The Promise of Bitcoin summary

Money is a medium of exchange, but that’s just one of its facets. Economists also identify a second feature: it’s a store of value, meaning it retains its value over time. 

Look back over monetary history, however, and you’ll see that this second trait is more common in theory than in practice. In reality, the value of money usually tends to shift. One solution to this problem is to centralize control over money, which gives governments and banks the power to influence its value. 

One-dollar bills and two-euro coins have no intrinsic value. One is a cheap piece of paper, and the other is a copper and zinc alloy worth a few cents. 

Clearly, the value of dollars and euros isn’t related to what they’re made out of. Nor is it linked to commodities like precious metals. This makes these currencies examples of fiat money. That term comes from the Latin word for “decree,” which is pretty much how they come by their value: states declare that one-dollar bills and two-euro coins are legal tender. 

So what is Bitcoin? Technically speaking, it’s virtual currency or cryptocurrency – that is, a payment system which uses digital “coins” that are encrypted to be fraud-proof. 

Bitcoin isn’t just about technology, though. At a deeper level, it’s a solution to the problems associated with centralization and fiat currencies that we looked at earlier. 

The thing that makes Bitcoin so much more trustworthy than traditional money is its distributed ledger. The ledger only records legitimate transactions, which is key to the whole system. After all, if the ledger were full of fraudulent transactions – say, people trying to spend the same bitcoins twice – no one would trust it. 

How, though, do you ensure the blockchain only contains legitimate transactions? In a word, mining – a reward system that compensates users for helping keep the ledger trustworthy. 

There are some striking parallels between gold and Bitcoin mining. In both cases, for example, most of the work in the early days was done by individuals. 

Like the prospectors who flocked to places like California and Australia during nineteenth-century gold rushes, the first Bitcoin miners relied on their own – limited – resources.

A bitcoin is essentially a unique series of digital numbers. These numbers are stored in an account, which in turn is made up of a unique sequence containing a private key and a corresponding Bitcoin address. 

Before you can start using bitcoins, you’ll need one of these accounts, which are called wallets. There are a couple of options here, and each has its own advantages and disadvantages. 

We’ve already looked at one way of acquiring bitcoins – mining. Let’s assume, though, that you’re not one of the few investors with the time, money, and inclination to mine Bitcoin. What’s the alternative?

In a word, exchanges – cryptocurrency bazaars or marketplaces that connect buyers and sellers.