This is part 9 of a series of short cryptocurrency “explain it like I’m five” posts. If you’re just joining us, start here: Crypto ELI5 Part 1: What is a blockchain?
This series of blog posts is meant for the absolute beginner in cryptocurrency. They are also meant to be concise and easy to understand. If you’re interested in learning about crypto, some of the history of crypto, and how to get started with using crypto, follow along! We’ll be adding a new post daily and each post will build on the one previous to it.
Bitcoin, a first generation cryptocurrency
The whole cryptocurrency movement began with Bitcoin a little over a decade ago, and since then it has exploded into thousands of different currencies.
The whole picture gets pretty complicated, but at its heart Bitcoin is pretty simple. It’s just a store of value. It has value because we agree it has value – because when you want to trade it, someone else will give you something else of value in return for it – just like dollars or gold. Its job is to hold that value for its owner, and increase that value over time. It doesn’t do a whole lot besides storing a number – or many numbers – in a digital wallet. Those numbers represent the amount of Bitcoin a person owns.
So what makes Bitcoin special? So many things! Probably too many to cover in a short blog post, but we’ll touch on the highlights.
First, Bitcoin gave us a decentralized system in which it is no longer necessary to trust a third party with our money. The decentralized nature of Bitcoin makes it so we don’t have to depend on and put our trust in the actions of a government or a bank to keep our money safe and influence the value of our money. The reality is that with traditional currencies (fiat), you have to trust a bank to hold your money, and hope that they don’t lose your money. Sure, governments create programs like FDIC Insurance, but that will only cover part of your losses. Governments can also print more Fiat whenever they see fit. In other words, they have the ability to reduce the scarcity of their own currency and drive up inflation.
This brings us to our second point: Bitcoin creates scarcity. There will only ever be a finite number of Bitcoins mined. This increases the scarcity of Bitcoin and makes it deflationary. Its value will increase over time as it becomes more scarce and as demand increases.
Third, the “trustless” system that Bitcoin created facilitates peer-to-peer transactions. If I need to send money to someone using Fiat, I need to wire money through a bank, use western union, or some other intermediary that charges expensive fees. With Bitcoin and a crypto wallet, I can simply send funds to another person’s wallet address. No third party necessary.
Finally, Bitcoin introduced systems and technologies that paved the way for more innovation in the crypto space. The blockchain, distributed ledgers, DAOs, and proof-of-work all made decentralization and the crypto ecosystem possible. They also opened the doors for new systems and tech that made new cryptocurrencies possible.
Check out the next installment in this series: Crypto ELI5 Part 10: What is a smart contract?
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