Bitcoin Beyond The Hype: Revolutionizing Finance As We Know It
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From starting at $0 in 2009 to its all-time high value of $68,000 in November 2021, Bitcoin has been all over the news, but what exactly is Bitcoin and where does its value come from?
Bitcoin is a decentralized peer-to-peer electronic currency, and thus, transactions do not require a third party, intermediary, or centralized control of funds. Bitcoin transactions are all stored in a public ledger called a blockchain, or a series of blocks, each linked to the previous one. Much like the internet, anyone can access the Bitcoin blockchain and verify that the transactions contained within are valid. Bitcoin’s value lies in it being the currency of the world’s first decentralized global monetary network, its scarcity, and the energy used to mine it.
The creation of Bitcoin, a process called mining, is also decentralized. New bitcoin are mined by solving complex cryptography problems, though only 21 million bitcoin will ever be mined due to its hard cap. The network’s robustness is accredited to proof of work, a process that proves one’s computational efforts in creating their bitcoin and allows verifiers to confirm the expenditure.
Bitcoin’s benefits lie in the fact that it is accessible and versatile. Its transactions do not require banking fees and the transactions themselves are speedy and secure. But most importantly, Bitcoin is a store of value, meaning that it maintains its value as time progresses. In The Bitcoin Standard, Saifedean Ammous states “Scarcity is the fundamental starting point of all economics.” All good stores of value are scarce, have a limited supply, and are unaffected by inflation. Bitcoin matches these characteristics.
Inflation is a worldwide problem. The United States (US) dollar, commonly used as a currency in the US as well as other countries, is being inflated; one dollar in 1973 is worth six dollars today. The problem with inflation is that people saving the currency being inflated have less purchasing power than they did before. This means that whatever they could buy previously, they can buy less of today. Since the amount of bitcoin being created every day is pre-determined and can’t be altered, Bitcoin offers a way around this problem. While those in the US can buy typical assets like stocks and gold, not everyone has this option. Millions of people around the world are unbanked, or lack access to financial institutions like banks. Without the permission of financial institutions, they are left without many essential financial services like banking, insurance, and currency exchange. Bitcoin is completely permissionless, or accessible to anyone without restriction. Despite this, it is near impossible to steal Bitcoin. While other physical commodities require millions of dollars for protection, Bitcoin is kept secure using inexpensive but incredibly secure cryptography techniques. Storing Bitcoin requires a private key, which can be represented as and then derived from a series of mnemonic code words. These mnemonic code words are a series of usually 12 or 24 words that can be written down on a piece of paper or stored in another method. Nevertheless, if the user loses their mnemonic code words, their Bitcoin is lost and can’t be recovered.
Bitcoin allows an individual to control their own funds without intermediaries that would make for more liabilities and security threats. Bitcoin also has superior qualities as a monetary network. Bitcoin distinguishes itself from other existing digital payment methods by being an open monetary network. This gives Bitcoin a huge advantage through the numerous ways to interact with the Bitcoin network—a custodial wallet or a non-custodial wallet—meanwhile, there is only one way to interact with a monetary network like Visa or Paypal, which is to create an account with them.
Bitcoin’s detractors usually highlight Bitcoin’s scalability issues, or challenges of growing the system. Some of Bitcoin’s scalability issues arise from the limit to the volume of the total transactions in a block, which means that sometimes, when many want to make transactions using Bitcoin, fees can be high because the network can only confirm a certain amount of transactions in a given time. Additionally, each transaction takes around 10 minutes to confirm, which can be a significant amount of time to wait for small, trivial payments. Developers recognized these issues and conjured compelling solutions like the Lightning Network, which allows for instant Bitcoin transactions with greatly reduced fees.
Many are inspired by the development and growth of Bitcoin because they see it as a way to regain control of their money. While government-issued currencies depreciate in value over time, the world grows more and more expensive. Bitcoin, with its limitless potential, may be the hedge against these challenges.