Bitcoin · kids

Bitcoin and the Modern Family

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Digital Currency is inevitable…

It’s too perfect (or it will be after a bit more scaling work.)  It works everywhere on the globe, the government can’t freeze it or de-value it, credit card agencies don’t have to insure it, and it’s guaranteed to be a limited resource.

It’s coming… so you should probably teach your kids a little something about it.  This article will help.

A little background…

My kids converted all their cash into Bitcoin.  I explained it, and within 10 minutes they wanted to cash in.  It may have helped that I first made an easy way for them to track the balance of their account with a little hardware balance tracker:

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(Yeah, the blur is on purpose.)

That’s an ESP8266 hooked up to a webserver that has access to Coinbase APIs.

It also helped that it was backed by the “Bank of Dad”.  Since they started using Bitcoin, they haven’t once thought to go back.

For the first time, they could see their bank account value anytime they wanted.  They didn’t have to login to a site, know their password, count all their bills and change or use a computer.  If they gave Dad $5, the five dollars would immediately show up on their Bitcoin balance.  If they wanted to purchase something – they’d either do it directly, or they’d simply ask me to pay for it, and I’d deduct it from their account.  It’s easy and fast, they love it.

They also enjoy seeing people’s reaction to hearing how they use Bitcoin for their money.

As an added Bonus – Bitcoin has been rapidly increasing in value since they got started – and so has their balance.  So much so, they pause before they spend, weighing the future appreciation cost of their money.  They’ve come to understand, money makes money, and using money today means less that is making money for the future.

They are 10 and 12… I’m thrilled to have tripped across this as a tool for teaching.  Let me help you play. 😉

What is it?  Parent’s version…

Bitcoin is a currency that is backed by cryptography.

The study of cryptography has been essential for traditional web banking.  Imagine the problem early web engineers were trying to solve:

  1. Banks have very important and secret information.
  2. Customers are on un-controlled computers and want access to that information.
  3. The pipe through which the information must travel is visible to the world!

So how do you show banking information to a user without showing the world at the same time?  Public Key Cryptography.

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Public Key Cryptography

It works like this – I build a secret no one else can discover (there is a program for this).  In fact the secret I can build is impossible to guess – because computers can work in numbers so huge – my number cannot be guessed… even by other computers.  It’s like saying to someone… “I’m thinking of a number between 1 and 100 trillion, go ahead, guess it”, but 100 trillion is not even close to the number space Cryptography works in.

So I start with an unguessable secret.  That secret is what I use to create two keys, one the world can use to encrypt messages to me and the other is the only thing that can decrypt those messages… that second one I keep to myself.

The first – I give out freely – if someone wants to make sure I receive a message that *only* I can read, they’ll encrypt it using my very-public key.  When I get that message, I can decrypt it privately using my secret key and read it.

Same thing with Bitcoin, my secret is used to sign my Bitcoin Checks.  The public key is used to verify that I signed it.

Check out the paper that started it all:

https://bitcoin.org/bitcoin.pdf

Why is it worth anything?

Because people agree it’s worth something.  I used to hate recursive reasoning… in this case the alternative is too complicated. 😉

cash-tender

This is a great conversation to have with the kids about money.  The immediate follow-on is, “Why is the dollar worth anything?”  Here, you tell the kids that the government has mandated that it has worth, and that they will only accept dollars for taxes.  Taxes must be paid, the number of dollars available is limited by the same government, so we must work to get access to those limited dollars.

 

 

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It’s a similar thing with Bitcoin, people have decided they will accept it for payment of goods, or US Dollars.  For instance – these online retailers will happily take Bitcoin for their goods:

http://o.co – Beds, furniture, household goods

http://adafruit.com – Electronics supply, Raspberry PIs, Arduinos

http://jmbullion.com – Gold and silver

http://newegg.com – Computers, and video games

http://coinbase.com – US Dollars

http://store.steampowered.com/ – Video Games

http://microsoft.com – Video Games, Enterprise Software

It’s worth something, because of who accepts it, and the difficulty in obtaining it.  Kinda like why Gold is worth something.  It’s hard to get, and its limited.

Why it’s spreading…

Developers…

Because there are easy APIs to get access to it.  Its transparent, and allows unfettered access.  All of which means – software people can play.  When software people can play – without the government or requiring special payment – it’s going to progress very quickly.

Cheap transactions…

For merchants who accept credit cards there is often a high percentage of the transaction they just lose.  For even the cheapest options it’s just under 3%.  Buy something for $100 and the merchants has to give $3 to Visa.  With Bitcoin… its .0001%

Unfettered spend…

Transactions are cleared very quickly.  If you compare sending money from one account to another, the free or near free options all take about 3 days to settle.  That’s because the banking infrastructure of the US all has to agree to move the account values.

Here that responsibility is distributed and fast.

Another reason – there are no approvals needed.  Card companies have to provide recourse if someone spends your money.  Which means they can stop any transaction they don’t like… in real time.

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Just the other day, I attempted to buy some groceries, and my card was declined.  It wasn’t declined because I didn’t have funds, or was late.  It was declined because the card company thought it was fraud.  Super embarrassing and I have no insight into when or why my ability to spend might be revoked.  In fact, whole networks like Visa or Mastercard can shut me out on a whim or a report.

With bitcoin – that won’t happen.  It’s on you… which for some is why it’s scary.

Why is it scary?

There are a couple of things to know about Bitcoin.

There is no safety net for users.

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(Not included for the commentary.  Just the fun lack of a net. 😉

  1. Because the government isn’t backing it, in fact no-one is backing it, you are completely on your own.  If you send money to an address that no one owns – the bitcoin is gone… forever, for good.  Not a soul on the planet can get it back.
  2. If you send it to an address someone owns, but it was the wrong person.  There is nothing you can do about it.
  3. If you lose your secret key… there is no way to recover it.  All the bitcoin at that address is permanently unreachable.
  4. If you make a mistake, it’s your fault, there is no recourse, nothing, nada.

So that’s what you have to get over.  It also happens to be why it flourishes.  When there is no one providing a safety net, there is also no one who can say “no you can’t spend that.”

Its traceable.

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Every purchase made on the blockchain is made in public.  Your address is public, but who owns the address is the private bit.  The trouble is, with very little information, there are network analytics that can be done to figure out who owns an address.  Therefore, folks like the NSA can figure it out if they really want to.

Now the government would have to work at it with Bitcoin… on the US Banking system the government doesn’t have to work at it.  They can just look. 😉

Where can I get it?

There are on-ramp businesses that will trade Dollars for Bitcoin.  The most respected of these is Coinbase.

They’ll allow you to use Visa/Mastercard, or if you hook up your bank account they’ll allow you to dollar cost average into Bitcoin.

How do I secure it?

Using an online bitcoin wallet is probably the best for folks who are just getting started.  There are two that I like:

Coinbase

Blockchain.info

If you’d like to get a hardware wallet – this one is awesome:

https://trezor.io/

If you’d like to make a hardware balance tracker…

Let me know in the comments and I’ll post instructions. 😉

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