I recently had a conversation with a friend that went something like this:
FRIEND: Bitcoin…? What the hell is that?
ME: It’s a crypto-currency.
FRIEND: (blank stare) Crypto-what?
ME: Well it’s a seriously encrypted protocol that exists only in the internet cloud that generates units of value called bitcoins (lowercase “b”) that you can buy and sell on an exchange just like shares, except they’re not shares, more like forex, except they’re not forex because they’re not a fiat currency like a dollar or a pound, more like gold, except that they’re not gold because you can’t hold them in your hand or lock them in a safe. You keep them in a wallet that doesn’t really exist except as an encrypted algorithm , and if you lose your wallet you’ve lost your bitcoins, just like cash. But they’re not cash.
FRIEND: (after a long pause) What have you been smoking?
ME: No, seriously, there’s really a new internet currency that people from around the world are buying and selling and using to buy stuff, although the “buying stuff”part is in its infancy. Not many places accept bitcoins as payment. Yet. And just like a dollar can be fractionalised into a hundred pennies, so a bitcoin can be fractionalised into satoshis, hundred million per bitcoin. And the really cool thing is that Bitcoin is a world currency that no central bank or government controls.
FRIEND: You’re shitting me?
ME: No, I’m dead serious.
FRIEND: Let me get this straight. Are telling me that you have spent some of your own, real money to buy some of these bitcoin things that don’t exist?
FRIEND: And keep them in a “wallet” that doesn’t exist?
FRIEND: You’re out of your mind.
ME: Maybe, but I don’t think so.
FRIEND: (realises that I really am dead serious) Well…where does this “encrypted protocol” come from?
ME: Apparently it was written by a person…or persons… called Satoshi Nakamoto.
FRIEND: What do you mean “or persons”?
ME: Well, nobody really know if it’s one or more people, male or female.
FRIEND: Dear God! And this algorithm that this…whatsisname…?
ME: …Satoshi Nakamoto….
FRIEND: …this algorithm he, she or they wrote gives out bitcoins to anyone who wants them.
ME: No. Only to miners.
FRIEND: Miners?! You said bitcoins don’t exist, except in the cloud.
ME: Yes. As encrypted algorithms.
FRIEND: Then what the are the miners mining?
ME: It’s a bit complicated, and I don’t really understand it myself, but the miners are like serious maths boffin geek guys who use hardcore computing power to do these really complicated sums called a hash, that are easy to reproduce but impossible to reverse so a hacker cannot easily reverse-engineer the sum from its answer.
FRIEND: Okay, you lost me there.
ME: The point is that the sums that these miners “mine”are really hard to do and take a lot of energy and time. So when the miners (the maths boffin geek guys) finally do a hash (sum) that the Bitcoin protocol (uppercase “P”) accepts as valid according to the rules it has laid down, it (the Bitcoin protocol) then “pays”the miner some bitcoins (lowercase “b”) that the miner then can sell on for dollars or pounds.
FRIEND: So the miners get real money for these sums.
ME: No, the miners get bitcoins.
FRIEND: That they then sell for real money.
ME: Yes. But don’t forget that “real”money is just paper with a picture printed on it that everyone agrees has a certain value. Just like bitcoins.
FRIEND: At least I can put paper money in a real wallet.
ME: So you keep all your paper money in your wallet?
FRIEND: Obviously not.
ME: Exactly. Most of your money is an encrypted algorithm in your bank account that is also just an encrypted algorithm…just like a bitcoin wallet. So what’s the obsession with “real”?
FRIEND: At least I can go to the bank and take it out when I want to.
ME: Only if the bank allows you to, as the Cypriots recently discovered. The cool thing about bitcoins is that they cannot be confiscated by a bank or government or anyone alse. There’s no bitcoin “bank” where you keep your bitcoins, only your wallet. And you are the only person on earth with access to your wallet. It’s like being your own bank. That’s why you lose everything if you lose the password/key to your wallet.
FRIEND: (after another long silence) Okay, suppose I get me some of these bitcoins, what can I buy with them?
ME: At the moment, not much. But more and more shops and places are accepting them as payment . But I’m not buying bitcoins to use to buy things. I’m buying them as a hedge.
FRIEND: Against what?
ME: The world economic depression.
FRIEND: What depression?
ME: The one we’re in.
FRIEND: We’re in a recession, not a depression.
ME: We’re in a depression disguised to look like a recession by the printing of trillions of dollars and pounds and yen and God knows what other currencies. Sooner or later (and I believe it will be sonner) those trillions are going to bite the world economy in the arse because there’s no way that we can pay them back. It’s like the God of all bankers somewhere in the universe is calling in the loan and our governments who borrowed those trillions on our behalf cannot pay, so he’s coming to repo whole economies. And then we'll see this "recession" will show its true colours.
FRIEND: And that’s why you’re buying bitcoins?
FRIEND: What’s stopping the God of all bankers from taking your bitcoins?
ME: The only way he can do that is to put a gun to my head for the key to my bitcoin wallet. By the time it comes to that the world will be in such chaos already that my bitcoins will be the least of my worries. Until then I’m buying bitcoins. They’re very cheap now because so few people in the world are buying them, but when the crunch comes there’s a very good chance that lots more people will want to buy them and because the supply of bitcoins is limited and cannot be expanded by any government, they could be worth a lot.
FRIEND: How much?
ME: No idea.
FRIEND: This Bitcoin business sounds risky to me.
ME: It is. But how safe are you feeling about the world economy at the moment?
FRIEND: You could lose everything on Bitcoin.
ME: Sure, but only if I put everything into Bitcoin. I might be mad, but I don’t put all my eggs in one basket.
FRIEND: So you’ve still got some of that paper money that you don’t trust.
ME: Yes, but I’ve also got bitcoins. All you’ve got is paper money.
(Longest pause of the conversation)
FRIEND: Sounds too complicated to me. Can I have another beer?