Wednesday, September 18, 2013

Explaining Bitcoin to Grandma

Want to know more about Bitcoin but don't care about the geeky underpinnings?

Here are some differences between Bitcoin and the traditional US financial system:

  • Most users hold a small amount of spending money in a wallet and most of their money in an account. 
  • To create an account one needs to find a financial institution to supply the account, apply for the account, give them all kinds of personal details, fund a minimum deposit. 
  • Banks accounts pay interest for using account holder's money and charge fees for services. 

  • It is a best practice to hold a small amount of spending money in a "spending account" and large amounts of money in accounts created on machines not connected to the internet.
  • Accounts are created through software or using a service provider.
  • There are no minimum balances and no interest paid on account balances.
  • It is recommended when sending funds to include an optional fee. Today the recommended fee is around 6 cents.
Transaction History
  • A receipt is needed to provide documentation of payment between parties.
  • In financial institutions transactions are kept private, but may be provided to government entities (courts, regulators, law enforcement)

  • All transactions and account balances are publicly visible. However account holders are only known if they disclose their identity - such as submitting identifying information to an exchange or as part of a transaction.
  • Cash transactions are irreversible.
  • Most other types of transactions are reversible.

  • Transactions are irreversible but the other party may issue refunds.
Issued By

  • Computers solving mathematical puzzles.
  • The process is called mining. 
  • Today specialized hardware is needed to profitably mine Bitcoins.
Currency Limits
  • Governments can create as much currency as they want.
  • This devalues that government's existing currency.

  • 21 million Bitcoins. 
  • Bitcoin is created at a predictable rate and will stop being created around 2140.
Risk of Loss
  • When I've had fraudulent transactions on debit cards and credit cards they have been reversed no problem by my banks.
  • When I've had cash stolen I've never recovered any of it.
  • US depository funds are covered by the FDIC. Banks have bonds to cover losses.

  • Improper use of software can result in loss of funds.
  • Having a computer hacked can result in loss of funds.
  • Software bugs can result in loss of funds.
  • Institutions being hacked have resulted in loss of funds.
  • Computer destruction or theft can result in loss of funds.

  • To send money a great length of distance I need to use a third party or deliver it in person.
  • Taking amounts over $10,000 across the US border needs to be declared to FinCEN.

  • The difficulty of sending funds does not change with distance. Bitcoin can be delivered across the globe the same way Bitcoin is delivered to your neighbor.