’s a dollar?” 

To which I might respond, “It’s a piece of paper! It’s how we used to buy things, like milk.”

But that’s an oversimplification. A dollar is actually an idea. A story shared across our culture. We made it up — like the boogie man. (h/t George Carlin!)

The piece of paper we typically think of as a dollar is not a dollar itself. It’s proof that you have a dollar. A trophy, not necessarily a victory.

The idea of a dollar is abstract, but using it is simple. If you want to prove that you have a certain amount of money, you show it. If you want to give someone money, you hand it to them.

This works pretty well, but its strength is sometimes a weakness. Having to carry around or store all your money is inconvenient at best and dangerous at worst. It’s a good problem to have, but nonetheless it’s a problem.

Financial institutions evolved to solve this problem. Banks, brokerages, apps, credit cards, etc. We give them our money so we can use their platforms to move it around. We trade control for convenience.

This also works pretty well. It doesn’t matter if it’s a dollar, pound, or euro.

But again, its strength is sometimes a weakness. When you give up control, you might not have the freedom when it matters.

The bank could freeze your account — even if it’s not your fault. The brokerage could get hacked, allowing someone to steal your information, credentials, or worse.

This lack of control even extends to the currency itself. You might spend years earning lots of money, only for the government to make it worth thousands of dollars less because they printed more of it.

This has ripple effects everywhere. It means that, if you want to maintain your standard of living, you have to make sure you get raises. You have to play hardball with companies that don’t want to. You have to look around.

You’ll always be on a treadmill that’s slowly increasing in speed, year after year. A treadmill you can’t get off of because the government legally requires you to use their currency. They’ll take you to jail if you don’t give them a portion of their money every year.

Bitcoin is an attempt to give you, the currency user and owner, back control. No government controlling the supply. No bank controlling the distribution or accounting. Just fixed, transparent rules for how money is created and how it flows. A true democratic currency.

On the outside looking in, it works the same way as the dollar. You can make an account on a crypto-exchange platform such as coinbase.com, buy Bitcoin, and then use it to buy other things.

Whether it’s the dollar or Bitcoin, transactions are recorded and verified to make sure nobody is spending money they don’t have.

The difference is who records and verifies. In the case of the dollar, it’s the bank. A single entity that can mess up (or, worse, be malevolent).

In the case of Bitcoin, it’s everyone. Everyone gets a copy of everyone’s transactions. Anyone can verify a set of transactions. In fact, that is what Bitcoin miners do. They get paid (in Bitcoin) for verifying transactions.

Imagine a Microsoft Word document with a whole bunch of entries that each say something like, “Bob paid Alice $50.00.”

To pay Alice $50.00, just add a new entry that says “You pay Alice $50.00” and send a copy of that document to everyone.

To verify that you had $50.00, Alice would simply look at the document.

With dollars, we pass around special pieces of paper that the government prints.

With Bitcoin, we add entries to the document (called a ledger) and pass it around. The document is a living, breathing entity. Everyone is writing it together.

As an added bonus, there is a built-in limit on how many Bitcoins there can ever be. No more endless treadmill.

If you’re wondering why this system is trustworthy and secure, stay tuned for the next issue!

Key Takeaways

  • Cash is useful to have some of, but becomes inconvenient to manage at scale

  • Financial institutions manage your money for you, but it costs you transparency and control

  • Cryptocurrencies are an attempt to give you back that control by not letting any particular individual have too much power over the system

Thank you to the Foster members who reviewed this post: David Burt, Stew Fortier, LaKay Cornell, Elizabeth Mendes, and Dani Trusca.

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