During 2021 we have experienced a great deal of activity in the cryptocurrency sector. We have seen many more people asking questions about this topic. Institutional money is pouring in and some people who used to despise crypto are showing some interest through NFTs, while others are jumping on the bandwagon and getting into all sorts of safe (and unsafe) projects. Those who are still on the sidelines may need more information to make the decision to enter the sector. If you have tried to explain cryptocurrencies and Bitcoin to other people and have not had much success, or do not know how to do it, read on and we will give you some ideas.
Elizabeth and her grandmother
“Grandma, I have a present for you!” Isabel exclaimed as she handed a beautifully wrapped gift to her grandmother. It’s Christmas in the Martinez family. After a hearty dinner filled with good food and lots of laughs, it’s time to exchange gifts. Grandma, the undisputed matriarch of the family, is sitting in her usual seat with a plum-coloured crocheted blanket draped around her slender figure. She smiles happily at Isabel, her favourite granddaughter, as she accepts her gift. Then, with their slightly trembling fingers alongside Isabel’s young and steady ones, they rip the paper from the wrapper, revealing a plain box. The ribbon was removed and the lid reveals a beautiful Wedgwood teapot with blue motifs.
“How pretty,” Grandma said as she slowly picked her up to admire her. “I knew you liked the hibiscus flower, so I saw it and had to buy it,” Isabel explained. “But this must be very expensive!” exclaimed Sara, Isabel’s mother. “Where did you get the money from? You’re still in college and art school. You’re not involved in anything illegal, are you? Sara frowned slightly as she walked over to Grandma’s side to admire the teapot. “No, mom. Of course not”. Isabel made a face at him, got up and left. “Why do you have to be so cruel?” she yelled before heading upstairs, followed by the sound of a door slamming.
Isabel was busy sketching in her room when a soft knock on the door caught her attention. She opened the door and found her grandmother. “Do you mind if I come in?” Grandma asked. Isabel ushered her in and moved some of her bedclothes away from her to make room for her. “I haven’t been able to thank you for that wonderful gift. It is simply beautiful. We have to have a cup of tea together one day,” Grandma said as she gently took Isabel’s hand. “I would love to,” Isabel said. “But I am curious. Where did you get the money to buy it? I heard your mother say that you had lost your part-time job, and I imagine that the materials for your work cost a lot of money. Your parents can barely pay your tuition. Aren’t you…?” Grandma asked cautiously. Elizabeth shook her head. “It is not what you are thinking”, then she was silent for a moment and said: “If I tell you something, will you promise not to say anything to anyone?” Grandma nodded.
He took out his phone and opened an app. It looked like a financial app with lots of numbers. She scrolled to a page and showed it to her grandmother. “This is the amount of money I have right now.” The app balance displayed a six-digit figure. Grandma’s eyes widened. “How did you get all this money?” she asked. “I bought some crypto at the beginning of the year. The price went up a lot and I sold some. That’s how I bought you the kettle,” Isabel replied. “ What is this about cryptocurrencies ?” asked the confused grandmother. “ Well, the simplest way to say it is that it is a kind of digital money that is used to buy and sell mainly digital assets, but that is not controlled by a bank Elizabeth said. “I haven’t understood much, my dear.” Grandma let out a laugh. “Hmm…let me figure out how to explain it to you,” Isabel reflected.
“Do you have a $5 bill handy?” Grandma reached into a pocket and pulled out a crumpled bill. “Will this one do?” she asked, handing it to Isabel. “Perfect”, Isabel held the bill in front of her. “Let’s imagine that I am a business and that you are a customer who comes to the store to buy me something. You pick something you want, you hand over the money, maybe some change needs to be given to you, and you walk away. We just made a transaction. When you hand over the money, you have less than when you entered and now I have more. We’re still strangers unless we shared a few stories while you shopped. Are you following me?” Grandma nodded.
“Today, we buy things with the money we see on our screens. We can’t touch or hold it, but we know it’s there, and we can use it whenever we want. It’s the same as using the $5 bill, except we can buy things from people we can’t see. So our money has gone digital.” Grandma nodded.
“The money is usually deposited in a bank to protect it from thieves. Once you become a bank customer, the bank needs certain information about you. Not only because it is the law, but because the bank wants to make sure that you are not going to commit crimes like selling drugs or something similar. You also have to trust that the bank will not take your information and sell it to someone else. All this despite the fact that when you use cash, no one needs to know anything about you. So you are giving up some of your privacy in exchange for security and comfort.”
“Since the bank stores our money, it also records what happens to it. So if our records and the bank’s do not match, what do you think will happen?” Isabel asked. Grandma thought for a moment.
“Remember that time Cousin Julia and I argued when we were little? We both said that it was our turn to put on your butterfly-shaped brooch”. Grandma said, “Oh yeah…you two had a fight and we didn’t know who to believe.” “And in the end, both mom and Aunt Sofia had to intervene to decide what to do,” Isabel continued. “What happened is that Julia and I couldn’t resolve the argument on our own. We need a third. What if, at that moment, someone else, or better yet, many people, are also keeping track of whose turn it is to wear the pin? If Julia or I forgot whose turn it is, we’d just have to look at those records and we’d know right away,” Isabel said feeling confident. “You would still need a third party,” Grandma said. “Yes, it’s true,” Elizabeth admitted. “But it wouldn’t be just one. It would be public knowledge. Everyone would know.
Grandma digested this for a moment and said slowly, “So everyone knows everything about everyone.” Isabel then said: “Yes, that is called blockchain technology. There are thousands of copies of the record around the world. So no one can make any changes once the money changes hands. And there is no reason to doubt that the record can be falsified because it is impossible to do so.”
“But what does this have to do with banks?” Grandma asked. “Well, mainly, we don’t have to take the bank’s word for the absolute truth about the record it keeps. Although it is not that they are going to falsify them”. Elizabeth added hastily. “What really excites me is that, for the first time in human history, there is another way to manage money, a way that is as safe as banks, or even more so. The interests that the bank gives us compared to those that dad and mom pay for their mortgage loans do not make any sense. And do you know what his dirty secret is?” Isabel asked, a little breathlessly.
“What is it?” Grandma asked. Isabel whispered in her ear. “The banks don’t need our money. They can create money out of thin air.” Grandma’s eyes widened. “But how?” “I’ll tell you next time”. Elizabeth smiled mischievously.
“So back to this cryptocurrency thing…” Grandma replied. “Yeah, well, it’s not always a type of currency. Sometimes it’s also an asset, but that’s beside the point. Cryptocurrencies are digital money based on blockchain technology. What makes them as safe as a bank is that technology. Anyone can issue a cryptocurrency for any reason,” Isabel said triumphantly.
“Isn’t that dangerous? What if people are deceived? Or if they swindle her?” Grandma intervened. “Yes, that’s why people have to spend time learning about projects before investing in them. It’s the same as when Dad went to buy a TV the other day,” Isabel said. “He went through about a dozen stores, and compared prices and models before buying the one we now have in the salon.”
“So what you showed us on your phone a moment ago is all the cryptocurrencies you’ve bought,” Grandma concluded. “Yeah, I bought them when they were cheap, the prices went up, and then I sold some of them for money,” Isabel said. “That’s how I got the money for the kettle.” “So that’s why you were always locked in your room, investigating?” Isabel nodded, feeling a little guilty.
“Well, I’m glad it’s all cleared up,” Grandma commented. “Thanks again for the kettle.” She told her as she stroked Isabel’s hair. “Now, as your grandmother, this is my advice. Go talk to your mother about this. I’m sure she will understand.” Grandma smiled. Elizabeth answered angrily. “I don’t know…”. “Try it for me, will you?” she told him. Elizabeth made a face. “I’ll think about it”. Grandma kissed her cheek and left the room.
Sarah and Paul
Sara sighed as Isabel headed upstairs. Grandma patted her arm. “I’ll take care of it”, she told Sara while she handed her the kettle for a moment to get up slowly from her seat, after returning the kettle to her, the grandmother climbed the stairs little by little.
Pablo reassured Sara. “Everything will be fine”. Sara reached under the tree, pulled out a small box, and handed it to Pablo. “Merry Christmas”. Pablo looked at the box in amazement. “Oh?” He unwrapped the gift, a Ledger Nano X. “Is this what I think it is?” he commented. Sara replied, “What do you think it is?” “Some kind of cryptocurrency?” he asked. “Yes. But what is it?” Sara answered. Pablo thought for a moment and looked at her. “You know I’m a newbie at this, so she must be pretty well known. Probably Bitcoin or Ethereum? “It’s one of those two, but which one?” Sara answered confidently. “Can’t it be both?” she shook her head. “Alright, I think it must be Bitcoin.” She laughed. “It’s Ethereum.” She smiled.
“Now that you’ve dragged me into this, I guess we should pay a little more attention to it. So to begin with, I need you to explain to me what they are and the difference between the two,” said Pablo. Sarah took a deep breath. “I will try to be as clear as I can.”
“You already know that both are cryptocurrencies, basically digital money made possible by blockchain technology.” Pablo nodded, indicating that he should continue. “Bitcoin was the first cryptocurrency to be developed. It was conceived by an individual or group of individuals under the pseudonym Satoshi Nakamoto. In 2008, after the financial crisis, a document describing the theory and use of Bitcoin, called a white paper, was published. You know that nowadays almost everything digital can be copied by anyone, right? Paul nodded. “One of the most important parts of the technical document was that Nakamoto had found a way to solve a problem called double-spending.” “Double spending?” Pablo asked. “Yes, when you give me a dollar, now I have it and you don’t. But if you send me a JPEG, you will still have your copy”, Sara explained. “Okay, I understand you. As there is no double-spending, only one JPEG is passed between us”, commented Pablo.
Sara continued: “For the blockchain to work, we need many people to keep track of the chain, and there has to be a master copy that keeps track of everything. Of course, there is nothing that works better than an incentive, so Bitcoin was the incentive that was defined for people to keep track of the flow of Bitcoin in their network, basically locating where it is and when each one was last used. time. The idea was that the people who get the Bitcoin could use it as if it were cash to pay for their basic needs. “I gather that hasn’t happened”, Pablo smiled. “Not yet, we’re on it,” Sara playfully smacked her on the shoulder.
“Alright, let’s see what I’ve understood so far. Bitcoin is a reward given to people who keep track of the movement of Bitcoin itself. Right?” Paul asked. Sarah nodded. “So why do people call it a store of value?” “That’s because there is a definite upper limit to the number of Bitcoin that can exist, about 21 million,” Sara continued. “And this limit cannot be changed at all?” Pablo asked. Sarah shook her head. “Maybe not now, but in the future… I heard someone say that great advances are being made in artificial intelligence and quantum computing…” Pablo joked. Sara gave him a playful push. “It’s not likely to happen.”
“Well, I think I’m starting to understand a lot more. We have inflation because more and more dollars enter the market, but none of that money is withdrawn from circulation. And there is no limit to the amount that enters. Whereas with Bitcoin, although there are also more coming in, there is a finite number.” “That’s right,” Sara said.
“Now, explain Ethereum to me,” Pablo reminded him. Sara continued: “Okay. Bitcoin is a kind of single-purpose blockchain. All you do is produce Bitcoin all day. It’s pretty useless for other things, at least that was the initial design. For its part, Ethereum has a much more ambitious plan. Although it also uses blockchain technology, the guy who invented Ethereum, a Russian named Vitalik Buterin, came up with something called smart contracts that work on top of the Ethereum blockchain. Like Bitcoin, it also needs people to keep good records, and the reward is known as ETH.” “And is it also in limited supply like Bitcoin?” Pablo chimed in. Sarah shook her head. “No, there is no limit.” “But then you have the same problem as with cash!”, Pablo said enthusiastically. “Not so fast, sir,” Sara put a finger to her lips. “ETH is destroyed as it is used. In fact, more is destroyed than is distributed, which differentiates it from cash. And there are still more”.
“Going back to smart contracts, these are self-executing deals.” “What do you mean?” Pablo asked. “Remember that bet you lost a while back where you said you would do the dishes for a whole week?” Paul rolled his eyes. “I can’t believe you keep bringing that up. I washed the dishes, didn’t I? “Yes, yes, I know you did. He was just using it as an example.” “Fine,” Pablo snorted. “I won that bet cleanly, by the way,” Sara said triumphantly. “I don’t know if it was fair, but you won, I admit that,” Pablo said. “Say I make a bet with another person who is not as principled as you are, and that person loses but does not honour his side of the bet. He may not be able to do anything about it,” Sara pointed out. “I wish the guy would try, you are the most persistent woman I know. I don’t think running away to the North Pole is enough,” Pablo joked. “Now, darling,” she patted his shoulder gently, “where was he going? Oh yes, smart contracts.
“In short, the Ethereum blockchain is more useful than the Bitcoin one because it has more functions since it does not only issue coins. With smart contracts, people can create services that use any agreement mechanism to function. To execute smart contracts, people pay gas fees that can only be paid in ETH. These services that people build also accept ETH as payment, so some people think that ETH can become more valuable than Bitcoin. And that’s why I gave you some ETH. Are you happy?” Sara concluded.
Paul was still somewhat confused. “Well, it’s still a bit complicated for me, but I can understand your point of view. Thanks for the gift”. Then he gave her a quick kiss. “Now, let’s go upstairs so we can give you our gift,” Pablo laughed. “By the way,” she said as she pointed to the Ledger device, “This thing doesn’t store Bitcoin or any cryptocurrency within it, but it does give you access to claim it on the blockchain. It also has a password called a seed phrase. The ledger and the seed phrase are the proof that you will need to prove that you can claim your cryptocurrencies, especially the seed phrase. It’s like your car key. Anyone who has the key can leave in your car, so keep it safe, okay?” Sara warned. “Yes ma’am,” Paul said.
Sarah and Elizabeth
The next morning, during breakfast, Sara approached Isabel: “I’m so sorry about yesterday. I shouldn’t have said something so abrupt or jumped to conclusions. You know, she was only worried about you.” Isabel stared at her mother for a moment. “I didn’t do anything wrong to get the money.” “Thank you for telling me. I trust you,” Sara said. They both smiled. “So where did the money come from?” Sara asked casually. “I sold some cryptocurrencies,” Isabel replied coldly. Sara laughed, “how could it not have occurred to me”.
That was a happy ending for this family. While it’s true that not every conversation you’re going to have about cryptocurrencies will go as smoothly as this one, it’s worth taking the time to have a good chat about it. As excited as you are about the potential of cryptocurrencies and the role they will play for years to come, take some time to listen to the concerns and fears of those around you, to acknowledge the shortcomings, but also to point out the imperfections. of the sector will lead to improvements in the future. When the time comes, these people will be ready to make the leap, or not. If it doesn’t happen at one point, maybe sometime in the future. They may just be waiting for something in the cryptocurrency industry to catch their eye,
For all those who accept the great challenge of explaining cryptocurrencies to their friends and family, good luck and may the force be with you!
Disclaimer: These are the opinions of the author and should not be considered investment advice. Readers should do their own research.