1. Provide Context
A great place to start when explaining bitcoin to a newcomer is analogies. Linking bitcoin to concepts that might be more familiar than digital currencies is a great place to start. A common and often powerful analogy for bitcoin is its resemblance to gold (“digital gold”). If the bitcoin newbie is familiar with the properties of gold that make it a valuable basis for currency (scarcity, durability, salability, fungibility, hardness, etc.) then this analogy can be a very powerful method for explaining the benefits of bitcoin as a currency. Similarly, if the person is familiar with how bank ledgers work, referring to bitcoin as a ledger can be a helpful trick as well.
On the other hand, if the person you are explaining bitcoin to is also a newcomer to the world of economics, it helps to provide more context about the weaknesses and pitfalls of our current fiat money system. There is no need to create an economics lesson out of this point – the issues with our current money system are easy to understand, but often newcomers just need them pointed out:
- Inflation: Governments are in control of the purchasing power of fiat currency. Year after year, the purchasing power of fiat money decreases – commonly referred to as inflation. Consistent inflation incentivizes spending, and disincentivizes holding onto money for long periods of time.
- Single Points of Failure: In the fiat money system, transaction histories are controlled by one central authority (typically banks). This creates a single point of failure for malicious attacks, or transactions to be permanently lost.
- Financial Censorship: Central authorities in charge of handling and storing ledgers can also alter, or prohibit, certain types of transactions. Recent moves by major credit card issuers have shown how companies have the freedom to prohibit transactions due to political agendas.
- Slow-Moving: With the current fiat money system, it can often take days, or weeks, to send large sums of money overseas because central authorities perform due diligence to ensure no malicious activity is taking place. The fiat money system was not designed for the digital age.
2. Explain the Benefits
Once you know that the newcomer has a decent understanding of the fiat money system, the next natural step is to explain the basic properties of bitcoin as a currency. Below is a checklist of properties to cover:
- There will only ever be 21 million bitcoins. The supply of new bitcoin currency is pre-determined by computer code, which means that no government or authority can decide to create more bitcoin in order to alter the purchasing power. In other words, bitcoin is resistant to inflation.
- Bitcoin is a distributed ledger. The history of all bitcoin transactions is stored in computers (nodes) across the globe and updated constantly. This means that no central company, government, or organization can authorize, alter, or prohibit transactions.
- Bitcoin is completely digital. The digital nature of bitcoin as a currency means that almost anyone, in any geographical location, can take part in the currency instantly. With bitcoin, a domestic transaction essentially takes the same amount of time as a transaction half-way across the world.
3. Explain the Basics
After explaining the benefits of bitcoin to newcomers, it is useful to also explain the basics of the technology that enables these properties.
For example, you can explain that the reason there will only ever be 21 million bitcoin is that the decentralized ledger created by the bitcoin software wont allow any more to be created. Since all bitcoin nodes in the bitcoin network follow the same rules, they can instantly invalidate any transactions that break the rules.
It’s also important to spend time explaining the role that mining (and miners) play in bitcoin, since they are integral to bitcoin’s success. You don’t need to explain things like difficulty adjustments or elliptic curve cryptography, but instead use high level analogies to explain the basics of bitcoin mining. I suggest explaining mining using something like:
- Bitcoin “miners” are computers that compete to add bitcoin transactions to the ledger, in exchange for a reward of newly issued bitcoin.
- First, miners group bitcoin transactions into “blocks” of around 2000 transactions per block.
- The miners then try to “mine” the block by solving a cryptographic puzzle that requires a lot of computational work to solve.
- Computing a valid solution to this puzzle produces a “proof-of-work” that other miners use to verify that the miner was indeed successful. This proof-of-work gives a real-world cost to producing new bitcoin and is used to disincentivize miners from behaving dishonestly.
- The miners add the block of transactions to the decentralized ledger (or blockchain) and the successful miner is rewarded with newly issued bitcoin.
- All miners begin mining the next block of transactions.
4. Show Them How to Get Started
Newcomers will have lots of questions at first, but eventually will want to get started using bitcoin. It can be useful to have a list of resources ready to share with them for getting started with bitcoin.
Here are a few articles that can be helpful to newcomers:
When explaining bitcoin to a newcomer it’s important to read the personality of the person who is interested: do they enjoy the technical details, or are they more interested in the societal benefits of a digital currency? Similarly, it’s important to understand their background knowledge on economics so you don’t over-explain or bore someone who was just starting to get interested in the topic. A general rule of thumb is to keep the technical details to a minimum but provide enough context to help with understanding the pros and cons of bitcoin as a currency.