You have probably heard the stories of Bitcoin millionaires. Some are still in their teens which makes me want to pull my hair out.

You’ve probably also heard stories of people losing millions of dollars on Bitcoin when it slid by more than 75% in a single year.

In any case, there is something to this internet coin.

I’m going to explain everything you need to know about Bitcoin in 7 minutes.

Let’s get into it.

On the go? Watch my video HERE.

To understand Bitcoin, you only need to answer three questions.

1. What is Bitcoin?

2. How does it work?

3. Why does it have value?

Let’s take it from the top.

What is Bitcoin?

Bitcoin is recognized as the first successful decentralized cryptocurrency. Let’s break that down.

Successful?

At this time, a single coin is worth $40,000. Yeah, I’d say successful.

Decentralized?

This means there is no single controlling entity that governs the currency.

For instance, let’s take the US dollar as an example of a centralized currency.

If I decide tomorrow to counterfeit billions of US dollars and go on a spending spree, businesses are not going to be able to tell that it’s fake money. The citizens of the United States rely on the government to make sure that the supply of money is legit, otherwise inflation would be out of control.

On the other hand, Bitcoin does not require a trusted third party because of the Bitcoin network and the blockchain. More on that later.

Cryptocurrency?

A cryptocurrency is a purely digital currency that uses encryption to verify transactions.

Let’s use the U. S. dollar once again as a counterexample.

The dollars in my account are tied to my identity. I rely on my bank to confirm that it is me before they allow dollars to be spent from my account.

On the other hand, the Bitcoin in my account is not tied to my identity at all. It is encrypted using a private key. The Bitcoin in my account cannot be moved without the private key. Therefore, whoever knows the private key owns the account.

Imagine a public P.O. box that is made of glass. Everybody can see the number on the P.O. box, and everybody can see all the Bitcoin inside the P.O. box, but unless you have the key, you can’t take any of that Bitcoin out of the account at all. In this example, the P.O. box itself is like the Bitcoin address. The number on the P.O. box is the public key.

When the public key and the private key are fed into an encryption algorithm, a unique signature is formed. Everybody can see the unique signature, but it does not give away the private key.

This is how modern encryption works.

Since everybody can see this unique signature, everybody can verify the transaction. Now, I realize this raises other questions. Why would anyone else want to verify my transaction? I will get to that in the next section.

The most important thing to remember is that transactions are verified by encryption and not by a trusted third party, like a bank.

How Does Bitcoin Work?

All traditional currencies require a trusted third party to verify 3 things:

1. Security of transactions

2. Security of supply

3. Security of creation

Again, Bitcoin does not need a trusted third party due to advances in blockchain technology.

Let’s tackle all three of these one at a time.

Security of Transactions

When you decide to pay for a good or service with Bitcoin, you and your partner in the transaction do so on the Bitcoin network.

The Bitcoin network contains 2 things:

1. The Bitcoin addresses like the P.O. boxes

2. The blockchain is a distributed public ledger. Simply put, it’s a receipt that contains a history of every single Bitcoin transaction in the entire history of Bitcoin. It’s a long receipt. And everybody on the Bitcoin network has a copy of this receipt that updates in real-time.

Moving Bitcoin from one address to another requires you to update the blockchain. Any changes to the blockchain that are not agreed upon by everyone get rejected.

This same concept also comes into play when verifying the total supply of Bitcoin.

Security of Supply

Just like moving Bitcoin from one location to another, adding new Bitcoin to the total supply requires you to change the blockchain.

I think you will agree that counterfeited money is not good. If you think inflation is bad now, just imagine if everybody was able to just print as many dollars as they wanted. The same goes for Bitcoin.

This brings us to the next topic: How are new Bitcoins created?

Security of Creation

New bitcoins are created in a process called mining. Bitcoin miners use their computer power to check and confirm Bitcoin transactions.

Many transactions are grouped into what is known as a block. Each block needs to follow certain cryptographic rules. Once a block is completed and 100% verified, it is added to the blockchain.

Earlier we asked the question: Why would anybody want to verify my transactions?

Well, now we know the answer: because people get paid to verify everyone’s transactions on the Bitcoin network.

There is not an infinite supply of Bitcoin.

The Bitcoin network is set up to slowly decrease the supply of new Bitcoin that is allowed into circulation until eventually there will be no more new Bitcoin. The way this is achieved is by cutting the reward for newly created blocks by half every 4 years. At the current rate, there will be no more new Bitcoin by the year 2140.

When the last Bitcoin is mined, Bitcoin miners will only receive a small fee for their trouble in helping verify the transactions of the other users.

Why Does Bitcoin Have Value?

This question is much easier to answer than how much value Bitcoin has.

When it first started, it was worth less than a penny per coin. At its highest, it was over $60,000 per coin. Talk about an insane range of possibilities.

It is true that for a currency, Bitcoin has great currency properties. I mean, let’s just look at this list. It’s interchangeable, non-consumable, portable, durable, divisible, securable, transactable, predictable, decentralized, able, programmable,… all the ables.

But the real reason that Bitcoin has any value at all comes down to one factor: Social Acceptability. Any cryptocurrency could theoretically have the same properties as Bitcoin or better.

For instance, Bitcoin is very energy-intensive when it comes to mining. Bitcoin uses way more energy than what is necessary because Bitcoin miners compete to be the first ones to mint new Bitcoin. As a result, Bitcoin is not exactly green. And yet, Bitcoin is the most socially accepted cryptocurrency.

The most important metric to consider is usage. Not only do 75% of retailers intend to accept Bitcoin by the year 2025, but there are also a lot of big names that are accepting it right now such as Microsoft, AT&T, and Burger King, just to name a few.

The trend is looking pretty positive, but speculation plays a massive role in the valuation of Bitcoin.

If it is true that Bitcoin will continue on its current trajectory of increasing use in day-to-day operations, then Bitcoin will continue to be valuable. On the other hand, if the world moves on to a different cryptocurrency, perhaps a greener one, then the value of Bitcoin will disappear quickly.

If it’s still too early for you to jump on the Bitcoin bandwagon, you can always invest in stocks and ETFs that tend to perform well during a market crash or times of high inflation.

Click HERE if you’d like to see my top 5 recession-proof ETFs, or if you prefer to invest in individual companies, click HERE to see my top 3 recession-proof companies.

Until next time.W