Bitcoin – A Simple Explanation

paragonfinancial

Elean
Hi everyone, welcome to the podcast and thank you for tuning in. I’m Elean Mendoza and I’m here with Evan Shorten, the firm’s founder and principal. 

Evan
Hi everyone, I hope you’re all doing well and staying safe. This week we’re going to cover a topic that has gotten a lot of positive and negative attention in recent years – Bitcoin. This episode is going to be an introductory overview of Bitcoin and its underlying technology. We’re not going to cover any other digital assets today, but we will in future upcoming episodes. So please subscribe to the podcast and don’t miss out when those are released. You can subscribe on the Apple Podacts app, Stitcher Radio, or YouTube.

Elean
So I want to start the conversation by explaining two very different concepts relating to digital assets. Those are blockchain and cryptocurrencie.

Cryptocurrency refers to the various coins and tokens that you’re probably most familiar with – Bitcoin, Litecoin, XRP, and so on. Cryptocurrencies get all the attention and it’s what the media usually refers to when they say “bitcoin went up or bitcoin went down.”

Ironically, the real value and technological innovation is the blockchain. The blockchain is the network that operates a cryptocurrency, an application, or a process. For example, the Bitcoin network is the blockchain that powers bitcoin; the Ethereum network is the blockchain that powers ERC20 tokens, smart contracts, and decentralized applications; the XRP protocol is the blockchain that powers XRP tokens and their suite of institutional bank services.

So with that, let’s go ahead and ask the basic question. Evan, what is Bitcoin?

Evan
To answer the question in a more informative way, let’s start with the bare bones basics and add a bit more detail as we go on. The most simplistic explanation is that Bitcoin is a decentralized, peer-to-peer, digital currency. Now that sounds cool and modern, but what does that really mean?

Well, a digital currency is simply electronic money, and in this case, it’s electronic money that exists on the internet.

Peer-to-peer is a type of network where the end users interact directly with each other. Meaning, I can send money directly to Elean or he can send money directly to me without the need of a 3rd party service like Paypal, Venmo, Western Union, or a bank.

And lastly, unlike traditional currencies like the US Dollar, Euro, or the Yen, which are controlled by central banks and their respective governments, bitcoin is fully decentralized. In other words it has no government or central authority that issues bitcoin or is responsible for processing transactions.

Elean
Ok, so let’s walk through a very simple explanation of how bitcoin works. Evan, let’s say I send you 1 bitcoin. What happens now?

Evan
Once Elean sends bitcoin from his wallet to mine, computers all over the world use mathematical functions to independently verify every bitcoin transaction, including the 1 bitcoin Elean is sending me. This is what’s commonly referred to as bitcoin “mining.” As each transaction is verified and time stamped, I’ll end up receiving the 1 bitcoin Elean sent. All these transactions are then added to a public and permanent list of transactions called the blockchain.

The blockchain itself is decentralized and stored on all of those computers who worked to verify bitcoin transactions. The blockchain is the universal public record of how much bitcoin every wallet owns and every transaction ever processed.

Elean
And now this is a perfect time to talk about the blockchain. In the beginning of the podcast we mentioned that blockchains and cryptocurrencies are two different things. Crytocurencies are the medium of exchange, but blockchains are the underlying technology that power a network.

With respects to bitcoin, the blockchain is defined as a shared public ledger, and now let’s break that down into a more simple explanation.

Evan
As we previously mentioned, every computer on the bitcoin network saves a copy of the blockchain. Meaning, the blockchain itself is decentralized and shared among all actors. Everyone shares access to the same information at all times.

The bitcoin network’s blockchain is public. Anyone with tech savviness can install a bitcoin node and connect their computer to the bitcoin network. Once connected to the network, every transaction ever recorded can be searched and viewed.

Lastly, the blockchain at its core is simply a ledger or an accounting book if you want to think of it that way.

Elean
It’s a very big accounting book on the internet accessible to anyone who wants to view it.

Hopefully this episode was able to clarify some of the mystique surrounding bitcoin. In reality bitcoin and the bitcoin network is heavily based on mathematical concepts, cryptography, and computer networking. Our goal was to explain bitcoin in a way non-technical listeners could understand.

If you want to learn more about bitcoin and the bitcoin communities that exist, you can visit bitcoin.org and the bitcoin wikipage. If you’re really interested in taking a deep dive, we’ll post the original bitcoin white paper in this episode’s blog post located on our website.

With that, we hope you enjoyed the podcast and we want to thank you for tuning in. Please don’t forget to subscribe and we’ll see you here next time.

Download the Bitcoin White Paper HERE

Visit Bitcoin.org HERE

Visit the Bitcoin Wiki HERE

Author: Paragon Financial Partners

Paragon Financial Partners, Inc. is a Registered SEC Investment Advisor. The topics discussed herein are for informational purposes only and should not be considered as a solicitation or offer to purchase or sell any securities. The financial strategies and guidelines discussed herein may not be appropriate for everyone as each individual circumstance is unique. Please review all tax information with your tax professional. Please review all legal information with your legal professional. If you have any questions or would like to speak with us, please contact us by phone at (310) 557-1515 or by email at info@paragonfinancialpartners.com.

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