I'll try to give an analogy. With real money you have tokens made and backed by the government, which get held for you in bank accounts. When money goes from one account to another, the change gets recorded in a ledger (in the form of a database the bank keeps).
With crypto, the tokens are digital only, made by computers doing math problems that are hard to solve but easy to check (so they can prove they did them). They're backed by enough people believing that they have value, that you can actually trade with them as if they do.
Instead of a bank account you have a "wallet" - a file only you can access that holds the tokens. Instead of a ledger kept by a bank, the ledger is "distributed" - it's kept by computers all over the world, and complex cryptography math makes it very hard to modify or fake transactions in it.
That's pretty much it. It's mostly popular because A) there's no bank to tattle to the IRS/DEA/DHS about something suspicious, and B) speculating on its exchange rate is a way to gamble without calling it that.
Well thank you for that great explanation. Next task: explain the game of cricket hint - it starts with "you have 2 teams, 11 men 'in' and 11 men 'out'. The 11 men out have to get the 11 men in 'out'..." 😂
One piece of nuance to this: not everything "crypto" is either shady or a scam or gambling, but most of what you'll see is. In particular, a distributed ledger has potential for financial assets because it eliminates many forms of accounting fraud.
There's also the concept of a "smart contract" - tokens representing funds or assets can be instantly transferred when specific conditions are met, defined in a chunk of code. That can streamline complicated transactions like real estate.
Basically, the most legit uses of the tech aren't something you're likely to see directly, unless you're part of a specific industry. They'll just exist in the background silently.
Great and clear explanation/analogy. I'd just add that it's also popular since it makes it easy to launder money or to buy illegal stuff or services.
That's what I was getting at in point A, but yeah, it's probably better to be more explicit about that fact.
Banks don’t hold all your money in their accounts, nog even close. See ‘fractional reserve banking’. Basically they issue IOUs.
That's true, but not particularly relevant to the analogy. Your money in the bank is represented by a number in the ledger, and as long as you're below the FDIC limit the bank's "IOUs" have the same value even if the bank itself goes under. There's no equivalent to explain in the crypto world.
The number in the distributed ledger also represents the amount of tokens (#bitcoin or otherwise) you hold, so that’s similar. However a bank can arbitrarily change the amount in your account (or disallow you from accessing it), which is fundamentally different from a truly distributed ledger.
When you deposit to a bank, it's no longer "your" money. What you own is a "claim" to the money. (read your bank's fine print). And like Jacob said, they don't keep it. So it's not there, and you wouldn't own it if it was. And the FDIC is WAY underfunded. They're only required by law to hold ...
... $0.0135 (that's 1.35 pennies) for every dollar they insure. Except they don't even do that. The FDIC's current Reserve Ratio is 1.18%, under their federally mandated limit. They can't even produce 1.2 pennies for every dollar they supposedly insure. Bitcoin on the other hand is a "bearer ...
And the $250k limit is comically small. A high inventory turnover, low margin business, like a grocery store, will run over that limit. Any SMB/startup with enough funds in the bank to feel safe covering employee salaries is over the limit. Any large corporation is over the limit. Any HNWI, etc
... asset". That means you own it outright. No one can take it. No bank, no corporation, no person, no government can take it away from you. It's 100% yours, protected by unimaginably strong cryptography. The only way to lose it, which should never happen but unfortunately sometimes does, if ...
... they somehow trick or force you to give it (or your "keys") to them. But, you have to do that. And secure storage methods have been in place for over ten years, tried and true already but still getting better all the time. Banks = not your money, and it's not even there Bitcoin = your money
An argument can be made around reserve banking for using Bitcoin instead, but that argument is equally valid for hiding cash in your mattress. It's a problem specific to banks, not a unique property of crypto. I only brought banks in to relate a complex idea to one that people are familiar with.
You brought banks in as an example of something that's nothing like bitcoin, to explain how bitcoin works? Is that like explaining dogs by showing me a cat and then saying, dogs are nothing like that though? Seriously, I don't understand the point you were making.
They asked for it to be explained like they're 50. I described key parts of how money works - minting, backing, and storing and transferring value - using banks because most people are familiar with that. Then I described how those functions are handled by crypto. You are not the target audience.
Explaining Bitcoin like they’re 50 might include explaining that it has the censorship resistance of cash, but with way better security options (try using a multi-signature storage solution with the cash under your mattress).