BitcoinBitcoin is a decentralized digital currency that was invented in 2008 by an unknown person or group using the name Satoshi Nakamoto. It is a peer-to-peer system that enables transactions to be made without the need for a central authority o is money in its purest form.
In order to understand this, let’s take a brief look at the history of money.
For thousands of years, gold and silver coins were widely used as money. At the beginning of the twentieth century, gold had become the standard for money worldwide. That’s because it has certain properties which make something a good money:
Desirable properties of money
- Scarcity: If a commodity is too plentiful, you would have to carry a lot of it even for relatively low-value transactions.
- Durability: You want your money to survive long periods of storage in various environments: Raw grain is good, but silver is better. Gold is even less susceptible to corrosion than silver.
- Recognizability: Only very few metals can imitate the color of gold, and none of those are nearly as heavy or malleable as gold.
Note: There are additional desirable properties of money, such as fungibility and divisibility, which do not have immediate relevance to this discussion.
The problem with gold
There is, however, one Achilles heel of gold as money: It is slow and expensive to transport over great distances, especially in large quantities.
The solution seemed obvious to most of us throughout our lifetime:
Money as bank account balances
Whether your grandmother wrote a paper check and mailed it across the country, or you used online bill pay on your phone, the basic idea is the same: Instead of holding money ourselves, we deposit it with a bank, and whenever we want to use it, we ask our bank to transfer the desired amount from our own account to the recipient’s account, at the same bank or even at a different bank.
In this way, we don’t have to guard or transport money at all. We simply rely on our bank to take care of these tasks for us.
The drawbacks of “traditional” banking
So powerful is this advantage that we accept two substantial tradeoffs, one of which most people have never actually experienced, and one which everyone suffers all the time, but mostly without noticing:
- There are quite a few reasons the bank can and will decide to prevent you from using the money in your account: They might tell you a bogus story about how they need to restrict or freeze your accounts “for your protection” or be a little more honest and admit they are doing it to protect themselves from litigation or fraud risks. But there is also the possibility that the government might decide someone with your last name or the name of the person you’re trying to pay is no longer allowed to transact. Or maybe you once donated to a political cause whose opponents now control the government. Numerous instances of all of these situations have happened recently in countries previously considered Western democracies.
- Inflation is what we call the—more or less steady—decline of purchasing power of our currency, which we have all experienced throughout our life. Contrary to the mythology currently prevalent in the corporate-owned media and universities, the root cause of this continuous increase in prices is not evil employees demanding higher wages, nor is it evil corporations raising the prices of their product so they can pay those higher wages. In reality we need to observe only one basic fact: Between governments and central banks, the easiest way to pay for spending without having to generate an adequate amount of revenue is to simply “print” more currency, to generate more dollars out of thin air. When there is more of something—in this case dollars—then each one of those units will generally be worth less. This is due to the law of supply and demand.
In short, the balances in your bank account are not really under your control; and the underlying currency itself, the USD, loses value over time, quite dramatically so.
Bitcoin fixes this
Using Bitcoin for transfers has all the advantages of bank transfers mentioned above and none of the disadvantages:
Bitcoin at its core is one unified global ledgerA crypto ledger, also known as a blockchain, is a distributed digital ledger that records all transactions made on a cryptocurrency network. It is a continuously growing list of records, called blocks, that are linked and secured using cryp More, so there is no need for intermediaries to communicate with each other on our behalf: Anyone can send bitcoin directly to anyone else in the world, without having to ask permission or work around a financial institution’s opening hours.
But more importantly: No single individual or entity controls the ledger that is Bitcoin, that timestamped, ordered, global list of transactions. Once a transaction is confirmed on the Bitcoin network, there is no way for anyone to reverse or alter it. No judge, no king, no president has the power to retroactively change an entry. No hacker has that ability, either.
Note: When you hear about bitcoin getting stolen by hackers, this does not mean the Bitcoin network itself has been compromised, just as it wouldn’t mean your bank or the banking system as a whole have been compromised if someone impersonates you and authorizes a fraudulent wire transfer. In the case of Bitcoin ATMs, the situation is very similar to regular ATMs: You might withdraw cash from a machine and then lose it to a fraud or robbery. In the same way, it is an unfortunate possibility that you might purchase bitcoin at an ATM and then lose that bitcoin to a scam. In neither case is this the fault of the ATM or your bank. What is really on display here is merely a simple quality cash and bitcoin share in common: They are both essentially bearer instruments. Whoever holds the cash—or the bitcoin—is presumed the owner and can spend it; transactions are always final.
The other major problem with fiat currencies, inflation, is also nonexistent in Bitcoin: There will never be more than 21 million BTC in the world. Tens of thousands of people running Bitcoin nodes make sure of this. This absolute, digital scarcity has never existed before in human history. In Bitcoin we are looking at the hardest money of all time.
How is this possible? It almost sounds like magic!
Once we start understanding what Bitcoin truly is, we inevitably question if all these properties are really as described. It just appears too good to be true. A 100% reliable, immutable, global ledger which does not rely on any centralized entity and as a matter of fact cannot even be successfully attacked by any entity, this concept seems unimaginable until you explore in depth the ingenious technological design that aligns incentives in such a way that all participants, while acting for their own economic benefit, strengthen the system as a whole and create value for everyone else. What a stark contrast to the zero-sum, exploitative financial system we used to consider the only possible way to organize an economy!
By now, almost everyone has heard of Bitcoin, but very few people as yet understand the basic idea behind it.
I invite you to join the Bitcoin revolution today! We are still early.