If I’d known when I heard for the first time about Bitcoin 4 or 5 years ago If I had invested all I had If I had known I would be 26 years old today and I’d have a little fortune with a house a sauna, near a lake with fibre-optic network. But no. My life is more about making videos with economics in it, I wondered “what is the bitcoin”? Is it really a currency? A revolution ? A good investment ? A utopia ? A sting ? And yeah, before going further I possess the equivalent of a hundred of euros in Bitcoin, I prefer to tell you. So, the first document I read to understand the subject better, was the White Book from 2008. A kind of report which explains what the Bitcoin is. It’s signed Nakamoto Satoshi, a pseudonym and ten years later, we don’t know more about this individual. Fortunately, I’m sure somebody in the comments will tell us who he really is We can read in this White Book that : If the system works relatively well for most of the transactions it suffers from inherent weaknesses to a system based on confidence.” To make transactions remotely, today we have to resort to a trusted third party banks and services such as Visa, Mastercard or PayPal We lend our money to a bank. We ask the bank for a transaction and above all, we trust it. And as nothing’s free, this confidence has a cost. It’s also good to know that a payment made by a bank has a sort of “cancel” button we can block our credit card if our credit card is stolen by someone and if you’re watching that from an online merchant POV that means there’s still a doubt on the fact that the money he sees on his account is really there. Definitely, as nothing’s free, this doubt has also a cost. These costs and doubts in payments can be avoided by the presence and physical money (cash) It’s necessary to have an electronic form of payment based on a cryptographic proof instead of being based on confidence With a cash payment, there’s no third-trusted party, instead, there’s a physical proof. This banknote is in my hands, the transactions took place and it’s final. This idea of “electronic cash” , in fact, it’s to have the same mechanism but instead of having a physical proof, we’re going to replace it by a cryptographic proof. This idea doesn’t come from nowhere, the bitcoin is described as directly inspired by the works of “Cypherpunks”, a programmers’ community highly interested in coding and virtual currency. After the publication of this white book and the creation of this new currency, nothing.. The Cypherpunks didn’t interest most of the people in the 80s and nobody wasn’t really interested 30 years later. Because well… The current system works relatively well in the majority of the transactions. So, in 2009, there was no crazy expectations to replace something which works well most of the time. Following the Bitcoin price, we see a rather little augmentation and then in 2013, while its price highly increases, posts, blogs, articles, videos and reports appear with titles like: BITCOIN It’s all the rage But what the hell is it ? Bitcoin is going bananas To make it simple the Bitcoin is an account book a list of transactions and that’s it. Well, ok, that’s a big account book nothing to be excited about, I know. But to go from an account book to a cryptocurrency we have to come back to the beginning of trade Unlike what we generally think, to barter, so to exchange wheat against an apple at a certain time hasn’t really been THE way the exchanges were made in the past. Because an economy based on battering is a total nightmare but I’ll probably do an episode on this subject one day. In fact, among the first traces of writing, we find account books. Documents which say somebody has to give some barley to Kushim or things like that Even before making coins, there were kind of account books engraved in pieces of rocks. Ever since, we still use the same system with some innovations of course but it remains that a bank is firstly a big account book and promises. Promises to register our transactions well and to allow us to remove when we want or nearly, all of the money we’re lending to our bank. So the Bitcoin is in this technological tree, it’s a list of transactions where it’s written that Gal Sal received 5 Bitcoins from Kushim Until today, nothing fundamentally revolutionnary but we can see what is taking place today when I use euros to buy something to Kushim who’s on the other side of the world. So I’ve lend € 100 to my bank, represented by a figure on my cheques account and I can send 20 euros to Kushim who’s in another bank. There’s a risk of simplifying so the two banks will have to communicate to transfer money so to do a -20 next to my name on their account book and the Kushim’s bank will write a +20 next to his name. But what these two banks will exchange is the debt they have towards Kushim and I and so these banks have to trust them mutually. The Bitcoin works in a rather different way. There’s a unique account book accessible for everybody and where everyone can register his own transactions. But at the beginning, you can feel the thing coming. Many people tried to hack the system to change it to their advantage or video markers ready to talk about it to have a million views. That’s where the Bitcoin is really interesting ! To secure the account book instead of having a unique backup on a highly secured computer there are many identical on each different computers. Individually, they are less secured but we don’t care because a true version of this account book is a predominant version. So to change the account book we should whether hack 51 % of thousands of computers which have a version or having an incredible calculation power Thanks to this system the account book is protected, while being public and each one can register his transactions without a person or an organisation being in charge of doing it. Now, a question remains : how do we exchange money with a virtual money in practice ? In the Bitcoin’s case, we only need an address a password and to receive Bitcoin from somebody From then, to send an amount of Bitcoins, I need the address of the recipient, I enter my password and I choose the amount of the transaction. I ask for the registration of this transaction in the account book and once it’s written, the transaction actually took place. But there’s a difference between the crypto currencies and the fiat currencies like Euro, Dollar, Rand (South Africa), Lek (Albania), CFA Franc or the Dobra Because these currencies are legal they can’t be refused in a debt settlement And fiat means in latin : then so be it So the Euro is a currency because it’s the case. It doesn’t mean that money isn’t real, that it’s a plot and so on… We can see it as a convention the same kind of convention as the one we use when we have a red light that means we have to stop. It’s practical. So the meaning of a red light is as real as the value of a €1 coin. the difference between a fiat transaction and the bitcoin is that in this last case it’s not a debt which goes from a bank to another. It works more as cash or any other physical object, which is the promise of the White Book at the beginning. These Bitcoins exist, they can’t be duplicated and they are yours because only your password can make them move. I haven’t yet talked about the “coin” part in Bitcoin, I kept that for the end because it seems to be the most interesting part for the people at this moment. With the Bitcoins, we exchange value which is not in Euros or in Dollars. The exchanges are made with units of Bitcoin, There is no legal stock price but that doesn’t mean it’s illegal simply we can’t pay our income tax with it for example. The other difference with the fiat currencies it’s the quantity in circulation isn’t controlled by a central bank. there is like thousand billions of euros in circulation, and if tomorrow the ECB decides to put 92 more tonillions in circulation she can do it. Well, in theory…And its main objective is written in the Article 2 : To guarantee the stability of prices in the Eurozone and so to make sure the €1 today could be worth the same in 2 years. So the quantity of a money varies according to the needs estimated by the Central Bank. The Bitcoin is different. There are today 16 millions in circulation and the maximum is 21 millions. Once these 21 millions reached there will be no more Bitcoin. These new Bitcoins are added according to the Protocol described in the White Book, the creator of the Bitcoin chose that the quantity mined ,would be so, in a pseudo logarithmic way It would be in fact divided in 2 little by little until it reaches in 2140 the number 21 millions of Bitcoins This distribution of Bitcoin is a kind of award for the miners who are essential to the securisation of the account book. That’s them who validate the transactions. Each transaction is in fact registered in a block, for them to be added in the account book the miner has to solve a very difficult math problem. That’s like asking a computer to solve a giant sudoku and once he has finished then we have the proof he has done the work. In the same way as the first person who completes this sudoku and tweets me he’s finished, will have the proof of his work . For the others, we don’t know, they should have cheated! So the first miner who will complete the task receives an award in Bitcoin and validates the transaction block. Then he passes to the next block while hoping he’ll also be the first one to solve it. So in fact the miners are in competition each one has to have the most power to solve calculations the quickest. The name of miners is well chosen, they dig more and more in depth to have access to a resource which gets rare. We could almost think that the Bitcoin simulates what is taking place with precious metals such as gold and in fact it’s the case. “The stable addition of an amount of new pieces is similar to gold diggers spending resources to add gold in circulation” At the end, there are still many things to say about the way in which the Bitcoin works we can summarize it to a big public account book secured in a cool way, which doesn’t depend on any central authority and which simulates gold to be worth. But presented like that it seems a bit of a technological overkill to find with a simple electronic cash as it was promised in his White Book. It shows that the cash we have in our hands is a complex technology to imitate, but it’s perhaps also because the Bitcoin is a bit more than electronic cash. It also enters in a certain philosophical movement, a rebellion against the actual financial system, a technological experience to get rid of the banks and the governments. But the Bitcoin is also the beginning of a new industry it exists now hundreds of cryptocurrencies Most of them take the principle very close even to close to the Bitcoin some of them on the contrary add functionalities to try to answer to different needs Ethereum for example tries to develop possibilities of programmables currencies and the use of its blockchain for other uses. There could be a whole subject to do on this and I know Micode is interested to do it on his channel so maybe we’ll come to add a bit of economy when he’ll do so. The Ripple is created by a company and aims to replace the backend of transactions between banks so instead of presenting it as a new ccurrency it should be a kind of new bank protocol. The Dash, the Monero or the Zcoin are other types of cryptocurrencies which try to make transactions completely anonymous whereas the Bitcoin only hides them behind pseudonyms and there are hundreds or even thousands of cryptocurrencies or projects linked to the blockchain about which I’m not going to mention the name here. I know I went quickly through the technical aspect of the Bitcoin for those who want to go in depth I listed all there is to know in the description below The objective is mainly to understand what the bitcoin is economically and not only how it works technically Next week I planned a second video on the subject to know if the Bitcoin is a revolution or a sting … And above all, a big thanks to Micode for coming, check out his channel It’s IT, high tech, cybersecurity, and for all the curious and even those who know nothing about it. A very good channel but well, don’t necessary subscribe he already has 400 000 subscribers, however you can click on the bell to be informed for the next episode. It was Stupid Economics! On that… High tech, cybersecurity for all the curious ones and even those who know nothing about it. A very good channel but don’t subscribe to it, he already has 400 000, I’m not sure he needs more However, you can click on our little bell… *laughs* Valentin :”Hell yeah kids !” Arnaud :” Hell yeah, our little bell !”