What is Bitcoin | A Beginners Guide
You may have only recently come in contact with Bitcoin. Maybe you saw a news headline or your techy son or daughter has been transferring some to his or her friends. Many people make the mistake of thinking that it’s purely a speculative investment that can make you a lot of money. While the price has been rising dramatically in recent years, it’s so much more than just that.
What is Bitcoin?
Unlike the picture in this article, Bitcoin is not physical. It exists only in digital form via the wires, protocols, and systems of the internet. Of course, most of our national currencies like Rands, Dollars or Euros can be represented in the same way. Some of us don’t even use physical money for days on end until we actually withdraw it from a cash machine. Debit, credit card, and electronic funds transfers are common in countries with good infrastructure.
So what’s the difference then? One word – decentralised. There is no authority like a central bank creating new money. There are also no intermediary banks debiting and crediting your account whenever you get paid or pay your bills. That job is done by miners, don’t worry I’ll explain that process in a bit.
So Why Do We Need Cryptocurrency Anyway?
Protection Against Hyperinflation
Unfortunately we’ve never before had a way to verify whether governments, banks, and corporations actually do what they promise to, especially when it comes to managing finances. Throughout history, governments have bankrupted entire countries by printing too much money. The fact that they can print infinite amounts of the stuff eventually leads to hyperinflation which can be seen in modern times in countries like Venezuela, Zimbabwe, and Iran.
Hyperinflation happens when too much money starts chasing the same amount of products and services in an economy. Our entire system is built on this inflation idea which effectively transfers wealth from citizens to a small group of elite. How? In most cases when money is printed it’s given to banks, corporations, and friends of those in power, not the people.
Bitcoin is different because it has a few major advantageous over the traditional system. For one, it has a fixed supply. There will only ever be 21 million Bitcoins in existence. That scarcity means it can never be inflated like fiat (paper) currencies which potentially have an infinite supply. If you understand this concept alone you’ll realise why the price of Bitcoin is currently as high as it is. Its symbol is represented by “BTC” and this chart highlights a 162 000% gain versus the dollar since 2011 (even with the dramatic drop in 2018).
The same can be seen against all national currencies. Why? Because people are looking for a way to preserve their wealth against the effects of the uncontrolled printing of money. If you’re looking for a more in-depth resource on the evils of inflation I highly recommend a free called book called Fiat Money Inflation in France.
Mind you, Bitcoin does have some inflation built into its code. The difference, however, is it’s predictable and we can track it. This feature brings me to my second advantage – transparency. Bitcoin is open-source which means that anybody with some programming skill can download and audit the code, including the monetary policy. Try walking into the South African Reserve Bank or The Federal Reserve Bank of the US and asking to audit their finances. You won’t get anywhere.
Secrecy has always resulted in scandals, from Enron to Lehman Brothers and the title holder himself, Charles Ponzi. With Bitcoin we no longer have to rely on trusting governments or banks. Cryptocurrency introduces a new motto:
“Don’t trust, verify!”
If you’ve been paying attention to the online payment provider space lately you’ll be aware of the widespread abuse of power. Providers like PayPal, Stripe, and YouTube have all been involved in campaigns to remove or demonetize certain channels or content creators based on certain ideas.
Now to be clear there are many I don’t like or agree with. But it has become a very dangerous world when these providers can simply remove your ability to make money because they don’t like you. That threatens the very notion of free speech which is so important if we want to live in a democratic world.
Gold has typically been the go-to asset in times of crisis. Paper money always returns to worthless. History says so. The problem with gold is it isn’t very portable. Want to pay for a single music track to an artist on another continent? Good luck trying to chip a piece of gold off your bar and then posting it. Bitcoin is an infinitely better solution in an increasingly connected world.
I can carry all the Bitcoins in existence on a cryptocurrency wallet on my mobile phone. And since it’s a purely digital money I can pay for goods and services in any part of the globe which has internet to confirm my transaction. That’s a pretty powerful advantage over gold.
Advantages of Bitcoin
There are others but these are the major benefits I’d like to focus on for now. So to recap, here are the benefits of cryptocurrency and Bitcoin in particular:
- Fixed supply
- Transparent code & monetary policy
- Censorship resistant
Disadvantages of Bitcoin
No monetary system is perfect of course and any sensible exploration of new money should also look at the risks involved. I won’t expand on these for now but in the future I may explore these issues in more detail.
- No mechanisms to prevent hoarding
- Requires internet to confirm transactions
- Cryptographic protocol broken by quantum computing in the future
Hopefully this post has given you some food for thought about how Bitcoin works and what advantages it has over traditional paper currencies. It’s early 2019 as I write this and we are heading into another financial crisis. Whether that happens now or in two years, the Bitcoin price will continue to trend up. It’s just history and finance. There is nowhere else for it to go.
It’s important to understand that Bitcoin currently acts more as a speculative asset. That’s because it’s a relatively new player in an old and disfunctional financial system. As more people learn about and use the adoption rate will increase. At some point it will find a healthy level against paper currencies and become more stable. That’s when people will start using it as a regular medium of exchange. They’ll have to because the probability of other means of exchange becoming worthless will be very high.
If you’re still doubtful, there’s no harm in buying only a few hundred Rands or Dollars worth of it and playing around with the tech for yourself. If that sounds like too much feel free to get in touch and we can arrange a session to learn and buy your very first Bitcoin. The future is decentralized.
* Feature photo courtesty of www.thoughtcatalog.com