What is Bitcoin?

Matthew Howells-Barby: Hello. Bonjour. Caio. Welcome to the first episode of series one of the Decrypting Crypto podcast. Where we take the complex and confusing world of cryptocurrencies and blockchain technology and distill it down into regular human language. I’m Matthew House Barby, and I’m here with my co-host, Austin Knight. Both of us have been in the tech industry for a number of years, but Austin why don’t you start by telling everyone how you got into crypto?

Austin Knight: Yeah, so I recently moved to Brazil. I’m been living there, soaking up the culture.

Matthew Howells-Barby: And the sun?

Austin Knight: And the sun, as much as I reasonably can, and I’ve been intrigued by the economic situation there. Recently went through a crisis, lots of inflation issues with the currency. And right around the same time cryptocurrency was becoming a massive force, so I’ve seen a lot of potential for crypto to change the power dynamic when it comes to currency. So I got interested in it, invested a little bit, played around with some it, and here we are today, learning about it still.

Matthew Howells-Barby: So you’re not driving your Lambo yet?

Austin Knight: No quite.

Matthew Howells-Barby: Okay. So I’ve been playing around in the crypto space for maybe a couple of years now investment-wise. Prior to that, played a little bit with Bitcoin mining, not really knowing what the hell I was doing at the time. And in all honesty, been super interested in the space, and I’ve been getting more and more involved, and that’s what brings us onto the podcast. Right? So both Austin and I collectively, we run The Coin Offering, an educational site, around all things crypto. But Austin, maybe you could give everyone out there listening a little bit of an intro into who this podcast is actually for.

Austin Knight: Yeah, I think that there’s two main types of people that would benefit the most from this podcast. The first, if you’re just now learning about cryptocurrency. Maybe you’re seen some of the news about Bitcoin rising and falling values. And maybe you’re a little bit overwhelmed by it. You’re thinking, this sounds interesting, I might want to buy some of this stuff, but I don’t really know where to begin, nor do I fully understand this yet. And of course, you don’t want to put your money into something until you actually understand it. We’re going to distill that information down into terms that you can wrap your mind around. Or you may be somebody like me a couple months ago, who has been in the tech industry, understand a lot of the dominant emerging technologies that are coming up right now, but still there’s a lot of intricacies to the blockchain and to cryptocurrency that you’re not completely sure about. And you want to make sure that you’re fully brushed up on how all of this stuff works. You’re going to benefit from this as well.

Matthew Howells-Barby: For sure. Just to give you a little taster for what’s coming in series one of Decrypting Crypto. We’re going to be covering all kinds of stuff, so things like, we’re going to show you how you go about actually buying your first cryptocurrency. What actually gives them value. What the hell mining is. You’re probably hearing a bunch of different terms. ICO’s, what are they? Things like ethereum, understanding Bitcoin. And that kind of brings us on to the topic of this episode, episode one of series one, which is all folks trying understanding what Bitcoin actually is.

Austin Knight: That’s a big question, Matt.

Matthew Howells-Barby: It is a pretty big question, right? And I think that’s where there’s a whole lot of question, and in particular, brings us into most people’s entry point into cryptocurrency as a whole. Maybe you could do a quick definition in the most layman language for everyone out there, of what kind of a cryptocurrency actually is.

Austin Knight: Yeah, so while Bitcoin might not be the most perfect entry point it is the most popular, so that’s where we’re at. Defining a cryptocurrency can get really complex. If you look up an actual definition of what a cryptocurrency is, it would be something like, “A cryptocurrency is a decentralized digital currency, that can be used like any other form of currency to buy, sell and trade.”

Matthew Howells-Barby: That makes complete sense. I understood it all.

Austin Knight: There’s so much more that goes into that though.

Matthew Howells-Barby: Oh, for sure. And I think here’s the starting point, is understanding first of all that cryptocurrency is first and foremost a currency, and we’ll come into what that actually means in a later episode. Basically hedging this against, what is a fiat currency, and what is a cryptocurrency? Anyone that started their initial bit of research, maybe you’ve done it yourself, and you’re thinking, what the hell is a cryptocurrency? And people are saying, well it’s very different from these fiat currencies. Fiat currencies very different to cryptocurrencies, are backed more importantly a controlled entity, but usually a government.

And examples of this would be like the US dollar, the Euro, the pound sterling. On the other hand, cryptocurrencies are very different. This is where people start to get a little bit confused, but please bear with us. Cryptocurrencies are not controlled by a government. More so, they’re not even controlled by any single centralized institution, body, individual, company, anything like that. They are run completely autonomously on a technology called the blockchain. But kind of before we go into that, maybe we just break down the difference between blockchain and Bitcoin, because these are two very different things. There are lots of different cryptocurrencies. There are lots of different blockchains. But they are not the same thing, right?

Austin Knight: Absolutely. So why don’t we start by just taking the example of a payment. How does that work?

Matthew Howells-Barby: Actually that’s a much better idea, I think. Okay, let’s think about this in terms of how you would go about making a payment in your current centralized banking system. So, most of us here, that are listening, probably have a bank. And let’s say I want to send some of my US dollar over to Austin. What I’ll do is I will ask Austin for his account number, routing number and I’ll maybe go online or I’ll go directly into the bank or over the phone, and I’ll make a request to the bank to send some money. Now, what a lot of people that haven’t dug into this would just think is “Well okay, then that request goes in, the money goes straight to Austin, he receives it, that’s it.” Well it’s kinda not really the case. The bank then sends this transaction through their systems, and let’s say I was sending money to Austin in Brazil, in particular.

That money may bounce over to a ton of different other countries on the way, especially if that bank doesn’t have a direct link to another bank in Brazil. So we may find that money’s bouncing over to Switzerland, Sweden and all of these other institutions is taking a bunch of extra time. More importantly, it’s take a bunch of extra cost. Because for every time this has bounced around all these banking systems, really old technologies in those banks as well, it’s racking up different fees from all these third parties along the way. Eventually after what, three or four days, at best, Austin receives his money from me and we’ve had a bunch of charges along the way. That is very different from how the blockchain works.

Let’s just take Bitcoin. So, with the blockchain what’s different is, similar to have we have account numbers and routing numbers for the bank, you have a public address. Think of that like your bank account number for Bitcoin. And you have a wallet, which is kind of like your bank account in the current banking system. In your wallet you’ll store your Bitcoins. This is a digital wallet. It’s not a physical thing. And I’d say to Austin, “Okay Austin, I need your Bitcoin public address.” Austin gives me that. It’s like a long, alpha numeric bit of text, and then I go through and I add in his public address into my Bitcoin wallet, I send the amount of Bitcoin that I want to send into the blockchain, which is almost like our version of the bank processing this transaction. That goes straight through into the blockchain.

There is a single fee attached, and the transaction is processed on the blockchain, sent directly to Austin within maybe on average, 20 minutes. There’ve been no third parties that have taken place, and it’s completely peer-to-peer. We drop all of the enormous fees. I mean we’re gonna probably come onto some of Bitcoin’s fess in particular, right? But what we’re not seeing here is all of these third parties involved in you just making a simple transaction, actually getting a cut of all these fees. And this is like the main differentiation between the blockchain and like cryptocurrencies versus making a payment in the current financial system. I think, to summarize that, it’s like speed and cost are the big benefits here.

Austin Knight: And also thinking about the fact that blockchain and cryptocurrency are not limited and controlled by national lines. Whereas USD, the Euro, those belong certain regions of the world. This is a little bit more global, so it changes the dynamic there.

Matthew Howells-Barby: Right, you can’t just have a government come in and say, “Well you know what, we need to print some more cash.” What often happens around economic crisis. Like 2008, the financial crisis, the US printed unprecedented numbers of US dollars. What that does is when you print more US dollars and push more into circulation, it weakens the value of every other dollar. That can’t be done on the blockchain because there’s no one person or entity that just says, “Hey, we’re going to change Bitcoin.” It has to happen in a very democratic way through a consensus between every single person that’s involved in this giant decentralized network. I don’t want to get too deep into that in the first episode, cause I know it can be pretty overwhelming. But I think another really interesting point to touch upon is the security aspect of Bitcoin and cryptocurrencies.

Austin Knight: How is it secured though? We know that it can be inherently insecure when you have centralized networks of currency or entities that are running your currency, like you do with fiat currency. And we’ve been talking a bunch about how cryptocurrencies are decentralized. And one of the largest benefits of this is that it makes it more secure. But how does all of that work?

Matthew Howells-Barby: Well, yeah. You look at just the news stories. If you type in “hack” or like “major hack” in Google, you’ll probably see a flurry of news articles that talk about different companies that have been hacked and personal details lost. What was it, Yahoo? Was that 2017 or 2016 where they lost …. was it billions of emails, email addresses that got leaked?

Austin Knight: Huge amounts of data.

Matthew Howells-Barby: Huge amounts of data, and more importantly, banks. Banks get hacked and have security breaches on a monthly basis. The extent to which data is lost is like another thing. One of the main reasons that all of these massive data breaches happen is because these companies, these institutions, they store and have access to all of your information, and have that all within their own systems. You get into, let’s say, in a very basic terms, you get into Goldman Sachs data warehouse, you have access to everything. On the blockchain, because all of this information is spread out across a ton of different, let’s say computer all intents and purposes right now, we’re going to go a bit deeper into explaining this in some of the future episodes. But because information is decentralized and not just stored in one location, you can’t just get into the blockchain and get access to all the information. You’d need to hack every single computer that’s hooked up to the blockchain, which is millions at this stage, and that’s only gonna get bigger. Which means you don’t have these honeypots of information or back door entries into these data warehouses where all the information can be lost.

Austin Knight: So if you want to rob a home, to use an analogy.

Matthew Howells-Barby: Right.

Austin Knight: You no longer have to break into a single house, you’ve got to break into the whole neighborhood at the same time.

Matthew Howells-Barby: That is a much better way to put it, Austin. Yeah, and I think that’s the best way to think about it, right? The whole hype around cryptocurrencies, there’s so much going on in the space, and so much news articles. But there’s also this huge, almost cult-like following. And what that stems from is that everyone that is a part of this community also has the opportunity to help be a part of, and benefit the whole of the blockchain community in the cryptocurrency networks. By literally being a part of this giant neighborhood of people.

Instead of just having one person … all right, Facebook. Cool, great company, interesting, but ultimately Mark Zuckerberg can just make a decision and go against everyone. And regardless of whether you have people who have very good intentions, the fact that they have power to make decisions over other people is not a good dynamic to create. And that’s one of the big pieces that cryptocurrencies solve. But I don’t want us to get too stuck in a rabbit hole here of going into all of the ethics and the morals around blockchain. We just want to do in this episode in particular, is bring you as a listener, up to speed with what this thing Bitcoin is. You’re not going to come away from the end of the episode and be an expert in Bitcoin. Right? I don’t think anybody is actually an expert in Bitcoin right now because it’s changing so much.

Austin Knight: Everybody who is an expert in Bitcoin was an expert in VR six months ago.

Matthew Howells-Barby: Yes, I think we’re going to see more and more experts pop up. I see Bitcoin trading experts pop up everywhere. Some just mind blowingly amazing, Facebook groups to just lurk within to see the things people are talking about. We do not profess to be experts, but we’re certainly very close to information and have at least used this technology regularly. In all honestly, I think we’re trying to make sense of a lot of this stuff ourselves.

Austin Knight: Yeah.

Matthew Howells-Barby: And that’s going to be a big part of you as a listener are going to be able to come aboard. So, let’s change speed a bit. One of the question I often get, and me and you Austin, we were talking before this episode about how you were speaking to your family, and getting more and more questions about what the hell Bitcoin is, what the cryptocurrency is. A lot of things people say, like “How is this thing different from the US dollar?” And maybe we go into something where it’s a bit of a more straight up comparison here. If we just break this down on a fundamental level, there are a few key things that separate … let’s just use the US dollar for this example.

Austin Knight: Yeah, sure.

Matthew Howells-Barby: The US dollar versus Bitcoin.

Austin Knight: So Bitcoin has a hard number in circulation. There’s a maximum number of Bitcoin that can ever go into circulation, and once we hit that number, it’s about 21 million, that’s it. There’s never going to be more of them. On the contrary, there is no limit on the amount of USD that can go into circulation. You need more money, you can print it. It’s completely fine. This changes a lot of the value dynamics that are applied to these currencies. Bitcoin has a very hard market cap that is partially determined by the maximum number of Bitcoins that can go into circulation.

Matthew Howells-Barby: Yeah, more importantly, it’s very predictable. We actually know new Bitcoin are released into circulation in a completely predictable manner. Like every ten minutes pretty much, some new Bitcoins are released into the economy. By around about, I think it’s some time in May of the year 2140, is when every one of those Bitcoins will be in circulation. That gives a huge amount of stability to know how much is in circulation. A complete constant to that will not be changed. This is written into the code of Bitcoin. Remember, all of this is software level. This stuff cannot be changed. Whereas, your main point there, is the US dollar is kinda like, this may change from one day to the next, and it’s very unpredictable.

I think the other big thing there, and we’ve touched on this a little bit, but the US dollar is controlled and backed by the state. It’s completely the government’s call on how they treat, determine, the rules and how much is in circulation. But Bitcoin, on the other hand, is not backed by any nation, any company. Bitcoin is not a company. It’s a technology. It’s software, in a sense. And this has been setup and completely runs on its own. It can sound a little bit scary. This doesn’t mean the Bitcoin can’t be used as legal tender. You don’t need to be backed by a state to actually use Bitcoin. It doesn’t need to be backed by anything. If anything, I think this prevents Bitcoin from being overly regulated or manipulated, to a certain extent. More directly, at least, in the long term, versus the US dollar.

Austin Knight: Yeah. And that’s one of the big things for me, as you start to learn about Bitcoin, it can sound a little scary and intimidating. In fact, people may say, “You know it’s not backed by anything,” which is a scary thing that we’re going to cover in later episodes. But as you learn more about it and you dive into the implications of this technology, you realize it’s actually a very good thing that it’s not controlled by a centralized entity, and that it’s not backed by a government. This means, for example, a corrupt politician cannot be elected into office, if you want to take Venezuela, for example, and completely change the national policy, destroy the economy and render people’s currency utterly useless to the point where they can’t even buy basic needs items like toilet paper and Tylenol, much less, leave the country and seek a better life. So because this is decentralized, and it’s not fully dependent on one single entity, it becomes a much more trustworthy and powerful solution.

Matthew Howells-Barby: Yeah, and I think the thing that we probably haven’t touched upon here, especially around the layer of trust … let’s just think about this. The US dollar, transactions are being made every day. People are using US dollars every day in huge, huge volumes. But, if I said to you, “Austin, how many people are using the US dollar right now?” What is the actual volume of transactions? You would have to, even if you can get that information, trust the government to release that information, and the fact that it’s true. One really powerful, and probably the most powerful, in all honesty, parts of Bitcoin and blockchain in general, is every single transaction ever made with Bitcoin is able to be seen in what is known as the public ledger. Think about this as an accounting ledger that you would have. You could go in, anyone, you could do this. You can go in and see transactions in real time that are being made by Bitcoin. These are like irrefutable transactions. You can immediately go in and see every bit that’s being used at any time. This means when transactions are made, and someone is saying that someone has paid someone, they are there for everyone to see. There’s no more, “Oh this transaction that I made to you via my bank, Austin, this money got lost.” That happens.

Austin Knight: All the time.

Matthew Howells-Barby: It’s crazy.

Austin Knight: All the time. The entire Nigerian prince scam is based on that.

Matthew Howells-Barby: Yeah, right.

Austin Knight: We just solved that whole issue.

Matthew Howells-Barby: Yeah, it’s done. This always baffles me. Where do the banks lose the money, and what happens to it? With Bitcoin that can’t happen. This is an incredibly powerful piece. And I think more than anything, if we just take a step back from a bigger picture political and philosophical point of view, building in transparency into finances and the way that the entire economy is being run. It’s such an important piece. Because right now, transparency comes, and the emphasis of that transparency comes from a government being trusted, and saying, “Hey, I’m gonna be transparent with you.” What they’re saying is, “Take my word for it.”

No matter how good their intentions are, you can’t really prove them any other way. Yeah, that’s like a big piece. But there’s a lot of people that don’t want Bitcoin to succeed and cryptocurrencies to succeed for obvious reasons. I think one of the biggest institutions attacking publicly cryptocurrencies has been the banks because this really could upend the entire financial services sector. And one phrase, that is probably one of my favorite phrases that I see all the time, and this is a common question as well … people will be like, “Isn’t Bitcoin just used by criminals? Is this basically not just the way to buy drugs, because Bitcoin is anonymous?” How do you about actually answering that question Austin?

Austin Knight: I think that as you dive into it deeper you realize that Bitcoin is much more difficult for criminals to use than fiat currency. It’s just that the nature of some of its history and ties to things to like Silk Road, those things get covered more in the media, especially by entities that feel threatened by this technology.

Matthew Howells-Barby: Silk Road, in particular, is a pretty interesting one, for any of you listening that didn’t hear about this, I would recommend Googling around the history of Silk Road. Basically, if any of you have heard of the deep web or the dark web, whatever you want to call it, there was a website called Silk Road, which I think was around 2012, 2011 that was launched, that was basically a huge marketplace for buying all kinds of awful things. Hiring hit men, buying drugs, whatever you want. I think there was human trafficking going on there. And one of the main ways that they took payments was through Bitcoin.

Now, there still has to be a facilitation to get US dollar into Bitcoin, so to say that Silk Road was basically only being made with Bitcoin is a bit of a stretch. I think certainly, it definitely helped. But I think a lot of people then attribute Silk Road to almost being a core part of Bitcoin. But it’s incredibly important to understand that those two entities are very, very, very different things. We were talking earlier, around hacking. People will say, “Well, wasn’t Bitcoin hacked recently?” No, Bitcoin has never been hacked, and it would be incredibly difficult to be hacked. But exchanges have been hacked.

Austin Knight: Yes, that’s correct. So when you talk about the security of Bitcoin, a lot of that security rests on the fact that it’s decentralized. And that for as our simple explanation that we used earlier, it’s being run and controlled by thousand, hundreds of thousands, millions of computers all around the world, and not a single data warehouse, like you would do in the case of a bank. So you would have to hack all of those computers rather than that single data warehouse. However, when you do take that currency and you centralize it in an exchange, like something like Coinbase, for example.

Matthew Howells-Barby: Just think about this like a currency exchange. As you would go, if you’re going on holiday, you’re going to go and transfer in a US dollar, you want to ship that into Euros, for example. Similarly, there needs to be a way of changing a US dollar into cryptocurrency like Bitcoin, so there’s a lot websites, Coinbase being one of the largest ones. Kraken and a few others are another big player. That’s where you go and actually make these exchanges online.

Austin Knight: Right, and in order to make those exchanges, the currency does have to be centralized to a degree. If you leave your currency in that exchange, in that centralized place and you don’t take it out, that exchange can get hacked, and you currency can be at risk. That’s why the number one rule of buying and trading cryptocurrency is that as soon as the transaction is complete, take it out of the exchange. So this can be misconstrued, especially in mainstream media and by analysts that don’t fully get how this stuff is working, to be that the blockchain has been hacked because some cryptocurrency has been stolen. But it wasn’t the blockchain that was hacked, it was the centralized exchange, which is a completely different entity, that was just holding onto the currency for a period of time. That’s what’s been hacked, and that’s how the currency was taken.

Matthew Howells-Barby: Yeah, and I think it’s important to bear in mind, these are companies that are centralized companies. Companies like any other company that you would find. That’s one of the challenges in the next episode we actually are going to be talking all about buying cryptocurrencies, and we’ll touch on some of these pieces in more detail. But one of the things I want to pull out of some of the things that you said there, was a bit around when we were talking of how Bitcoin is anonymous. There are elements to this that aren’t necessarily true. And a lot of people find that quite scary, maybe listening thinking, “Wait, so I can own currency and nobody knows that? It’s completely anonymous. Surely I could do anything with that money.”

Yes and no. The reason, first of all, why people say Bitcoin is anonymous, is because when you have a bank in the current system with US dollar, you have all of your details stored within that bank account. You’re completely identifiable by your name, you’ll have to give over your passport, publicly identifiable records, and everything will be stored by the bank on your behalf. The other thing to remember there is that the bank owns your money. You don’t own your money. They choose to give you access to that money. Then with Bitcoin and other cryptocurrencies, all you basically have is what we call your “public key” or public address, which is kind of like your [inaudible 00:27:22] account number, and your Bitcoin wallet, which gives you access to Bitcoins. That doesn’t have any of your public data stored in it. You don’t need to give over your … even your name, anything to open up a wallet.

That said, if you want to buy Bitcoin, you need to first of all transfer in some of your US dollar, your pound sterling, your Euro, whatever. And to do it, at this moment and time, go through and exchange. And when you sign up for an exchange like what we talked about with Coinbase, you have to give over your personal information. Cause they have to abide by KYC, know your customer rules, which basically say you need to be able to identify all of these people, so that it can curb things like tax evasion and things like that, so that creates kind of a foot print. We’re going to go into this in way more detail at a later point, but I just wanted to reel that piece off.

Austin Knight: It’s also important to note that the legislation is still really developing in this space right now. The United States is cracking down on this. We’ve just gotten a bunch of information on how taxes will work, and KYC laws. And ultimately, at the end of the day, it is a public ledger, even though it’s anonymous, there’s a high amount of transparency to this. It’s much more transparent that any fiat currency ever has been. So, I think that this association that cryptocurrency has earned itself indirectly, to criminal activity, is largely due to the fact that it was a fledgling technology that was not in mainstream, and was therefore a little bit more exploitable. This turned into a big media story. But when this comes full circle, when cryptocurrency really reaches the point that its ultimately heading to as being a dominant monetary form, it will be way, way more difficult to do criminal activity with this form of a currency.

Matthew Howells-Barby: Yeah, we’re going to need to find something else for us to do our criminal activity.

Austin Knight: Yeah, I know. We’re going to have to print like paper Bitcoins. [crosstalk 00:29:28] Paper currency is much better for situations like that. I’ve actually seen people handing out physical Bitcoins in Brazil. That really freaked me out.

Matthew Howells-Barby: There was actually an interesting news story I read, and this was actually a few days ago. So around 2013 there was some guy, and I forget his name, and he was basically creating physical gold coins, with like the Bitcoin logo on them. I can’t remember how he did it, but he was basically, within the coin, was printed, the public and private key to get access to that one Bitcoin. So these were like a limited release, and he actually got shut down by the government, because he was … I can’t remember the exact rules … but he was making…

Austin Knight: He was printing currency.

Matthew Howells-Barby: Yeah. But one of these Bitcoins, they went up on eBay the other day, and I think it sold, one Bitcoin sold for $28,000 when the current valuation at the time was like $14,000. Because there’s almost an element of collector’s items with this piece. But yeah, as we see this space evolve, there’s going to be all kinds of other stuff that comes in amongst all of this.

Austin Knight: There will be, but just to be completely clear, that’s like a really silly thing, that that guy did. There’s not going to be actual physical Bitcoins floating around, at least as far as we can tell, that’s a little bit of the antithesis of what this is supposed to be. And that is part of its strength, is that it’s not fully physical.

Matthew Howells-Barby: For sure. The thing, just to round this all up, we are such at an early stage of Bitcoin. US dollar has been in circulation for a couple hundred years, right? So Bitcoin has been around since 2009, and that is the oldest cryptocurrency of any cryptocurrency. At the time of recording this, I think there’s around about 2,000 different cryptocurrencies, not all of them using the application of just being a payment solution. We’re going to come into that in a bit more detail later on in the series. There’s a lot of development that’s going to happen in this space. To just round things up here, before we jump off, is the key differentiation that we really want to drive home is the difference between fiat currencies like the US dollar and cryptocurrencies. One, the fiat currency being completely centralized and owned and backed by the state. Whereas the cryptocurrency themselves, running on a technology called blockchain, is completely decentralized. The thing that you’re probably kinda thinking about right now is, “Alright, cool. I kind of understand some of these basics, how do I actually go in and own these coins?” And that is what we’re going to be going through in the second episode. So make sure you join us for that one.