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- MCS Crypto 101 - Issue #7
🌐 MCS Crypto 101 - Issue #7 🌐
Crypto Concepts Made Simple - Straight to your inbox, every Tuesday and Friday.
Hello and welcome back to MCS Crypto 101.
In our last two issues of MCS Crpyto 101, we dove headfirst into the types of cryptocurrencies - and learned about Bitcoin, Stablecoins, and a variety of altcoins.
Still unsure what crypto actually is? Click HERE.
Today, we’re diving deep into Bitcoin. Many of us have known about Bitcoin for years. However, few actually take the time to research it for themselves.
Personally, I ignored Bitcoin for years - claiming it was an unexplainable scam. The problem was that I never took the time understand it before writing it off.
Like many people, you have probably done the same. Here’s your chance to truly understand the most important financial instrument to ever exist.
💡 What is Bitcoin? 💡
Let’s dive down the rabbit hole.
At its core, Bitcoin is a digital currency, often referred to as a cryptocurrency. Unlike traditional currencies issued by governments (like the US dollar or the euro), Bitcoin operates independently on a decentralized network of computers. This means no central authority, like a bank or government, controls or issues it. Instead, it's powered by a groundbreaking technology called the blockchain.
Want a deep dive into blockchain? Click HERE.
🕰 A Brief History of Bitcoin 🕰
The story of Bitcoin began in 2008 when an anonymous person (or group) using the pseudonym Satoshi Nakamoto published a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This document laid out the foundation for a new kind of money - one that's digital, decentralized, and operates on trustless principles.
This was done in response to the 2008 financial crisis. After what happened, it was clear that a better solution to the current system was desperately needed.
In January 2009, the first-ever Bitcoin transaction took place, marking the birth of the world's first cryptocurrency. Since then, Bitcoin has evolved from an obscure project known only to a handful of enthusiasts to a global phenomenon that's captured the imagination of millions.
🤔 Why Should You Care? 🤔
You might be wondering, "Why all the buzz about Bitcoin?"
Bitcoin introduces a novel way to transact, save, and even think about money. It offers the promise of lower transaction fees compared to traditional online payment systems, provides financial inclusion to those without access to banking, and presents a form of money that's resistant to censorship and confiscation.
Most importantly, it’s not controlled by a central authority. Nobody has the ability to print more and inflate the supply.
Remember, the US Dollar is a fiat currency. This means that it is not backed by anything other than the governments word. In the past, if they government wanted to print more money, they needed to acquire more gold to back the value of the newly printed dollars.
With a fiat currency, they DO NOT need to acquire anything to back the new money… and once you give someone the keys to a money-printer, its very difficult to get them to turn it off.
The amount of money that has been printed by the federal reserve over the past few years is INSANE. Check out the chart below from the St. Louis Federal Reserve:
Really think about this chart. Zoom in if you have to. Look at that spike in 2020. Inflation is not going away - no matter what the mainstream media says.
Inflation and excessive money printing have a profound impact on the value of a currency over time. When a central bank prints more money to stimulate economic growth or cover government debts, it increases the total money supply in circulation.
As the supply of money grows disproportionately to the goods and services available in the economy, each unit of currency becomes less valuable. This results in the erosion of purchasing power, meaning that the same amount of money can buy fewer goods and services.
In essence, inflation reduces the real value of money over time, making it a less reliable store of value. To protect against this devaluation, many individuals and investors turn to assets like Bitcoin, which has a fixed supply and is not subject to the whims of monetary policy.
The Argentine Peso is far along in this death spiral. The inflation rate in Argentina is 10%. PER WEEK. Let that sink in.
This has historically happened to all fiat currencies. Click HERE to learn more about Argentina’s monetary problems and what will eventually happen to the US Dollar.
🔗 How Does Bitcoin Work? 🔗
At its heart, The Bitcoin Network is a digital ledger that records all transactions made with the cryptocurrency BTC. This ledger is maintained by a network of computers (called nodes) that validate and record transactions on a public record called the blockchain.
Decentralization: Unlike traditional currencies controlled by banks or governments, Bitcoin operates on a decentralized network. This means no single entity has control over the entire network.
Cryptography: Bitcoin uses cryptographic techniques to ensure the security and integrity of transactions. This means that once a transaction is added to the blockchain, it's nearly impossible to alter.
Public and Private Keys: Think of these as your Bitcoin "username" and "password." Your public key is like an address that others can see and send Bitcoin to, while your private key is a secret code that allows you to spend your Bitcoin.
📚 Key Terms to Know: Blockchain, Cryptography, and More 📚
Navigating the world of Bitcoin can be daunting with all its technical jargon. Here are some essential terms you'll come across:
Blockchain: A digital ledger where all Bitcoin transactions are recorded chronologically. It's transparent and can't be easily tampered with.
Cryptography: A method of protecting information by transforming it into a code. It's the backbone of Bitcoin's security.
Node: A computer that participates in the Bitcoin network. Nodes validate and relay transactions. Anyone can set one up.
Wallet: A digital tool that allows you to store, send, and receive Bitcoins. It's secured by cryptographic keys.
Satoshi: The smallest unit of Bitcoin, named after its creator. One Bitcoin is equivalent to 100 million Satoshis.
🌐 Bitcoin's Global Reach 🌐
Bitcoin's decentralized nature means it's accessible from anywhere in the world. Whether you're in New York, Nairobi, or New Delhi:
You can send and receive Bitcoins across borders without the need for currency conversion or traditional banking systems.
Bitcoin operates 24/7, so there are no "banking hours" or waiting periods.
Its global reach has made it especially valuable in countries with unstable currencies or restrictive financial regulations. Remember Argentina? Here’s the price of bitcoin over the past year denominated in Argentine Pesos, not USD.
Look at that continuous uptrend. As you can see, Bitcoin has been a life-saver for the Argentinian people.
⛏ Bitcoin Mining ⛏
🤖 What is Bitcoin Mining? 🤖
Mining is the backbone of the Bitcoin network. But instead of pickaxes and gold, Bitcoin miners use powerful computers to solve complex mathematical problems:
Purpose: Every time a miner solves a problem, they help verify transactions on the Bitcoin network, adding them to the blockchain.
Reward: In return for their efforts, miners are rewarded with newly minted Bitcoins. This is also how new Bitcoins are introduced into circulation.
🔧 How Does Mining Work? 🔧
Mining might sound complicated, but here's a simplified breakdown:
Transaction Verification: When you send or receive Bitcoin, the transaction is broadcast to the network. Miners pick up these transactions and place them into a block (a group of transactions that need to be processed).
Solving the Puzzle: Miners compete to solve a cryptographic puzzle. The first one to solve it gets to add the block of transactions to the blockchain, finalizing them.
Getting Rewarded: The successful miner receives a set amount of newly created Bitcoin as a reward, plus the transaction fees from the transactions in the block.
Note: The mining reward halves approximately every four years in an event known as the "halving." This ensures that only 21 million Bitcoins will ever exist.
This is what a Bitcoin Miner looks like:
⚙️ The Role of Miners in the Bitcoin Ecosystem ⚙️
Miners play a crucial role in keeping the Bitcoin network secure and functional:
Security: By verifying transactions, miners help prevent fraud, ensuring that the same Bitcoin isn't spent twice (known as double-spending).
Decentralization: Mining is distributed worldwide, preventing any single entity from taking control of the Bitcoin network.
Transaction Processing: Miners ensure that transactions are added to the blockchain in a timely manner.
🌍 Environmental Concerns 🌍
It's worth noting that Bitcoin mining requires a significant amount of electricity:
Energy Consumption: High-powered computers used in mining consume vast amounts of electricity, leading to concerns about its environmental impact.
Sustainable Solutions: Some mining operations are transitioning to renewable energy sources, and there's ongoing research into making the mining process more energy-efficient.
⚖️ Regulation and Legal Aspects ⚖️
🌍 Bitcoin's Legal Status Around the World 🌍
Bitcoin's decentralized nature poses unique challenges for regulators:
Varied Approaches: Different countries have different stances on Bitcoin. Some have embraced it, some have specific regulations in place, and others have banned it outright.
Common Concerns: Many governments are concerned about potential illicit activities, tax evasion, and consumer protection related to Bitcoin.
Ongoing Evolution: As Bitcoin and other cryptocurrencies gain popularity, expect regulatory landscapes to evolve.
💼 Tax Implications of Using and Investing in Bitcoin 💼
Bitcoin isn't just a digital currency; tax authorities often view it as property:
Capital Gains: In many countries, selling Bitcoin at a profit results in capital gains, which may be taxable.
Mining and Income: Earning Bitcoin through mining or as payment for goods and services may be considered taxable income.
Record Keeping: It's essential to keep detailed records of your Bitcoin transactions to ensure accurate tax reporting.
Consult a Professional: Tax laws and regulations related to Bitcoin can be complex. It's advisable to consult with a tax professional familiar with cryptocurrency.
🔒 Consumer Protection and Security 🔒
Regulators are also concerned about the protection of Bitcoin users:
Lack of Recourse: Traditional banking systems often offer recourse in case of errors or fraud. With Bitcoin, transactions are irreversible.
Exchange Regulations: Some countries have implemented regulations for Bitcoin exchanges to protect consumers, ensuring they have adequate security measures and financial reserves.
Stay Vigilant: While regulations can offer some level of protection, they often don’t understand what they’re regulating. It's crucial for users to be proactive about their security.
❌ Common Myths and Misconceptions ❌
🚫 Debunking Common Bitcoin Myths 🚫
As a beginner, it's essential to clear up some common misconceptions about Bitcoin:
Bitcoin is Anonymous: While Bitcoin transactions are pseudonymous (not directly tied to real-world identities), they are recorded on a public ledger. With enough effort, someone could trace a transaction back to you.
Bitcoin is Only for Criminals: Bitcoin is used by a diverse range of people for various legitimate purposes, from investment to international remittances. Here’s a quote from SWIFT:
“Cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods”Coinbase estimates that only 0.34% of crypto transactions in 2020 were related to criminal activity.
Bitcoin is a Get-Rich-Quick Scheme: Bitcoin's price can be volatile, and while it has delivered significant returns in the past, it's not a guaranteed path to wealth. Investing carries risk.
Bitcoin Has No Value: Bitcoin's value is derived from its scarcity and the trust people place in it, much like traditional currencies.
Bitcoin Can Be Hacked: Bitcoin's underlying blockchain technology has proven extremely secure, and has never been hacked. Most cryptocurrency hacks occur on exchanges or due to user errors.
❓ Addressing Concerns ❓
Energy Consumption: Bitcoin mining does consume energy, but it's essential to compare it to the energy usage of traditional banking and gold mining. Some mining operations are transitioning to renewable energy sources.
Security: While Bitcoin's blockchain is secure, personal security is crucial. Safeguard your private keys and use reputable wallets and exchanges.
Usefulness: Critics argue that Bitcoin isn't useful for everyday transactions due to scalability and fee concerns. Solutions like the Lightning Network aim to address these issues.
🔗 Seeking Reliable Information 🔗
With so much information, it's essential to verify sources and seek reliable information:
Educate Yourself: Take the time to learn the basics of Bitcoin and cryptocurrency from reputable sources.
Community Involvement: Engage with the Bitcoin community on forums and social media platforms to ask questions and gain insights.
Stay Informed: Stay updated with the latest news and developments in the cryptocurrency space through trustworthy news outlets.
🌐 Until Next Time… 🌐
Now that you have a basic understanding of bitcoin, we can dive into applicable stuff, like how to download a wallet and how to buy, sell, and trade bitcoin.
But you’ll have to wait until Friday.
We’ll see our premium subscribers tomorrow for MCS Alpha - and the rest of you on Thursday for MCS Crypto News.
Thank you for subscribing to Make Crypto Simple 🌐🔗
Chris Schawel