| Think of it that way, payment processing is a valuable product, especially online. It's costly and challenging to take money from one person and send it to the other in a secure and trusted way. So companies come along to offer it as a service, like PayPal, Stripe, and you can think of CreditCard companies as well. So you could imagine yourself investing in those correct? Alright, now imagine I made an open source software that lets two people process a payment between each other? They can just install the software on their computer, and suddenly they can start transacting money with one another? For free! No need for PayPal or Visa anymore. So what's the catch? The catch is that software can't actually move real physical money around, that requires trucks and truck drivers and safes, and all that. So it's not possible to move USD dollars with software alone. What does PayPal do then? PayPal enters into an agreement with your bank or credit card. When you send me 100$ through PayPal. PayPal and your bank agree that eventually 100$ will be moved from your bank to PayPal's bank account. That is done digitally, and both PayPal and your bank write that down in their system on their own ledger. Now PayPal assumes it will eventually have 100$, and it agrees with my bank to eventually deposit 97$ into my bank account. Similarly PayPal and my bank write that down. Now eventually money will actually get moved physically, but it'll play catch up. You, me, PayPal, and our banks, we all trust each other, so we assume it will be moved for sure, and so even before that happens you might have sent me some item through the mail in exchange for that money. Now back to my open source software alternative to PayPal. What if instead of this big dance, and eventual physical exchange of money. What if we made a currency that was fully digital? So when you processed a payment with my software, you arn't exchanging USD dollars, but something I shall call Bitcoin instead. That can easily be exchanged through software alone, no need to actually physically move anything. Well, there's a few challenge to this. First, since the software is open source and we're each running it (no central service), how can we trust that you removed the amount you gave me from your account? And that I didn't add more than what you gave me to mine? That's where cryptography comes into play. Okay, so now let's assume I figured out the tech, so my open source software can truly be used to exchange securely and without possible cheating some amount of a digital currency between two parties without any central coordinator. Now we have the problem of how do you get some of that currency in the first place before you can exchange it? Well, my software also guarantees that there's only 1 million coins of it max. And as the author, I gave myself 100k coins. And I randomly distributed the rest amongst the first thousand users. Now you were a lucky one, and you have 100 coin if it. So again, maybe I want to buy something from you, but you're in another country. So I tell you, I'll give you 100 of my crypto coin, exchanged through my open source software, and you'll send me by mail my item I buy from you. Perfect, now we have a way to exchange a currency without having to physically move anything, it is fully handled by software and can be exchanged over the internet only. So maybe you say, well what can you buy with my coins? Well, you started selling goods in exchange for them? And so did others. So maybe Joe Blo sells Video Games and accepts my coin in exchange for them. And you sell plants. So now you can use my coins to buy video games from Joe and he can use them to buy plants from you. And so on. So the coins are slowly starting to be worth real assets, as more and more people start to accept them in exchange for goods and services they'll be worth more and more. What's cool about a fully digital currency is that exchanging it is super fast, easy and cheap. It's just really convenient. You might also believe it to be more trust worthy then the agreement between PayPal and our banks, if you think the tech is harder to cheat. And you might believe the software is more stable than some government backed currency at managing inflation. So you might actually find that my software and my currency is overall more convenient, more secure, more safe, and more stable as a currency to exchange and trade in, so maybe you just fully move to it and stop accepting USD in exchange for plants. Now back to investment. Say you thought that this piece of software was amazing, and you believe that people will slowly stop using other payment processors in favour for it. Well, sell your stock in PayPal cause eventually everyone will move to using my software instead. Now you want a piece of that pie, but I don't sell stock, and I don't sell my software for money, it's free and open source. Except there'd still a way for you to profit from my software gaining in popularity. If you find a way to acquire some of its digital coins, for less than what people will be willing to exchange for them in the future, you can profit from it. Thus it becomes an investment vehicle. Sorry for the length, hope that explains it though. |