What makes a Bitcoin Valuable?
Hello – I’m new to the steemit community, and I wanted to write a post that will help those that click on the ‘cryptocurrency’ trending tag to understand where a ‘bitcoin’ gets its value from.
Firstly, What is Bitcoin?
Bitcoin is a form of electronic cash (source Wikipedia). It is a digital token to which an individual has access to, that can be traded from person to person, similarly to how you have access to your Bank Balance in your Bank Account.
If you have £100 in your bank account, then you can give an instruction to your bank to say who you want to send your £100 to. Your ability to send this money determines the fact that you own it.
With Bitcoin, you have a unique account address (similarly to a sort-code and account number), and also a password (similarly to an internet banking password) that allows you and only you to send the balance in the account to a different person.
Bitcoins: The Points System
A Bitcoin can be analogised as simply a points system that someone made up. There is a limited number of Bitcoins that are deemed to exist, so the more people wanting these points (the higher the demand), then the higher the value that a person will pay to get a hold of one.
People have paid up to $20,000 for just 1 of these points, but where did this Perceived Value come from?!
Here is my explanatory analogy on how a made up points system became a global industry worth over $10billion:
My Analogy: The “Points” System
Josh decides with his 3 friends that they are creating a points system. They all agree that everyone has 10 points each; so in total there are 40 points. Everyone is given a piece of paper to write down / record how many points each person has at any given time.
So at 13:00 hours on Monday, here is what everyone’s identical piece of paper looks like:
Name – Number of pts
Josh 10
Ben 10
Mark 10
Liam 10
At the moment, these 40 points are deemed ‘worthless’ by each of the 4 people.
Liam gets bored easily, and he decides he’s willing to swap one of his currently worthless points to try and get some food out of the others, so he tells Josh – “If I give you 1 of my points, will you give me your chocolate bar?”.
Josh thinks about it – he bought the chocolate bar at the shop earlier in the day for £1, but he’s not really hungry, so he decides to give it away to Liam in exchange for 1 point.
Now, to record the exchange of points, all 4 boys must update their pieces of paper, to show that Josh now has 11, and Liam now only has 9. Here’s what the 4 new pieces of paper look like:
At 13:10
Name – Number of pts
Josh 11
Ben 10
Mark 10
Liam 9
There are still 40 points, apart from the swap of 1 point, nothing else has changed. However the ’perceived value’ of what a point is worth has been created. If the chocolate bar cost Josh £1, and he traded it 1:1 for 1 point, then it’s fair to believe that each point is worth £1 each! Ben & Mark have 10 points each, so they think to themselves, 10x £1 = £10, so my previously worthless points are now worth £10, judging by Josh and Liam’s transaction.
At 13:20:
Another friend Paul comes along. He wasn’t around when they decided on the points system, so he doesn’t have any points. He heard that Josh traded his £1 chocolate bar for 1 point of Liam’s, so he knows that 1 point is probably worth £1.
However, none of the boys want to sell.
Mark finally says, “Paul, if you really want some points, I will sell you 1 point for £2, so that you can join in.”
Paul agrees – so Mark and Paul broadcast the transaction to the group, so that they each update the points balances on their pieces of paper. At 13:20, here’s how the pieces of paper look:
Name – Number of pts
Josh 11
Ben 10
Mark 9
Liam 9
Paul 1
The number of points always adds up to 40 points, because that is what was agreed at the start.
But Paul paid £2 for his point, so the previously worthless points now have a higher perceived value of £2 each point. If Liam kept hold of his point earlier, he would have had £20 worth of points, but instead he has £18 worth of points and a £1 chocolate bar instead.
Great, but what has points got to do with Bitcoin?
A Bitcoin is exactly this, it is a points system that someone made up. In total, there will only ever be 21 million bitcoins (this is the number that the creator decided). Every 10minutes, everyone updates their pieces of paper with everyone’s balances on them, based on the transactions that happened.
With Bitcoin, there are not just 5 friends with pieces of paper, but there are tens of thousands of computers that make up the network. Every 10minutes, every one of these computers agree on the points/bitcoin balances that each person/account has.
If one person’s computer breaks, or the government shuts it down, the remaining tens of thousands still hold the account balances on their computer. The only way to shut it down is to simultaneously shut down all the computers in the network, which is frankly impossible.
Introducing the ‘technical’ words
Each 10minutes that happens is called a Block. A Block is simply a record of the entire account balances at that specific time. 10minutes later, several transactions happen, and therefore there is a new state to the ledger of account balances.
The Blockchain
In the Points Analogy example, in the first block (the genesis block), everyone has 10 points each.
BLOCK1
Name – Number of pts
Josh 10
Ben 10
Mark 10
Liam 10
< 10minutes later, 1 trade has happened between Josh and Liam >
BLOCK2
Name – Number of pts
Josh 11
Ben 10
Mark 10
Liam 9
The balances have changed for Josh’s and Liam’s account, and now the latest state of the chain is Block2.
In 10minutes time, Paul comes along and makes a transaction, which produces the 3rd state of the block – Block3.
These blocks are called the Blockchain. If you follow all the blocks back, you will reach the genesis block where the first 4 boys had 10points each. This un-editable history of blocks is what keeps the chain of transactions secure.
Each computer in the blockchain verifies that only the specific total number of points/bitcoins exist, and that each point has followed a path from the genesis block. This means that a person can’t come along and make-up points, because all the other computers will reject their attempt at giving themselves points, because there is no history of the points back to the genesis block.
…. I’ve decided to stop here for the moment. If this has helped anyone then please comment and I will continue the post!
- KidOnTheBlock Xx