BITCOIN
Bitcoin Explained
If you enter “What is Bitcoin?” in Google search, the responses will broadly match the following statement:
“Bitcoin is the first decentralised open-source, peer-to-peer network with no central authority or intermediaries, using blockchain technology powered by its users”.
The answers tell most people absolutely nothing.
So, what is Bitcoin? How does it fit with money as we know it? And why should we take notice?
What Is Bitcoin?
A whitepaper promoting the idea of a peer-to-peer, decentralised online payment system was published in 2008. The author was Satoshi Nakamoto, and the payment system was Bitcoin.
Bitcoin is a digital currency that buys and sells goods and services online. It is based on a technology called blockchain, a system of storing and verifying transactions in a distributed network of computers.
The concept of blockchain was outlined in 1991, and Satoshi was the first to apply blockchain use just under 20 years later, in 2009, with Bitcoin.
The genesis block was the first block of transactions mined by Satoshi on the network in 2009.
Bitcoin was launched.
God Bless Bitcoin is a documentary created by the Bitcoin community.
It explores the ways in which bitcoin can present alternatives to the current fiat money system.
Click on the image below to watch the documentary:
Characteristics
Bitcoin has some characteristics that make it different from traditional currencies. Some of these features are:
Supply limit
There will only ever be 21 million bitcoins, making them scarce and valuable. Bitcoin has a fixed supply that can’t be manipulated or changed. FIAT currencies, however, can be printed at will by central banks.
Security
Bitcoin transactions are secured by cryptographic algorithms that make them resistant to fraud and hacking. Every Bitcoin transaction is recorded. Each transaction is recorded in a public ledger. That ledger is called the blockchain, maintained by a network of nodes that update and validate the data. The blockchain also contains the history of all transactions made on the network, making it transparent and immutable.
Decentralisation
Bitcoin does not rely on any central authority or intermediary to operate or facilitate transactions. Anyone connected to the internet and a Bitcoin wallet can participate in the network and send or receive bitcoins. This makes Bitcoin more democratic and inclusive than traditional payment systems.
Scalability
Bitcoin can process thousands of transactions per second, compared to thousands per day for most banks and payment processors. This makes Bitcoin faster and cheaper than traditional payment systems for cross-border payments.
Applications
Bitcoin has many potential applications beyond just online payments. Some of these applications are:
Remittances
Bitcoin can enable fast and low-cost international money transfers, especially for people who live in countries with high inflation or currency devaluation. Bitcoin can also reduce the fees charged by banks or money transfer services.
E-commerce
Bitcoin can enable secure and anonymous online shopping, especially for merchants who want to avoid chargebacks or censorship from governments or regulators. Bitcoin can also offer more choice and flexibility for consumers who wish to pay with different currencies or avoid intermediaries.
Investment
Bitcoin can offer an alternative way of storing value and diversifying one’s portfolio. Bitcoin has experienced significant price fluctuations over time, which can attract investors who are looking for high returns or hedge against inflation. However, investing in bitcoin also involves high risks and volatility, so investors should research before buying or selling bitcoins.
Challenges
Bitcoin is not without its challenges and limitations. Some of these challenges are:
Regulation
Bitcoin operates in a legal grey area in many countries, where its status as money or property is unclear or disputed by authorities. This creates uncertainty and complexity for users who want to comply with laws or regulations regarding taxes, reporting, anti-money laundering (AML), counter-terrorism financing (CTF), etc.
Education
Bitcoin requires users to have basic knowledge of how it works and how to use it safely and securely. Users must understand concepts such as wallets, addresses, keys, addresses, mining pools, etc., and how to protect their seed phrases and private keys from theft or loss.
Adoption
Bitcoin still needs to overcome many barriers to widespread adoption among individuals and businesses worldwide. These barriers include lack of awareness, trust, infrastructure, accessibility, usability, etc.
Bitcoin is an innovative technology that has revolutionised how we think about money. It offers many benefits, such as security, decentralisation, scalability, etc., but also faces many challenges, such as regulation, education, adoption, etc., that it must address before reaching its full potential.
What Is Money?
In simple terms, money is a representation of value.
If I do some work for you, you give me money in exchange for the value I gave you. I can then use that money to get something of value from someone else in the future.
Historically, value has taken many forms, and people have used many materials to represent money.
Salt, wheat, shells, and gold have historically been used as an exchange for value.
How does something represent value? There has to be agreement and trust that the item being exchanged does have value. In addition, a trust that the value can be redeemed in the future.
Money = Value = Trust
Money is an abstract word; its actual definition is a medium of exchange in the form of banknotes and coins, in addition to being property, assets and resources owned by someone or something.
Paper Money
Over time, people found it too cumbersome to carry gold as money or other forms of cash, so paper money was invented.
A government or bank would offer to take possession of your gold, let’s say, worth £100, and in return, would give you receipt certificates, which we call bills, amounting to £100.
Not only were these pieces of paper much more accessible to carry, but you could spend a pound on a cup of coffee and not have to separate your gold into a hundred pieces.
If you wanted your gold back, you returned £100 in bills to the bank and surrendered them for the actual form of money, gold, whenever needed.
That was the beginning of the use of paper as money and an instrument of practicality and convenience.
Fiat Money
Over time and due to macroeconomic changes, this bond (the gold standard) between the paper receipt and the gold it represented was broken.
Explaining the path that led away from the gold standard is hugely complex, but suffice it to say that in 1971, President Nixon announced that the U.S. would no longer observe the gold standard. People were told by their governments that the government itself would be liable for the value of that paper money.
Governments said let’s stop using gold to trade and only trade with paper.
As a result, people continued to trade with receipts that were backed by nothing but the government’s promise.
The dislocation from the gold standard was only ever meant to be temporary. Fiat money was a temporary solution to a specific set of economic challenges. In many ways, it is an experiment. However, it’s an experiment that has been in play for over 50 years.
Why was that accepted?
It comes down to trust. Even though an actual commodity did not back the paper money, people trusted the government.
By Decree
The word Fiat is a Latin word that means “by decree”.
The basic definition of fiat is:
“Fiat is a pronouncement, arbitrary decree, or a command given by a person or group of people with absolute authority to enforce it.”
This means the pounds, dollars, euros, or any other currency, for that matter, have value because the government orders them to.
It’s known as “legal tender”. Coins or banknotes must be accepted if offered as payment.
So, the value of today’s money comes from the fact that the government has given it a legal status.
The trust model has changed from trusting some thing to trusting some one, in this case, the government.
In essence, the government made an arbitrary decree that fiat money, or the pound sterling, would be used in our economy as a medium of exchange for goods and services.
Essentially, the UK government has commanded or told us that our fiat pounds should be used to buy goods and services in our country.
Disadvantages
Fiat money is used in most countries today, such as the United States dollar, the euro, the yen, and the pound. However, fiat money has some negative issues that can affect its stability and functionality. Some of these issues are:
- Inflation
Fiat money can lose its purchasing power over time due to the central bank’s excessive printing or expansion of the money supply. This can erode the value of savings, investments, debts and reduce people’s real income and wealth. - Counterfeiting
Fiat money can be easily forged or duplicated by criminals or terrorists who want to use it for illegal activities or evade taxes. Counterfeiting can undermine public confidence in fiat money and cause financial losses for legitimate users. - Value collapse
Fiat money can become worthless or irrelevant if public trust is lost in the government or the central bank that issues it. This can happen due to political instability, corruption, war, natural disasters, or other crises that affect the credibility and legitimacy of fiat money.
According to Wikipedia, fiat money can be classified as:
So all of the “money” or UK pounds we have in our bank accounts is intrinsically useless, valueless, and is only a form of debt repayment or medium of exchange.
Digital Money
From the point of the implementation of fiat money, the progression towards digital money was a logical next step.
There was a central authority that issues money, so it made sense to make money mostly digital and let that same central authority keep track of who owns what.
Today, most people use direct debits, credit cards and other forms of digital money like PayPal. The amount of physical money in the world is almost negligible and is getting smaller each year.
Imagine having a digital file representing one pound sterling. What if you could duplicate this file a million times, effectively owning a million pounds?
This is the essence of the “double spend” problem, where a single digital token can be replicated and spent multiple times.
Attempts were made to create alternative forms of digital currencies. However, none successfully solved the “double spend” problem without a central authority.
The solution that the banks use today is a “centralised” solution. The banks keep a ledger on their computer, which keeps a record of who has what.
The records are held in a separate account, and the ledger updates each account as transactions are made.
Account holders trust the bank, and the bank trusts their computers.
Modern Money System In Practise
Let’s imagine that to shake someone’s hand, you had to shake another person’s hand, who then shook that person’s hand for you. That’s how banks, credit cards, and our traditional financial system work.
When you swipe your bank card to pay for groceries at the store, your bank takes your money from your account, gives it to the grocery store for you, and then charges you for their role in the transaction. This is the case with cheques, credit cards, debit cards, and any money exchange.
It’s so ingrained in our society and how we think about money that it seems completely normal and okay for the most part.
The reality is that the only person with anything to gain in this arrangement is not even a person; it’s the banks.
They profit from storing, transferring, controlling money, and issuing loans.
We are encouraged to deposit our money with the bank under the guise that:
- It’s safer there… which is not the case
- We aren’t competent or qualified enough to manage our wealth without their services.
We own and “hold” fiat, like the UK pound sterling, as a representation of value. However, we use entirely separate mechanisms to use, store and move it around.
For example, you have pound sterling representing value, with a Natwest account to store it in, an American Express card or bank card to spend it, and maybe even a PayPal account. All to buy, sell, and manage value and at each step, the bank turns a profit.
We are accustomed to this standard concept because that is all that’s been available until the past decade.
The Case For Bitcoin
Banks profit from shaking a person’s hand for you. That is how our “modern” financial system works. However, you could just as easily shake the hand directly yourself.
Satoshi Nakamoto knew this and created Bitcoin to mitigate the following:
- Value and the means of exchanging the value are separate systems by design to generate profit for financial institutions
- Financial institutions are in complete control over people’s money in banks and their credit cards, in that they can reverse transactions, freeze or close accounts at any time for any reason
- All the fiat money in bank accounts is a debt repayment instrument, not an actual form of value.
- Banks, credit cards, and other financial instruments are not widely available to everyone around the world
Solving The “Double Spend” Problem
The document, published by Satoshi Nakamoto, suggested creating a system for a decentralised currency called Bitcoin that eliminates the need for traditional intermediaries like banks and governments to make financial transactions.
More specifically, it promoted digital money creation that addressed the “double spend” problem without a central authority.
Like most money today, bitcoin is digital with no physical backing. There are no actual coins, only rows of transactions and balances.
When you “own” bitcoin, you can access the ledger and gain access to a specific Bitcoin address record. You can send funds from it to a different address.
Bitcoin is also decentralised; no one computer holds the ledger.
Every computer engaged in the Bitcoin system keeps a copy of the ledger, also known as the Blockchain.
So, if you want to hack the ledger or take down the system, you’ll have to take down thousands of computers that are keeping a copy of bitcoin transactions and constantly updating the ledger.
Advantages
Bitcoin has several advantages over the current FIAT system.
The supply of bitcoin is capped at 21 million. Bitcoin is scarce like gold.
Because bitcoin is not issued or controlled by governments, we don’t have to worry about them printing a lot more of it. When central banks print more fiat currency, it dilutes the worth of the existing money. It reduces the purchasing power of the existing money and is why things cost more over time.
With Bitcoin, you control your money. You and you alone can access your funds.
No government or bank can easily decide to freeze your account or confiscate your holdings.
Bitcoin also cuts many intermediaries from the process of money transfer. In addition, in many cases, Bitcoin is cheaper than traditional money orders.
In our current financial system, bank accounts and credit cards are luxuries most people (2.5 billion) worldwide don’t qualify for, don’t have access to, or can’t afford.
Bitcoin, unlike fiat currency, is designed to be digital by nature; this means that you can turn it into “smart money” by adding additional layers of programming on top of it.
Compelling arguments, however, the road to acceptance by the majority of the public is still a long one.
Note:
New technology that challenges the status quo often prompts governments to get involved to ensure that things remain as they are “supposed” to be.
The U.S. government and other governments are looking into Bitcoin. In part because they are driven by a desire to ‘regulate’ cryptocurrency in its current form and partly because they see real benefits in adopting cryptocurrency technology’s benefits (to governments and central banks).
Store Of Value
Bitcoin is a store of value. It can preserve its purchasing power over time. Click on the Value button below to access the page.
Bitcoin And Liquidity
Investors need to understand how Bitcoin liquidity affects price. Click on the Liquidity button below to access the page.
Bitcoin And Volatility
Volatility is often used by investors as an indicator of risk in an asset. Click on the Volatility button below to access the page.
Bitcoin Supercycle
Bitcoin is entering a new phase characterised by mass adoption. Click on the Supercycle button to access the page.
Fiat Destroys Wealth
The value of Fiat currency is being destroyed by governments. Click on the Fiat button below to access the page.
Bill Gates
“Bitcoin is a techno tour de force.”