1Before we talk about Bitcoin I want to take a moment and talk about money.
2What is money exactly?
3At its core, money represents value.
4If I do some work for you, you give me money in exchange for the value I gave you.
5I can then use that money to get something of value from someone else in the future.
6Throughout history, value has taken many forms and people have used a lot of different materials to represent money.
7Salt, wheat, shells and of course gold have all been used as a medium of exchange.
8However, in order for something to represent value, people have to trust that it is indeed valuable
9and will stay valuable long enough for them to redeem that value in the future.
10Up until a hundred years ago or so we always trusted in someTHING to represent money.
11However something happened along the way and we've changed our trust model from trusting someTHING to trusting in someONE.
12Let me explain.
13Over time, people found it too cumbersome to walk around the world carrying bars of gold or other forms of money,
14so paper money was invented.
15Here's how it worked: a bank or government would offer to take possession of your bar of gold;
16let's say worth $1000,
17and in return, that bank would give you receipt certificates,
18which we call bills, amounting to $1000.
19Not only were these pieces of paper much easier to carry,
20but you could spend a dollar on a cup of coffee and not have to cut your gold bar into a thousand pieces.
21And if you wanted your gold back,
22you simply took $1000 in bills back to the bank to redeem them for the actual form of money,
23in this case that gold bar, whenever you needed...
24And so, paper began its use as money as an instrument of practicality and convenience.
25However as time progressed, and due to macroeconomic changes,
26this bond between the paper receipt and the gold it stands for was broken.
27Now, to explain the path that led us away from the gold standard is extremely complex,
28but suffice to say that governments told their people that the government itself would be liable for the value of that paper money.
29Basically we all said "let's just forget about gold and trade paper instead".
30So people continued to trade with receipts that are backed by nothing but the government's promise.
31And why did that continue to work?
32Well, because of trust.
33Even though there is no actual commodity backing paper money,
34people trusted the government and that's how fiat money was created.
35Fiat is a Latin word that means "by decree".
36Meaning the dollars, or euros or any other currency for that matter have value because the government orders it to.
37It's what is known as "legal tender" - coins or banknotes that must be accepted if offered as payment.
38So the value of today's money actually comes from a legal status given to it by a central authority,
39in this case, the government.
40And so the trust model has changed, from trusting someTHING to trusting someONE,
41in this case, the government.
42Fiat money has two main drawbacks:
431. It is centralized:
44You have a central authority that controls and issues it.
45In this case the government or central bank.
46And two, it is not limited by quantity:
47The government or central bank can print as much as they want whenever needed and inflate the money supply on the market.
48The problem with printing money is that because you're flooding the market with more money
49the value of each dollar drops, so your own money is worth less.
50When you see prices rising throughout the years
51it's not necessarily that prices are rising as much as that the purchasing power of your money is dropping.
52You need more dollars to buy something that used to "cost less".
53Once fiat money was in place, the move to digital money was pretty simple.
54We already have a central authority that issues money,
55so why not make money mostly digital and let that authority keep track of who owns what.
56Today we mainly use credit cards, wire transfers, Paypal and other forms of digital money.
57The amount of physical money in the world is almost negligible
58and is getting smaller with each year that passes.
59So if money today is digital, how does that even work?
60I mean, if I have a file that represents a dollar,
61what's to stop me from copying it a million times and having a million dollars?
62This is called the "double spend problem".
63The solution that banks use today is a "centralized" solution;
64they keep a ledger on their computer which keeps track of who owns what.
65Everyone has an account and this ledger keeps a tally for each account.
66We all trust the bank and the bank trusts their computer,
67and so the solution is centralized on this ledger in this computer.
68You may not know this, but there were many attempts to create alternative forms of digital currencies,
69however none were successful in solving the double spend problem without a central authority.
70Whenever you give anyone control over the money supply,
71you're giving them enormous power and this creates three major issues:
72The first issue is corruption;
73power corrupts, and absolute power corrupts absolutely.
74When banks have a mandate to create money, or value,
75they basically control the flow of value in the world,
76which gives them almost unlimited power.
77A small example of how power corrupts can be seen in the Wells Fargo's scandal
78where employees secretly created millions of unauthorized bank and credit card accounts
79in order to inflate the bank's revenue stream,
80without their customers knowing about it for years.
81The second issue of a centralized system is mismanagement.
82If the central authority's interest isn't aligned with the people it controls
83there may be a case of mismanagement of the money.
84For example, printing a lot of money in order to save a certain bank or institution from collapsing,
85as what happened in 2008.
86The problem with printing too much money is that it causes inflation
87and basically erodes the value of the citizen's money.
88One extreme example for this is Venezuela,
89where the government has printed so much money,
90and the value of it has dropped so much,
91that people are no longer counting money but are weighing it instead.
92The last issue is control.
93You are basically giving away all control of your money to the government or bank.
94At any point in time the government can decide to freeze your account and deny you access to your funds.
95Even if you use only cold hard cash
96the government can cancel the legal status of your currency
97as was done in India a few years back.
98This was the state of things until 2009.
99Creating an alternative to the current monetary system seemed like a lost cause.
100But then everything changed.
101In October of 2008 a document was published online by a guy calling himself Satoshi Nakamoto.
102The document, also called a whitepaper,
103suggested a way of creating a system for a decentralized currency called Bitcoin.
104This system claimed to create digital money that solves the double spend problem without the need for a central authority.
105At its core Bitcoin is a transparent ledger without a central authority,
106but what does this confusing phrase even really mean?
107Well, let's compare Bitcoin to the bank.
108Since most money today is already digital,
109the bank basically manages its own ledger of balances and transactions.
110However the bank's ledger is not transparent and it is stored on the bank's main computer.
111You can't sneak a peek into the bank's ledger,
112and only the bank has complete control over it.
113Bitcoin on the other hand is a transparent ledger.
114At any point in time I can sneak a peek into the ledger and see all of the transactions and balances that are taking place.
115The only thing you can't figure out is who owns these balances and who is behind each transaction.
116This means Bitcoin is pseudo-anonymous;
117everything is open, transparent and trackable
118but you still can't tell who is sending what to whom.
119Let's explain this with an example.
120You can see on your screen certain rows from Bitcoin's ledger.
121We can see that a certain Bitcoin address sent 10,000 Bitcoins to another Bitcoin address in May of 2010.
122This specific transaction is the first purchase that was ever made with Bitcoin
123and it was used to buy 2 pizzas by a guy named Laszlo.
124Laszlo published a post back in 2010
125asking for someone to sell him 2 pizzas in exchange for 10,000 Bitcoins.
126Well, someone did,
127and now the price of these two Pizzas is worth well over 100 million dollars today.
128Bitcoin is also decentralized;
129there's no one computer that holds the ledger.
130With Bitcoin, every computer that participates in the system is also keeping a copy of the ledger,
131also known as the Blockchain.
132So if you want to take down the system or hack the ledger
133you'll have to take down thousands of computers which are keeping a copy and constantly updating it.
134Like most money today, Bitcoin is also digital.
135This means there's nothing physical that you can touch in Bitcoin.
136There are no actual coins,
137there are only rows of transactions and balances.
138When you "own" Bitcoin it means that you own the right to access a specific Bitcoin address record in the ledger
139and send funds from it to a different address.
140So what does all of this mean?
141Why is Bitcoin such big news?
142Well for the first time since digital money came into existence
143we now have an alternative to the current system.
144Bitcoin is a form of money that no government or bank can control.
145Think about the time before the Internet, how centralized the flow of information was.
146Basically if you wanted information,
147you could get it from a few major players like the New York Times, The Washington Post and others like them.
148Today, thanks to the Internet,
149information is decentralized and you can communicate and consume knowledge from around the world with the click of a button.
150Bitcoin is the Internet of money and it's offering a decentralized solution to money.
151Bitcoin has several advantages over the current system.
152First, it gives you complete control over your money.
153With Bitcoin, you and you alone can access your funds.
154How you actually do this will be explained in a later video.
155No government or bank can decide to freeze your account or confiscate your holdings.
156Bitcoin also cuts a lot of the middlemen from the process of transferring money.
157This means that in many cases Bitcoin is cheaper to use than traditional wire transfers or money orders.
158Also, unlike fiat currencies, Bitcoin was designed to be digital by nature,
159this means you can add additional layers of programming on top of it and turn it into "smart money",
160but more on that in later videos.
161Finally, Bitcoin opens up digital commerce to 2.5 billion people around the world
162who don't have access to the current banking system.
163These people are unbanked or underbanked
164because of where they live and the reality that they have been born into.
165However, today, with a mobile phone and a click of a button
166they can start trading using Bitcoin, no permission needed.
167Today there are several merchants online and offline that accept Bitcoin.
168You can order a flight or book a hotel with Bitcoin if you like.
169There are even Bitcoin debit cards that allow you to pay at almost any store with your Bitcoin balance.
170However the road toward acceptance by the majority of the public is still a long one.
171The revolution of money began in 2009
172and these days we are seeing it change money as we know it.