What is Bitcoin? I’m quite tired of seeing the various answers, misinformation and overly technical jargon (let alone the mockery) around this question. There is no reason Bitcoin should not take off. To that end, I want to help answer the question “What is Bitcoin?” Before I do though, I think people need to really focus on who the audience is, as far to often this question is answered with how it works, how it was developed, who is Satoshi, etc.. So I propose that go forward we focus on what the question really is until the general population understands it. With that in mind, for those with knowledge of Bitcoin to really consider what the layman is asking when responding. I propose that the layman will better understand what Bitcoin is if the answers to other Bitcoin questions are not buried in the answer to “what is Bitcoin?”.
a. What is Bitcoin? b. How does Bitcoin work - for the laymen? (ie: How do I get a wallet and use it) c. How does Bitcoin work - for the techy developer? (ie: What happens behind the scenes on your hardrive.) d. Who invented Bitcoin? e. How do I buy Bitcoin? (see b. above)
The questions could go on, however I believe until the layman understands simply what Bitcoin is (question a.) and not the other upper level class questions (questions b. –e.), it will not be understood or accepted. The following is my informal attempt to answer question a.
Bitcoin was a puzzle to me for about a year. I had picked up bits and pieces of what it was, how it worked, how to get a wallet, etc.. For that year, I never got my head wrapped around it. I finally sat down and read up on the history of it and then I realized how simply amazing and transparent it really was. It answered several questions I had while studying finance, in addition to creating the platform for what I consider to be one of greatest potential efficiencies of our time….a single global accounting general ledger. Imagine if every monetary transaction was tracked in one ledger (accountants start drooling….)
By way of background, I am an accountant and have dealt with GAAP/IFRS/Tax reporting in multiple currencies in various countries. What always bothered me was why for accounting we never spoke the same language (note there is a current convergence movement happening right now around GAAP/IRFS) and in a common currency. Obviously borders create issues around tax, but at least for financial reporting we can have one set of rules. Translating currencies also provides added complexity to reporting that might be eliminated. I also never quite accepted the concept of interest for risk and “value creation”, especially if you believe in one of the fundamental laws of physics (I know…its getting weird..but read on).
So here is some food for thought before I answer “What is Bitcoin”.
- As any first year accounting major knows debits and credits must equal zero. So if we added up all the debits and credits (assets and liabilities/equity) for all the companies, people, governments and other entities in the world…I mean everyone..then they would all offset and equal…..ZERO. The reason we can’t do that goes far beyond this statement, but two of the main reasons are differing sets of ledgers and the world operates in multiple currencies (set aside differing year ends, private companies, access to records, people who don’t account, etc.).
- As any first year finance major knows, the value of money is found in the governments who support it (I’ll come back to this) and purportedly, the USD is supported by gold at Fort Knox. We all know that is not the case and when the theoretical fall of Rome (US) happens, we won’t all be able to line up at Fort Knox and trade our greenbacks for little pieces of gold to put in our pockets and take with us as we sail across the ocean to trade with other countries. The US dollar and other currencies are supported by the fact that the people of a given country (call it a community) acknowledge it is an ‘I owe you’ for goods or services in the future. That simple. Not gold..but a promise to take back that piece of paper (US Dollar) and give up a chicken, goat, widget..whatever…at some point in the future.
- Where did money come from in the first place? Who got the first dollar? Let’s say Bob got the first dollar. So what did Bob give up for that first dollar..a goat? Some gold he found. Great..so Bob walked over to Doug and said, “Hey Doug, I’ll give you this gold for that ‘I owe you’ piece of paper?”. That doesn’t sound right. So how did it go down. Did the government just print a bunch of ‘I owe you’s’ (ie: dollar bills) and distribute them equally amongst the people? Did the people just accept it as something valuable? Where was the gold to back up its value? How did that gold get into the governments hands to support the value of those dollar bills? What did the government have to give up for the gold…certainly not dollar bills as you can’t put the cart before the horse?
- Who cares about the national debt! It’s just a giant payable on the ledger of the US government. Somewhere though another country has a giant receivable (aka China). Well certainly the US must also have a giant receivable from other countries that once we collect we can pay our debt? At the end of the day..none of it matters! It’s like a perpetual loan….if you never settle it or it never comes due, then it just keeps growing and growing. And guess what, when you add up all the payables and receivables of all the people, countries, entities, etc. in the world…they offset eachother. So unless we default on our debt, it really means nothing. Even if we did default, then what….well personally, maybe they take a car away, but if you are the US government, then what…they take your country away? No..you go into a workout group…you pay off what you can and get it forgiven…restructure.
- Interest rates have always had me a bit stumped. I did great in finance and mathematics, however I never quite understood the concept of interest rates. I get the concept of creating value. For example, I might only give up one chicken for some milk and another chicken for some powdered chocolate, but I you offered me chocolate milk…I might pay 3 chickens. So value creation is the increase in value created by combining goods or services to receive more in trade than if the components of the goods or services were traded for on an individual basis prior to being combined. Sounds great…right? I’m willing to pay more for a product whose whole is worth than the sum of its parts? Let me propose this - energy is neither created or lost, only transferred. It’s a fundamental principal of physics. So with that in mind, if I can measure the effort that goes into creating that great combined product, shouldn’t I only be willing to pay for the inputs to it? For example, one chicken for the milk, one chicken for the powdered chocolate and how much for the effort of combining them? Well if energy is neither lost or created, then the effort is measurable by the food the person put in their mouth that was converted to the energy used to mix the chocolate milk drink. Let’s say it was the equivalent of an apple. So if I’m paying three chickens for this combined product, I’m really paying that third chicken in exchange for the energy of an apple. Seems a little overpriced? That’s because it is! I propose that value creation is really the result of unfair trades and the inability to measure everything (for various reasons). So in theory, if everything was perfectly measured and no unfair trades ever took place, then I ask this…why do we need interest rates? Some will say that interest rights are the premium for being given something in exchange for having to pay it back in the future, including the risk it might not be repaid. That sounds pretty good and up to Finance 101 standards. I can buy that, if someone is willing to pay for it, but I ask, in the grand scheme of things (the answer is 42), did that act of lending that chicken today in exchange for getting a chicken back next week really result in the creation of more chicken? Should I have to give two chickens a week from now as a penalty for having received the one chicken today on loan? Some say yes, some say no…my only point is some would say this is an unfair trade and in a world where no energy is created or lost, the only variable here is time….so should the borrower really have to pay for that. He is giving back the same amount of energy he received (welcome to my brain).
So now that I dragged you through that, this is my answer to “What is Bitcoin?”……
BITCOIN IS A GLOBAL CASH BASED ACCOUNTING LEDGER (aka: A CHECK BOOK) THAT EVERYONE CAN SEE, HOWEVER THE IDENTITIES OF ACCOUNT HOLDERS ARE MASKED AS A SET OF NUMBERS AND LETTERS.
It really is that simple. How it works is a different beast as far as how everyone can see it, but again, that is not what I want to answer here. So if you accept my definition, then quite simply think about it like going to the bank and looking through all their accounts. You can see which accounts have how much money, what date they deposited or withdrew money, how much money there is in all the accounts. The only thing is, at the bank, the accounts have names you recognize. My prediction is that in order to legitimize Bitcoin, there will need to be trusted banking institutions (with controls and regulations) who associate the masked Bitcoin account number with a name and address (as is happening right now at Coinbase and other formerly popular Bitcoin exchanges). Coinbase will become the first bank of Bitcoin! There will however always be those how don’t take their Bitcoin to the bank and effectively keep their Bitcoin “in their mattress”…so no one will ever know their name. Regardless, the Global Accounting Ledger will always keep track of how much is under their mattress based on their masked account number, instead of their name.
So to round out my above ramblings
• Bitcoin really will form the basis for the first potential cash based global accounting system. Maybe Google can host it. Maybe none of us will have bank accounts or need to file tax returns….they will all be stored on GoogleBank and be measured in Bitcoin. We won’t have to file tax returns as the IRS will just access or GoogleBank account. Gone are the days of Quickbooks and MYOB.
• So what about Fort Knox? Well…the Bitcoin community will be just as strong as the current country based communities that issue fiat currency. It is all in what you agree on and believe in…..but remember, there is no gold at Fort Knox!
• Who got all the first Bitcoins then? Good question! You need to go read up on bitcoin “mining”. It is not unlike the first miners that mined for gold.
• And settling national debt then? Well…not sure Bitcoin will solve that, but a Global Accounting Ledger in one Bitcoin currency will sure bring transparency and simplicity to who owes who what?!!
• Then do away with interest rates and unfair trades? Not at all! Unfair trades will always be there as idiots are born every day. The common currency and global ledger will just allow for things to be priced more efficiently without having to account for exchange rates. Interest rates I’m sure will always be as they are a just a cost of giving something to somebody for a period of time and expecting it back…..theoretically an unfair trade when talking about thousands of days vs. infinity.
For how Bitcoin actually works, how to get a wallet and how the Global Accounting Ledger is copied and validated by the users on the network (aka – no different than a clearing house….arguably more reliable)……I suggest you don’t wait a year to find out. Bitcoin is the future…….get your wallet now!
GAAP vs Statutory Accounting. Every industry has a given set of principles for the preparation of financial statements. These principles define how financial transactions should be accounted for in accordance with the rules and regulations of the statutory bodies. IFRS and US GAAP, refer to our ‘ IFRS and US GAAP: similarities and differences ’ publication. For more detailed guidance on IFRS 9’s hedging provisions, see PwC’s . In depth: Achieving hedge accounting in practice under IFRS 9 . For more detailed guidance on ASC 815, see PwC’s . Derivatives and hedging guide . IFRS/HKFRS News International Financial Reporting Standards (IFRS), is a set of standards for accounting that are developed by an independent nonprofit organization known as the International Accounting Standards Board whereas the Generally Accepted Accounting Principles (GAAP), are a set of principles, criteria, and processes in accounting that should be Despite these large strides, double-entry and the reporting systems such as GAAP & IFRS built on top of it are still works in progress. Bitcoin Accounting vs Double Entry Accounting. Accounting for Cryptocurrencies. The guidance in U.S. GAAP does not currently directly address the accounting for cryptocurrencies. For the reasons explained below, we believe that cryptocurrencies should generally be accounted for as indefinite-lived intangible assets under ASC 350; however, there may be limited circumstances in which cryptocurrencies are (1) held for sale in the ordinary
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