Bitcoin is a relatively new form of currency that is just beginning to hit the mainstream, but many people still don’t understand why they should make an effort to use it.
Bitcoin was one of the biggest leaps in technology since the inception of the Internet, hailing the new era of digital money, disrupting industries and financial institutions as well as introducing a new social paradigm where transparency and trust are the default value.
How does this work?
Bitcoin has no central monetary authority. Instead, it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks; a procedure is known as Bitcoin “mining.” The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21 million. There is, therefore, no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.
The entire network is used to monitor and verify both the creation of new Bitcoins through mining, and the transfer of Bitcoins between users
Transformation in Financial Industry
German philosopher Schopenhauer was right in saying that all truth passes through three stages – first, it is ridiculed, then it’s violently opposed until finally it’s accepted as being self-evident. Case in point for Bitcoin.
Back in 2010, when most of the world first heard of Bitcoin much-renowned finance and economy experts were skeptical about the digital currency’s complex mathematical algorithm, dubious origins, and unknown creator.
Fast forward six years, leading banks and financial institutions are pouring millions of dollars investment into research. In the attempt to harness the power of the blockchain, the protocol that enables Bitcoins and other cryptocurrencies, major players such as Santander and JP Morgan gave a tacit acknowledgment to the fact that Bitcoin is valuable.
BITCOIN COULD ELIMINATE CREDIT CARD FRAUD. About one in 50 credit card transactions are fraudulent and merchants eat that cost according to Bitpay co-founder Stephen Pair. Bitcoin offers a huge opportunity to merchants because sensitive information is not transferred in Bitcoin transactions. This makes the potential for fraud minimal. Bitpay is a Bitcoin payments processor. (Bloomberg)
If banks proceed to adopt blockchain-based transactions as well as officially accept bitcoin as a currency, they will be doing humanity a huge favor. Considering current bank transaction times of up to five days not to mention the enormous fees as compared with any cryptocurrency transactional, blockchain payments would be instant and cheaper.
Inflation -vs- Bitcoin
One may argue that Bitcoin as a store of value may even be better than some of the national currencies, especially in countries where the local economy is turbulent as is the case with certain Latin American countries where $1 today may be worth just 50 cents the next day.
Another advantage of Bitcoin is its built-in deflation mechanism achieved by a hardcoded limit of 21 million bitcoins that will ever be in existence. The way our traditional debt-based economic systems work, inflation is almost inherent in the design. In other words, your dollar’s purchasing power today is almost guaranteed to be lower in a year or a decade from now.
Matthew O’Brien, a renowned American author, and journalist for The Atlantic described Bitcoin as a “tech stock,” claiming that its volatility rate doesn’t represent a legitimate currency.
“Bitcoin has a massive deflationary bias. Its money supply is mostly fixed, but the menu of things it can buy is growing. The same amount of money chasing more goods means money will be worth more. Or, put another way, prices will fall in Bitcoin terms. And that’s why it’s not a currency, and won’t be one until it has a central bank.”
On the contrary, bitcoins by design will steadily increase in value as the currency becomes universally adopted until the point when the last bitcoin is issued, a process, which is controlled by a mechanism called halving. Halving ensures that the prize that miners get for each bitcoin they mine is halved on regular intervals before all the bitcoins have been mined which is projected to be around the 7th May 2140.
Despite recent years’ volatility, bitcoin has been relatively stable and increasing in value. From an investment point of view, you may have been safer investing in the digital currency as opposed to more traditional commodities such as silver that in fact lost nearly 40% of its value in the last five years.
Power To The People
When the Bitcoin whitepaper was released in 2008, it caught the attention of programmers and hackers who revered it as a true masterpiece in cryptography and computer science. This unleashed a wave of other cryptocurrencies also known as alt-coins, and a whole new community of computer experts formed who were inspired to share a spirit of exploration and experimentation which lead to the first wave startups utilizing bitcoin blockchain technology.
What is more, the decentralized ledger concept that Bitcoin introduced applies to many industries outside of finance. Many developers believe that blockchain will become the main data storage medium for authorities in the future when the authenticity of birth certificates, marriage agreements, and education diplomas will be guaranteed through the technology. Using Bitcoin for everyday transactions is an act of support for innovation.
According to Alasdair Rambaud, senior vice president for payment solutions provider CardinalCommerce
“I don’t see any other barriers to mass adoption of this aside from the image. It’s easy to use, super transparent and you don’t have to take any risk as a merchant.”
Ultimately, mass adoption of Bitcoin will not only mean financial and technological revolution. Bitcoin is not simply a currency or protocol. Bitcoin is the ultimate showcase of trust in mathematics and perfectly embodies the changing times we live in. Disrupting the money space is also disrupting our cultural, social and political systems.
Finance and politics have been closely linked throughout history and recognizing Bitcoin as an official currency will have a big impact on world’s governments, political parties and administrative institutions who will have to adjust legislations to match the new paradigm. Undoubtedly, this will lead to more transparency within governments and prevent corruptive practices.
Reducing the human factor in money supply and institutional involvement in money distribution to the minimum is an important step forward for our society, and hopefully, we will witness a widespread economic reformation in an attempt to solve the inherent problems with paper money. In this respect, Bitcoin was the missing piece in the puzzle.