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Tom's BitCoin 101

Discussion in 'Bitcoin Forum' started by TomB16, May 22, 2020.

  1. TomB16

    TomB16 Well-Known Member

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    I'm posting this for an acquaintance. He's not a member but I will send him a link to this thread.

    As far as I know, this doesn't exist on the net. People just understand it and assume everyone else does or they have no clue and the working of bitcoin is a total mystery. My estimation is that 99.99999% of people fall in the later category, despite everyone claiming to be in the former.

    Being an old guy, I will compare BitCoin to the monetary system I know. To be fair, it isn't a high ratio of people who understand the traditional monetary system but it's a lot more than understand BitCoin.

    Here we go...

    The Fed creates money. They power up their printers and create notes. They also inject it into the financial system through virtual mechanisms. The government gives this money legal value by fiat (they write a law that forces people to accept money as "legal tender for all debts, public and private").

    How much money do they create? For the most part, this is a closely guarded secret. We know that sometimes they create *a lot*. When the fed prints money, the rest of the money becomes worth less (inflation).

    Money represents national productivity so, as productivity goes up, money becomes worth more (deflation).

    Traditional thinking is the Fed should print a bit more money than would balance productivity gains. In other words, it is generally accepted that we should have some inflation. This is purely by convention and not any sort of requirement or "correct" operating mode.

    The government could run up a huge debt and the Fed could print a ton of money to reduce the value of money through inflation. The government can borrow $10, buy 4 loaves of bread, print enough money to inflate the price of a loaf of bread to $12, then pay back the $10 plus a bit of interest, and end up buying 4 loaves of bread for the cost of 1. It's a beautiful thing.

    How do we know the Fed won't go berserk and print so much money, we will be stripped of our buying power? We don't. For those who don't trust the Fed, what options do they have?

    Satoshi Nakamoto did not create the BitCoin currency. He created the BitCoin algorithm and released it to the public domain. The algorithm gained enough mindshare that some people started running the algorithm on their computers in a process called "mining". They did this because it was a novel idea. The algorithm is designed such that running it will result in discovering tokens. These tokens are the BitCoins. All new BitCoins come from miners. Initially, BitCoins were a commodity, not a currency, although it was always intended for BitCoin to be a currency.

    BitCoins, as a commodity, gained value only because people wanted them enough to pay for them. They had artistic value because they were only worth what someone would pay.

    BitCoin turned into a currency the moment the first person decided they wanted BitCoins bad enough they would let people come to their store, buy goods, and pay for them with BitCoin. The currency gained traction due to more people accepting it as currency in exchange for goods and, eventually, people began accepting it as payment for labor. 50 cent famously sold his album "Animal Ambition" for 700 BitCoins in 2014.

    Once you could purchase goods or services with it, BitCoin had real value and became a real currency.

    Miners are trying to inflate the currency. They are trying to find all of the tokens they can, as fast as they can. They are the equivalent of the Fed trying to print as much physical money and inject as much virtual money as possible. The rate of mining is limited by the complexity of the algorith and the cost of electricity.

    So...

    The cost of electricity will fluctuate regionally, around the world. When the cost of electricity goes up in an area, miners will stop mining. Other areas, where power is cheaper, will continue to mine but the community will shrink so there will be fewer BitCoins introduced.

    These days, BitCoin is mined primarily in Slavic states and Asia, where power is cheap (and economies are bad).

    If enough people stop mining BitCoin, the supply will dwindle, pushing the price up, and BitCoin mining will become profitable again.

    The value of BitCoin is tied directly to power, in that power is needed to create new BitCoins to meet demand for the currency.

    When it started, the guy with the fastest CPU would find the most BitCoins. This created an arms race of buying the most, fastest, CPUs.

    Graphics cards have the ability to perform mathematical calculations quickly and massively in parallel. That's how they render images for games. These days, a GPU (graphical processing unit) can have thousands of cores, each able to run calculations. The first guy to mine for BitCoins with a GPU cleaned up, for a while.

    GPU mining dominated until somebody with a ton of money decided to make a custom chip that was purposely built to mine BitCoin. These chips immediately dominated GPU miners. From there, each successive generation of chip (with more power) would dominate the generation before it.

    At this point, there is no legitimate reason for mining BitCoin with a CPU because it will cost you a lot of power for extreme little result, due to the ASIC (application specific integrated circuit) mining. But, CPU mining is still interesting where the power is free and so is the CPU. Enter the hackers. Trojan Horses have been written that infect people's phones, tablets, computers, coffee makers, etc. and immediately start mining, returning any tokens found to a 14 year old in Rajasthan.

    BitCoin is traded like a commodity so, if people stop wanting it, the value will go down.

    New BitCoins are somewhat hard to find so, demand for BitCoin will drive the price up, over time.


    Gotta run! I have to chase some visible minorities off my lawn.
     
    #1 TomB16, May 22, 2020
    Last edited: May 22, 2020
    T0rm3nted likes this.
  2. TomB16

    TomB16 Well-Known Member

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    Further,

    One of the ways one country can attack another is to inflate their currency. They do this by counterfeiting and injecting cash into the target economy.

    In 2016, India stopped accepting their own bank notes when they realized about half of them were counterfeit. Pakistan was attacking India's financial system.

    BitCoin is reasonably resistant to counterfeiting due to the complexity of the algorithm. It's a lot more resistant than normal cash, even current stuff with a lot of security features.

    The problem with BitCoin is it exists on computers which are eminently hackable. Someone can simply let themselves into your machine and take it.

    I like BitCoin. I hope it succeeds. It is unlikely I will ever own any but it makes sense as a hedge against inflation and is a likely currency in a SHTF scenario. These scenarios become increasingly more likely over time, as governments become less fiscally rational.

    Another hedge against inflation is owning any hard asset, like a company or real estate. BitCoin is more likely to be useful as currency in the next financial crisis which will be created by political lunacy in the future, shortly after we're done digging our way out of this financial crisis.
     
    #2 TomB16, May 22, 2020
    Last edited: May 22, 2020

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