Episode 59: What Is Bitcoin and How Does It Work?
Have your question answered on the Money Wisdom Question Series!
Today’s question is, “What Is Bitcoin and How Does It Work?”
Representation of Value
In a sense, Bitcoin is a currency, like the dollar. Let’s say we’re back in ancient times and I wanted to buy a goat from you. I would have to find something you wanted and trade you that item for your goat. Maybe a bale of hay, or a tractor, something like that. So, I’d have to go find this item, give it to you, and then you would give me your goat. That was trade back then. Well, obviously that was inefficient, so people came up with money. In ancient days it was coins, today it’s dollars for us in the US. If I want to buy your goat today, I simply give you dollars and then you use those dollars to get what you want. I could pay you in Bitcoin, and so think of it like a currency. Bitcoin is also a representation of value. There’s a lot of technology that goes on behind it, you’ve probably heard the words blockchain and so on, but Bitcoin itself can be used as a currency.
Challenges with Bitcoin
The challenge with Bitcoin is the value compared to the dollar bounces all over the place. You’ve probably heard that Bitcoin was worth $60,000 and then it went back down to $40,000, then it went back up to $60,000. That’s because the value of converting Bitcoin to dollars jumps all over the place, and that is a challenge right now with using Bitcoin as currency. So, will we use Bitcoin in the future as currency to represent something where if I want something from you, I can give you a Bitcoin and you can give me that item? Maybe it’s a car that you’re looking to sell? Yeah, possibly, but the value needs to stabilize, or we need to agree that we’re just going to use Bitcoin as currency versus dollars or euros or whatnot.
Takeaways
It is absolutely a valid store of value, a representation of value that we can use. But again, if we’re going to convert Bitcoin back to dollars, that becomes a challenge. So, think of Bitcoin as currency. It’s in its young stages compared to a currency. There’s some secrecy that was touted as we’re going to be able to keep those transactions secret from taxation and so on. That has yet to be seen, but Bitcoin is just simply a store of value.
Thanks for joining me and I hope you found this information helpful!
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