BITCOIN – PART I

We’re going to write a lot about Bitcoin over the next few months, as its pretty topical. Just this weekend in fact, China got mad with the cryptocurrency and is now working to shutdown many of the exchanges it trades on in China. After this news came out, the price of a Bitcoin promptly fell 7%. So many questions, so little time.

OK, so what is Bitcoin?
There are so many different ways we have thought about attacking this question, but none of them are appropriate for a single 5-minute session. So instead, we are going to do this over multiple notes. By the end, you will know exactly what a Bitcoin is, why China is closing exchanges which allow you to  trade bitcoins and why them doing so has caused the price of a bitcoin to fall.

First and foremost, it is really important you realise that Bitcoin is a completely made up currency that only exists on computers and the internet. And technically, it’s not even a currency at all. It’s an invention. It’s a piece of technology. And it’s the technology part which is super interesting. The bitcoin itself, not so much.

But today we’re not going to discuss any of that. Today, we just want you to know what a currency is, and why it has value.

Ok then. Do it.
Have you played the game “if you were stuck on a dessert island, and could only take ten things with you, what would you take”? Classic game. Good times. How many of you ever answered “cash” as one of your things? None right. Ever wondered why? It’s because money or cash, actually has no inherent or intrinsic value. Zero. You can’t eat it, drink it, smoke it, sleep with it, wear it or live in it. It would be of literally no use to you on a deserted island.

Cash only has value because people believe that everyone else believes it has value. Sounds dumb, but its true. And because everyone else believes it has value, they are happy to receive it in exchange for providing goods and services.

The real question then is, why does everyone else believe it has value? Well that’s because it’s the only way you can pay your taxes to the government. That is why currency has value. In fact, that is the only reason currency has value. If the government suddenly announced it would only accept bananas as payment for taxes going forward, bananas would become the accepted form of exchange (and store) of value in Australia. It’s would be how you paid for your uber, your toothbrush and your energy bill. That’s not a joke. That is exactly what would happen.

A bit of history
Back in the old days, when people road dragons, rather than use currency, they would exchange goods and services for gold. Literally. The price of a good or service would be in terms of a weight of gold. The problem with that though, was gold was hard to transport and more so, difficult to breakdown into small, agreed sizes. This made it problematic to exchange. To solve this problem, over time, rather than exchange pieces of gold, people would exchange pieces of paper, which represented claims on gold. And you could trade these claims with the government, who would give you gold for your currency. Therefore, currency had value because it represented a claim on gold.  Today currency has value because it is backed by the full faith of the government.

So in Summary
Currency is a way to store value. And currency has value because everyone else believes it has value because the government accepts it in return for the payment of taxes. Bitcoin however IS NOT accepted by the government for the payment of taxes….. 

At this point, you should be asking yourself, how then does Bitcoin have any value. 

But for now, that’s 5 minutes. Hope it helped. 



Categories: Bitcoin, Investing

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