Can Anyone explain Bitcoin? Here’s my attempt. (originally published 8.9.2017)

There has been a lot of buzz lately about Bitcoin. The base price of a Bitcoin keeps going up and up, and sometimes down and down.

For years, I’ve struggled how to understand and best describe Bitcoin.

I had a conversation years ago with Brock Pierce (legend in the BC space), and he was explaining bitcoin as it relates to an Apple. Something out you can take a small bite, but still have the apple. Actually, I don’t really recall the analogy at all. I do remember saying to Brock, “all that is great, but WHERE do you get the Apple?”.

See, to me, I always like pragmatic ways to look at and attack a problem. The Bitcoin to me was like a glorified Gift Card.

Meaning, to get a Bitcoin, you first had to BUY a Bitcoin.

This to me was like buying a $100 American Express Gift Card, except there were two major differences.

1- The Price of the Bitcoin can fluctuate wildly, unlike a $100 Gift Card;

2- You could at least redeem your gift card at specific retailers, unlike a Bitcoin which still to this day does not have the redemption options.

So, in an effort to try and explain Bitcoin again, I tend to look at it like the following:

First, Bitcoin, as it stands today, is more like a stock investment. Most people are playing Bitcoin hoping it goes up (much like a stock), but could just as well crash (much like a stock), and recently went through a split (called the Fork in Bitcoin parlance) (and this was much like a stock).

Technically though, the Bitcoin (unlike a stock) is not tied to any true performance of an underlying company.

Think of Apple or Amazon. The stock price can go up or down based on how well the company does as it relates to growth or earnings.

Instead, the price of BitCoin is based on supply and demand. While the same dynamic does exist for stock, it is usually driven by investor interest in the stock based on the financial success of the company.

For Bitcoin, this isn’t quite the same. Bitcoin “demand” is driven by the ever-increasing number of new investors (Or, as they should be properly called to avoid SEC scrutiny- Token Holders).

Thus, the more interested parties who want to purchase a token, the more the demand continues to rise.

The “supply”? Well, that one is tricky as it has to do with term called mining, and CPU’s, and computer systems cranking out these elusive “Coins”.

So, think of it like this. There is an Automotive plant that is selling cars for $10,000. However, that plant can only build 1,000 cars per month (supply). If there are more buyers for the car (demand), than there are cars available, then the price of the car will go up.

Let’s say the price of the car has now increase to $12,000 and you really want one. How do you get it?

1- You wait for a new car to get created, OR

2- You buy it from someone who already owns a car

This means as more people own cars, more potentially become available for sale. If the demand for the car goes up, people are willing to pay “over sticker” for the car they really want.

For Bitcoin, this means someone who bought the token at a lower price, may want to sell it to someone for a higher price, and thus make a profit. However, again, if there are more buyers than sellers, the price continues to go up.

At some point the Automotive company (Bitcoin) may add more capacity (miners) to create more cars. Part of this comes by adding more computers, machines and “Miners”. Part of it was possibly going to come from the Fork (which is like a Stock Split).

So, the Demand drives the price side of a Bitcoin, like a stock, but the supply side is restricted to the amount that can be created/mined. Thus the supply is controlled by an underlying system, not a particular company’s performance.

With all that being said, let’s play the What if game. What if….You had invested $1,000 in Apple? Google? Amazon?

Have you ever wondered what Bitcoin would have been worth if you had invested years ago? Well, you can play the “What if” game by using this Calculator to see how much a Bitcoin investment would have been throughout time.

For the second part, lets address what I call liquidity.

Liquidity means if you own a bitcoin, how many places are there where you can either A- convert the BitCoin to a local currency, or B- find a seller willing to accept the Bitcoin as payment.

Again, back with the gift card analogy, and the areas where you can “spend” your card.

If you think about a Gift Card in a simplistic way, it is simple a plastic card, which holds an account number, and that account number is tied to a specific digital number (which is your dollar amount), and when that card is presented, those digital amounts (money) moves from your card account (buyer) into the business account (seller).

So a gift card enables you to;

1- Go buy a card;

2- Pick the amount of the card based on how much money you contribute to the card (thus converting a physical currency into a digital one);

3- Use that card at various accepting merchants;

4- Have the account (your digital currency) moved from one account to another.

Now how that happens through the entire credit card system is something to behold. For this “Interchange” to occur, there are fees all along the way.

That is how the current credit card industry makes money.

The future of Bitcoin is in looking at where you would be able to transact or spend that Coin, just like you can now present a gift card to a Merchant.

To address that future, we should first look to the past.

Think of the Credit Card industry as it exists today. For the most part, you can walk into almost any business in the world (online or offline) and present a gift card for payment.

However, that wasn’t always the case. Many years ago, I spent a lot of time looking into creating my own global currency (more to come on that later).

In my research, I looked heavily at the inception of the Credit Card industry. When it first started, there were many dynamics;

1- No one knew what a credit card was, as they had never seen one (Thank you Bob Wieseneck for changing that. Bob created the first credit card ever called- SPS or Sears Payment System).

2- No Merchant would really accept a credit card. What was it? A piece of plastic that would somehow deposit money in your account? (Thank you, Bruce Marcus and Visa, for changing that).

3- Eventually plastic cards become a Global Form of digital payments where Credit Cards/Gift Cards are now accepted around the world. (Thank you Roger Van Scoy and First Data).

What does that have to do with Bitcoin?

Well, it’s easy.

1- Not everyone knows what a Bitcoin really is.

2- There aren’t very many locations, businesses, stores, etc. that will accept the Coin as payment.

3- While Bitcoin is global in a sense, there is still not a true network tying it all together.

So, the example of Bitcoin being a glorified gift card, is in the reference to using Bitcoin as a payment mechanism.

And, if you recognize I used “American Express” as the gift card as opposed to Visa? Why? There was of course a reason for that. Even today, American Express is not accepted at merchants around the world.

For Bitcoin to make progress as a true currency option for payments, more merchants will have to be willing to accept the BC as payment.

While this may seem simple at first, it’s actually much more complex than you would think.

There still needs to be settlement systems, transfer networks, conversion and FX rates, etc.

All of this is of course solvable and there are hundreds of companies working on it.

The biggest risk to a seller in accepting Bitcoin is the fluctuating price.

Can you imagine running a business where you accept payment for your goods and services, and then see your account balance drop by 30%?

That is the challenge with the Bitcoin being a traded commodity.

If you’re into the stock and into gambling, take a look at Bitcoin.

If you’re into looking at future business mechanisms, then start studying Bitcoin now.

Again, this may not be the perfect analogy (and for any of you Bitcoin Experts out there feel free to correct, clarify, or codify my examples).

Last, keep an eye out for my next article.

In that one, I’m going to tackle the following: “How Ethereum is like the iPhone and an ICO is like an App”