Crypto

Using Cryptocurrency

Remember Grandpa? From our last post about Bitcoin? Yeah, that nice old farmer who sold potatoes. He'd give you a small sack of potatoes and in return you'd hand him a $1 bill. Boom. Transaction complete. No middle man.

Well, these days there is almost always a middle man, whether you need him or not. You pop into the corner store for a bag of chips and a water. Three bucks. You whip out your phone, wave it like a magic wand over a black box, and in an instant you've just paid the store owner for your goods. Oh, well, you paid him about $2.90, the other dime went to Visa. Quite the racket, huh?

What if we could cut out the middle man? What if every transaction—no matter how simple or how complicated—could be completed fairly, and securely, without anybody other than the two parties involved exchanging anything? What if a third-party didn't need to know about every purchase you make?

Well, that can happen with Bitcoin.

A Dollar Transaction

It's time to zoom in a little and uncover how a transaction in bitcoin works.

First, let’s look at our analog transaction by pretending you are Grandpa with a sack of potatoes to sell me. I have a dollar bill in my pocket. You have a sack of potatoes. You hand me the potatoes, and I hand you the dollar bill. Now you have a dollar in your pocket, and I don't. Pretty simple, right?

My dollar was physically put into your hand, and your potatoes were put in mine. You know it happened because you were there. You touched it, felt it, and could even smell it if you wanted to. You didn’t need a third person there to help you make the transfer. You didn't need a bank to confirm that I handed you the dollar. This type of analog transaction can safely occur between two total strangers without the need for us to trust each other.

The dollar is yours! I can’t take it back because I no longer have control of it. The dollar left my possession completely. You of course, can do whatever you’d like with the dollar. You can spend it, gift it, or save it. The point is, you don’t doubt that I gave it to you, even if you don’t know or trust me.

But this was a simple transaction between two people standing face-to-face. There are millions of different types of transactions taking place each day, from the simple farmer's market cash purchase, to a mortgage signing, to a tanker of oil being bought from halfway around the world.

Bitcoin was invented to bring into the digital world the same ease, and security, to any of these transactions.

A Digital Transaction

Let’s unwrap this a bit to see how a digital version of our potato encounter might work these days without a third party being involved. I don't have a dollar bill on me, but I have a photo of it on my phone—a digital dollar. I open my phone app and text you a photo of the dollar, and tell you it's yours. Would you hand me the sack of potatoes? How do you know that the specific dollar I had in my phone is now yours?

Even if you see me text you the photo of the dollar, how do you know it’s the real deal, and not just a photo? Could you then text that photo to someone else in exchange for, say, a bottle of Coke? Digitally, we could all be sending dollar bill photos around as many times as we wanted, and each one would look identical to the previous one. If you know and trust me, perhaps you could simply believe that I did indeed pay you, but what about in a transaction between two strangers?

As you can see, a digital exchange of money is a bit of a problem. This is the problem that up until now has been solved by banks, and services like Visa and Paypal. You might ask me to send you payment via Paypal so that you know the money arrived into your account. PayPal will be happy to comply, and it is very efficient at doing so, but they will want their cut in exchange for providing a secure transaction. Instead of earning a dollar for your potatoes you earned maybe ninety-seven cents instead.

Now, there isn’t anything wrong with PayPal’s business model. There is room for a third party to offer security in exchange for a small percentage of each transaction. But without a doubt, the digital transaction will result in you receiving a little less than the dollar that I sent to you. Every single time.

Before bitcoin, there wasn’t a way to conduct such a simple transaction as me digitally handing you a dollar without the need for a third-party to authenticate the transaction and give you peace of mind. This goes for every type of transaction. The mortgage signing couldn't complete without wire transfers between bank accounts, with the associated fees. And that ship full of oil sure isn't going to leave the dock before contracts are signed, and millions of dollars are moved between accounts with a lot of checks and balances in between, taking a lot of valuable time.

The Ledger

How does Bitcoin solve the problem of digitally exchanging money? Since a dollar can be digitally reproduced an unlimited amount of times, there needs to be a way to authenticate who owns the original dollar. A way to keep track of where that dollar has traveled. A place where it is being kept track of all the time. A ledger.

But not just any ledger. We can't have an accountant in charge of entering every transaction to keep track of things. No, this ledger, since it is digital, needs to live in its own world, and be updated automatically. Putting someone like an accountant in charge of it once again requires that a third-party participate in the simple transaction of me buying your candy bar. Putting someone in charge puts us right back where we were originally. Nobody is going to take on such a big responsibility unless they are adequately compensated for the task. Now we're no better off than having Visa or Paypal in between us taking their 3% cut. Not to mention, we'd still have to put all our trust in this third-party.

But what if the third-party was everyone? Instead of the ledger existing on a third-party’s computer, what if it could live on everyone’s computer? By making the ledger available to everybody, there is no need to trust any one individual or entity.

Further, to the above, what if every transaction ever made with digital dollars was recorded on this ledger? By making the ledger and transaction visible to everyone, there is no doubt that I no longer have the dollar. Nor is there any doubt that you have the dollar. It would be impossible both to use your digital dollar for more than one exchange, and impossible to slip any phony digital dollars into the ledger.

By having a trustworthy ledger, the act of me “handing” you a digital dollar becomes official. Once again, I can’t cheat you, and you do not need to trust me in order to have a secure transaction. In fact, you could participate in this network too, updating the ledger and making sure it is authentic through a process called mining.

Now, before you tell me that you aren’t interested in doing accounting just to sell a candy bar, let me assure you, somebody else is. Why? Because under the rules that govern Bitcoin, whoever updates the ledger first will earn a small amount of bitcoin as compensation. This is mining, which we'll discuss in another post. Since the ledger is available to everyone, it is impossible to falsify the numbers because other people are also trying to update the ledger and earn some bitcoin for themselves. That is what Bitcoin is all about—providing a digital means to conduct a transaction in a way that is as safe as physically hand a paper dollar bill to another person.

With Bitcoin, the transaction behaves just like an analog transaction. The system constantly monitors the exchange of bitcoin between parties and ensures that when I hit the pay now button, the bitcoin that I had in my pocket is now in your pocket, and you can safely hand me the candy bar without worrying about whether you will get paid, or if the bitcoin that I sent to you is the real McCoy. When you see the transaction appear in your wallet you know it is done. It is yours and can't go back without your say so.

Bitcoin
This is simplified a bit. We'll discuss bitcoin/crypto transaction fees in a later post. (click to enlarge)

Real World Use

The benefits of a system that is constantly being monitored and updated are obvious. Let’s take a real live example of a transaction that DIDN’T occur because Bitcoin didn’t yet exist.

When I was 19, I was shopping for a used car. Perusing the classifieds one Saturday, I came across the kind of car I had been looking for, and the price was low enough that I knew it would sell quickly. Wasting no time, I called the seller and went to look at the car immediately. After looking under the hood and taking my obligatory test drive, I was ready to call it mine.

Now, I had been saving for years for a car, so I had the ability to pay for it. The problem was, my savings were at my bank, and remember it was Saturday? The bank wouldn’t open until Monday. If the car were owned by a friend or family member, they might be willing to hold the car for me until Monday when I could go to the bank, but what if I change my mind by then?

Other potential buyers were calling and asking if they could come look at the car also. The seller didn’t like the idea of turning them away until he was paid in full. Even though the car was a great deal, the seller didn’t know if he would get a lot of calls, or just a few. Since he paid good money for the classified ad, he didn’t want to be put in a position where I fail to show up on Monday, and the few other interested parties were already turned away.

No, the seller told me, he couldn't hold the car over the weekend for a total stranger that might never come back. Ok, I thought. “How about a check?” “Not a chance,” was his reply. Those of you that remember writing checks also remember how easily a check could be cancelled before actual money was transferred, or how people could write a check with no money in the bank to back it up. No, this car was going to be sold to the first party that could hand him the full amount in cash.

With the bank closed, and the seller unwilling to hold the car for two days in hopes that a total stranger would follow through with a promise to pay, I lost out on the deal. Someone with a pile of cash in his wallet had come along instead.

If Bitcoin had been around this wouldn't have happened. There would have been no need for anyone to wait until Monday for the bank to open. With the click of a few buttons, my money would have transferred to the sellers online wallet, and he'd have known it was done. A completely legitimate transaction of funds done in seconds, with nobody else involved.

The freedom to transact safely and securely, without the need for a third-party intermediary is game changing.

Recap

To sum up:

Bitcoin is essentially online money. Only a certain amount of bitcoin will ever be created. It's decentralized and no government or entity can ever produce more of it. This means it won't be subject to inflation. When our government prints more dollars it makes the money we have in our hand worth less. This can't happen with Bitcoin.

Bitcoin is decentralized. This means that no one person is in charge of it. This is what makes it secure. No one, two, three, or ten people can collude to steal your money. The system of checks and balances that create the ledger make that impossible.

The transfer of Bitcoin is simple. You send your Bitcoin electronically to someone else's wallet by entering in their wallet key, which they provide to you. Nobody else needs to know about it. It's simply a long block of numbers and letters going from one place to another.

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I've been trading and traveling my entire adult life. I'm currently trading from my boat in the Caribbean. Over the years this has gotten easier and easier to do. Drop the anchor, tether your phone to your laptop, browse some charts, and trade. At Wanderer we first began investing in Bitcoin in 2017 when it was worth $2,500. Fortunately, we recognized its potential, unfortunately, we didn't realize it even earlier. Today it is worth about $50,000, and we believe it is here to stay. Bitcoin will have its ups and downs along the way, but years from now we expect it will be much higher, and we'll still be bopping around in the islands.

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