Explaining Bitcoin to a Layman
Every day, while watching the morning news, my mom comes up with this question “What’s the thing with Bitcoin?” Yes, I mean every single day.
And to my surprise, one fine morning, I had to finally sit and explain her. Yes, we had “The talk.”
Don’t look that surprised. We daily come across so many people to whom we have to explain things in a layman language. Especially, when it comes to technology, it will be first our parents for whom we have to and need to explain things like we are back in the 80s and of course, not to forget the fact that it’s both technology and finance.
Bitcoin is Money
Now, when you are trying to explain this whole thing of Bitcoin to a layman, never ever start with “Bitcoin is a cryptocurrency.” Wondering why? Because as soon as you say this line, you will lose the other person then and there. Explaining something unfamiliar with something equally unfamiliar actually never works.
Instead of that, you can try and say, “Bitcoin is just like usual money and in some ways, shares.”
Of course, the next immediate question would be “How can it be both?”
Your answer should be “Well, it is like regular money because it has value and you can utilize Bitcoin to purchase goods and services. It’s also like shares as its price fluctuates depending on demand and supply. But yeah, there åre no dividends or any other advantage that a share has other than the value that Bitcoin has on a given day and time.”
Feeling like they’re getting there? Don’t worry. They will be by the end of the post. Right now, they still have too many questions to ask.
“So do you have Bitcoins now? If yes, then show us.” Your mom may ask
You might be thinking what the heck you are going to say. Chill.
“No mom, Bitcoins are like the money we usually have on the credit cards. Or when someone sends you the money via wire transfer and then you directly use your debit card to purchase something. The money changes places without touching our hands. You can never ever touch Bitcoins because they are…” You need to stop there. I know you will end that sentence saying “a cryptocurrency or virtual currency” about which they have absolutely no idea.
Rephrase the sentence, “It looks a bit different than our usual currency, but this is, in fact, one of the ways it is similar.”
“We get money from the bank that is usually printed by the government. Now, where does Bitcoin come from? Who prints that?” Asks mom.
Huh, I know. Toughest question.
Mining Gold = Mining Bitcoin
“OK. Now just like we mine gold out of the ground, Bitcoin is also mined. There are only 21 million Bitcoins that can be mined and out of which 17 million Bitcoins are already mined.”
Mom interrupts, “Wait. You said they weren’t real and we touch Bitcoins and all. What’s that?”
“No mom, they aren’t real. I’m just trying to give you an example.”
“Now just like gold, we have to mine Bitcoin. But instead of mining out of the ground, in Bitcoin case, we mine through computers that have a lot of computational power. Just like the special equipment gold miners use to mine gold, the Bitcoin miners also utilize special computers that have special features as Bitcoin mining consumes a lot of electricity. One Bitcoin can be broken down into as many little pieces and distributed in Bitcoin exchange platforms for the money.”
Mom shoots one more question, “How do they break Bitcoin into small pieces?”
“Just like one dollar can be broken down into pennies, similarly, one Bitcoin can be broken down into smaller denominations of currency. As of today, one Bitcoin is $9, 379.99 worth.”
“One Bitcoin is $9, 000? What the heck?”
“Mom, it’s like gold. You buy invest in gold today in anticipation of its price will increase. Similarly, today, you buy one Bitcoin value $9, 000 and two days later if the same Bitcoin is worth value one million you sell it. It’s how it works.”
“So there are good reasons why should invest in Bitcoin,” Mom says.
Keep it there. Only the good stuff.
“Yes mom, there are no bank or any other financial institutions involved. They have zero control over Bitcoin.”
Mom gives both surprised and pleased glances.
“No bank or government has to approve the transactions. If you want to purchase a Bitcoin, you give the other person your account number and they will send it just like the regular money transactions. And if you want to exchange your Bitcoin for goods and services then you just need to have your own private key.”
“What private key? We already have a safe deposit box in a bank. What do you need another private key?” Mom shoots again.
“No mom, it’s not a physical key. It’s the type of code that we usually use to access online banking or a pin number we use to withdraw money from ATM machines.”
Mom looks a bit relaxed. Before she shoots another tougher question, let’s give her another benefit of having or owning a Bitcoin.
“Bitcoin can be used anywhere, mom. We don’t have to go to currency exchange platforms to get money of that nation. Bitcoin is a global currency. No single nation can over inflate or devalue Bitcoin. The price and value of the Bitcoin stay same across the globe.”
Time to purchase something
“How am I supposed to purchase something with it when I can’t see or touch?” Blurts out, mom.
“The whole concept of Bitcoin exists in the cloud. All transactions, I mean every single transaction of Bitcoin is tracked and stored in a ledger where anyone can access it. Nobody can change/modify/manipulate the ledger.”
“That ledger is called as a Blockchain.”
I know, it isn’t working.
“It’s like a digital ledger mom. Similar to QuickBooks which can manage itself as long as all Bitcoin transactions are logged.”
“Then my Bitcoins are stored in that digital ledger?” Mom asks, abruptly.
“No mom, they are not.”
“Then where’s my money? My Bitcoins?”
“Good question. Unspent transactions are on the blockchain. In order to access these Bitcoins, you have login into your wallet.”
“You said no real money. Then why do I need a wallet?”
“It’s a digital wallet mom. Similar to the one you have on your iPhone. Just like we have unique numbers printed on our regular currency, Bitcoins also have their own IDs which cannot be modified.”
I can see that expression. She is understanding. Huh, better late than never.
Where can I spend my Bitcoins?
“For now, people are using it for investment purpose mom like gold. Because the profits are good. However, you can use it on platforms that accept currencies like Bitcoin as well.”
“How good are the profits?” Mom asks in a dilemma
“As it is new on the market, the prices of Bitcoin have been pretty volatile. They were two brothers who became billionaires after investing in Bitcoin. Of course, they made an investment in millions and got returns in billions. So it depends on how much investment you want to make.”
Mom gets back to her usual daily chores and then there is calm again.
Mom comes back suddenly and asks, “What do you know about Ripple?”