In the first two topics that I have covered, I discussed wallets for holding bitcoin and I explained transactions and how they work within the bitcoin ecosystem. For the third topic, I need to explain some more basics about money so everyone can further relate how money works. Based on what is explained, you should be able to understand how to translate all of the terms over to the bitcoin way of thinking.
Before bitcoin started, everyone used fiat money to buy things. A merchant that was selling a hat – for example – would set the price of a hat at a certain price. For this example I will say that the hat cost $5.00. If the buyer saw this price as acceptable, they would give the merchant the five dollars in the local currency. (I will use US Dollars for this example.) The buyer would get the hat and the merchant would get the five one-dollar-bills.
The Six Truths
There are six truths that applies to any currency:
1. scarcity – supply cannot be manipulated like fiat money which causes the boom and bust cycles in the economy
2. durability – gold and silver will not rot which makes them a great store of value
3. fungible and divisible – they can be divided into small, interchangeable amounts which make them ideal for trade.
4. portable – Their high concentration of value allows you
to carry and store substantial value
5. proven – gold and silver have been used as money for over 6000 years of recorded history.
6. use value – both gold and silver have tremendous use value in industry. The highest use value though is in their role as money
Each dollar represents one US dollar. Everyone that uses the dollar (or your currency) understands what the value of that dollar is and what it can buy.
The smallest unit of measurement in USD is the penny and has a decimal place of 0.01. It is the smallest unit needed for that currency.
Now I am going to translate all of that into the bitcoin way of thinking.
The price of one bitcoin can move up and down so much, it is a good idea to keep an eye on the exchange rate. Yesterday it might be worth $250. Today it may be worth $300. It is hard to predict for the average user. (Here is the site I use for viewing the exchange rate.) Knowing what a bitcoin is worth helps merchants set the price of goods and it helps buyers/users understand what one bitcoin is worth.
Since the price of bitcoin can change so rapidly, when you go to buy or sell bitcoin, there will be a specific buy and sell price. Exchanges do this because they anticipate the currency moving in a certain direction and try to minimize the difference between what the value is when it is first agreed-upon-purchased and when it is actually purchased. When you go to buy bitcoin for the first time, you will see that difference.
Unit of Measurement
The smallest unit of measurement in bitcoin is called a Satoshi and in decimal format it looks like this: 0.00000001. There are a total of 8 decimal places.
Having eight decimal places is a really good idea because this currency is global and it can represent much smaller units of measurements in currency where they have small value.
USD BTC CEDI (GHS)
0.01 = 0.00004038 = 0.0381
Shown here is what an American Penny looks like across all three currencies. Instead of having a standard 2 digit unit after the decimal place, it can go all the way to eight places and is more accurate to show value.
This concept of measurement in bitcoin can be a difficult one for most people to understand. I wanted to have one of my blog posts about this because when this is understood, you can start to understand bitcoin better overall.
Physical vs. Digital
Bitcoin is a digital currency so there is no physical money to hold on to. This is also something that can be difficult for anyone to understand. Bitcoin is held in wallets and the value is shown as the balance on your wallet. For some older people, it will not make any sense that you cannot hold any piece of paper or coin. There are some companies that still do produce a physical coin, but that is not very common. Since all transactions are digital and users within bitcoin do not normally use physical coins, the whole idea is more for having souvenirs then for any real purpose. Bitcoin – as a digital currency – means it is made to exist inside of the digital world. Not physical.
It is a similar thought from when people would move from writing physical letters to people to then using email to write letters to people. There was no longer a stamp needed to send the letter. You didn’t have to put the letter into an envelope so that is would stay private. Email is free to send and receive and it is basically private between the two users.
Some of these concepts translate easily and some are harder to understand. For further explanation, please contact me and I can further explain in better detail. Understanding these basics will help to further your knowledge of bitcoin. That will help you feel more comfortable when you start to use bitcoin in the real world.
Thanks for stopping by and stay tuned for our next topic in the Bitcoin 101 series!
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