What Is Bitcoin? [VIDEO]

Sergio Valdés

Dec 17, 2020

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The value of Bitcoin

We as people give money its value. Not banks, not governments, each of us gives value to pesos, dollars, euros, and every other currency. If everyone in Mexico decided today that the peso had no value at all, then the peso would stop having value. That is also why some currencies are worth more than others.

Now that we understand where the value of a currency comes from, let’s talk about a newer type of money that appeared in 2009. Bitcoin is a cryptocurrency. The word cryptocurrency basically means that the currency is secured and authenticated through computer code. By using mathematical processes and encrypted code, every bitcoin has a signature of authenticity that confirms its validity. This encrypted signature prevents you from simply copying and pasting bitcoins the way you would duplicate an image or a file on the internet.

Bitcoin is a new class of currency in the sense that it is not made of paper or metal, but of ones and zeros inside computers. What is interesting is that people still give it value even though it is not backed by a bank or a government.

How can we trust a currency like this?

To answer that question, we need to go back to the beginning of Bitcoin. It all started with an anonymous figure using the pseudonym “Satoshi Nakamoto.” Nobody knows who Satoshi Nakamoto is. It could be an 18-year-old teenager or a 78-year-old grandmother. No one knows the person’s nationality or gender. What we do know is that Satoshi created Bitcoin in such a way that no government or bank has authority over how bitcoins are created or how they work. The creation of bitcoins is controlled by a network of anonymous computers around the world. But how can we trust that the people operating those computers won’t use them to create more bitcoins than they should?

The simplest way to explain how a bitcoin is created is to compare that network to a classroom. Imagine that a child named Chuchito wants to pay one bitcoin to his classmate Juanito. The problem is that Chuchito has a terrible memory, and Juanito is always taking advantage of that by saying he was never paid. So Chuchito asks the rest of the class to take out their notebooks and write down that on this specific day and at this specific time, Chuchito gave one bitcoin to Juanito. That way, even if Juanito later says he was never paid, the other students can open their notebooks and confirm what really happened. Even if Juanito has a friend who lies for him, or if one student writes it down incorrectly by mistake, the majority of the class will still have matching records.

That is essentially what happens with all Bitcoin transactions. Every time bitcoins are bought, sold, or transferred, that information is recorded across computers around the world that are part of the network, and the records are compared to confirm what actually happened. Now, why are those computers spending processing power and memory on this? The answer is simple: each time they help validate the record, new bitcoins can be issued as part of the process. The people who run these systems to earn bitcoin are called bitcoin miners.

Bitcoin is popular for many reasons. Some people do not trust governments or banks to safeguard their money and place more trust in a decentralized network that validates transactions. The fact that Bitcoin’s value and authenticity are not verified by a single institution or government, but by thousands of anonymous computers, gives some people confidence in the neutrality of the system. With traditional currencies, people have to trust the bank, trust that it will not misuse their money, trust that it will not distort the currency’s value for its own benefit, and trust that it will protect them from identity theft and card fraud, things that have happened and continue to happen around the world.

Other people like the relative ease of making anonymous purchases with bitcoin and the fact that they can change the digital address they use to make those purchases. Still others are interested in bitcoin as an investment, believing it could eventually become one of the most widely used currencies in the world, although the fact that it is not regulated by any government makes it theoretically a very risky investment.

The value of bitcoin has changed enormously since it was created. One of the first known bitcoin transactions was used to buy pizza. Today, one bitcoin can be worth more than 356,082 Mexican pesos.

The Bitcoin system is designed so that there is a maximum number of bitcoins that can ever be created. It is expected that the last bitcoin will be issued around the year 2140. And that leads to an interesting question: do you think limiting the number of bitcoins will make it more valuable or less valuable? Leave a comment on the YouTube video or inside the Robin platform.

If you want to learn more about finance, you can explore our finance course for children and teens.

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