Bitcoin Review: What is Bitcoin?
in Bitcoin (BTC)
Bitcoin: What is it?
Bitcoin is the world’s premier cryptocurrency. If someone has only heard of one crypto, odds are its Bitcoin. However, it’s one thing to have heard of Bitcoin and another to understand it. Bitcoin is many things and some of its coolest features have nothing to do with money.So...what is Bitcoin?
A Copy-Resistant File
Bitcoin is the first-ever digital “file” that can’t be copied. DVDs, music, classified information... As Edward Snowden and Chelsea Manning have shown, even top-secret government documents can be copied. Bitcoin is the first digital file ever that cannot be copied. You would have as much luck sticking a bar of gold in a Xerox machine as you would trying to duplicate Bitcoin.
What is the value of a digital file which cannot be copied? Money, certainly, is a good use case. Nobody wants to use money that someone else can make more of… However, money is just the tip of the iceberg. Bitcoin is digital trust and we’re only just beginning to find out how to make use of this property.
Bitcoin is the world’s most secure cryptocurrency. It is backed by a network of more than 1 million ASIC miners—machines collectively worth billions of dollars. This network of computers is what makes Bitcoin secure and immutable (cannot be hacked). We could further explain Bitcoin’s security network with an analogy.
A friend asks, why is Bitcoin so special? Bitcoin claims to have excellent security but there’s another cryptocurrency that makes the exact same claim. If both projects say that they’re immutable and secure, what’s the difference? Why is Bitcoin so great?
The Safe Analogy
Imagine you have $1,000,000 in gold coins.
Scenario 1 - The coins are stored in a bank vault. The vault is sealed with 12-inch blast doors that can only be opened via authorized fingerprint. The premises are monitored with cameras and infrared sensors. Trigger happy guards with automatic rifles patrol the premises.
Scenario 2 - The coins are stored in a $200 safe that’s poorly hidden in someone’s closet.
From a very high level, we can claim that both sets of coins are equally secure, as both sets are stored in a locked safe. This is the same thing as saying that Bitcoin and the other cryptocurrency network are equally secure.
As soon as we look closer though it’s quite obvious where the gold is safer. The same is true for Bitcoin. As soon as we look at what backs up the claim of immutability, we can see why Bitcoin is the safest protocol. Bitcoin is secure because it would take a multi-billion dollar investment to buy enough hardware to attack it successfully. That’s if the potential attacker could even buy the hardware, as such a large purchase would exceed available supply and raise any number of red flags.
On the other hand, some other crypto networks can be attacked with rented hardware at a minimal cost (thousands to tens of thousands of dollars).
Once information is recorded on the Bitcoin blockchain, it stays there. Typically we think of this as transactions; however, it doesn’t have to be only transactions being recorded on-chain. We can put lots of different types of data on the Bitcoin network, including a message.
Imagine that you’d like to predict what will happen five years in the future. With Bitcoin, you can timestamp your prediction so that it gets recorded on-chain and everyone can see when you made it. This would provide incontrovertible proof that you made a prediction at a given point in time and are not falsifying the claim.
A prediction is only a simple example of the value that comes with timestamping data. There are many other use cases that will become popular in the coming years.
Show me the money!
When most people think of Bitcoin, they probably think of it as a currency. Below are two explanations of how Bitcoin works as money. There’s the simple explanation, ideal for Thanksgiving dinner conversations. Then there’s the longer explanation, for those who want to see the full picture.
Bitcoin Explained in 60 Seconds
Bitcoin is like a digital money order that you can send anywhere in the world. Unlike Western Union, the Bitcoin network functions 24 hours a day, 365 days a year. Unlike a bank, anyone in the world can create an account for free and transactions cannot be stopped by a government or any other organization.
A majority of the time, a transaction will cost a few dollars or less and take about an hour. However, when the network is busy, a transaction can cost more and take longer, but this is rather unusual.
In Depth Coverage
Bitcoin is hard money, like gold. There is a set inflation schedule that dictates how much new Bitcoin is created every year, and this cannot be altered or changed. There will only ever be 21 million Bitcoin, that is all. There is no Bitcoin central bank, and no single person, organization or government body controls the network. Changes can only be implemented when there is a wide-scale consensus between the miners and developers.
Since Bitcoin has a predetermined inflation schedule, it is fairer than traditional fiat money systems. The Cantillon effect suggests that those closest to the money printing benefit the most, while those farther removed from the money spigot are hurt by inflation; i.e., Wall Street and the large banks benefit from Fed money printing as they receive the newly minted dollars, while the average citizen is hurt by inflation since the money reaches them at a later stage.
As mentioned, Bitcoin is the world’s most secure cryptocurrency. It also has the longest track record out of any major cryptocurrency. For more than a decade, Bitcoin has never been hacked or compromised. It has a single focus: fantastic security, and the network achieves this very well.
In terms of usability, anyone can use Bitcoin! That’s a really big deal. In the traditional world of finance, there are a lot of restrictions on who can open a bank account. You must have all of the right documents to prove your identity. Even then, a bank manager can deny you, or they can close down your account at any time. We saw this recently in Hong Kong, where politically unfavorable persons had their bank accounts closed and credit lines frozen.
Compare this to Bitcoin. Accounts are free, they require no verification, and they cannot be closed. Furthermore, transactions cannot be censored or reversed. Nobody can stop a transaction from happening, nor can anyone take Bitcoin from your account. Civil forfeiture happens when the government takes (freezes) all of a person’s assets, including everything that’s in their bank account.
This cannot happen with Bitcoin. By following proper security procedures, it becomes impossible for anyone in the world to confiscate your Bitcoin.
- Bitcoin is hard money with a deflationary monetary policy
- Bitcoin is the most secure cryptocurrency on the planet (secure money is good money)
- Anyone in the world (with an internet connection) can use Bitcoin
- Nobody can stop or reverse a Bitcoin transaction
- Nobody can take your Bitcoin (provided your security procedures are excellent)
Bitcoin grows in value as central banks around the world inflate the money supply and debase their currency.
Bitcoin grows in value as governments increasingly try to control what their citizens can and cannot do with their money.
Bitcoin grows in value as more people join the network. Like a social media platform, Bitcoin and other cryptocurrencies benefit from the network effect. It’s believed that just 1 or 2% of people in the world who have access to the internet currently use Bitcoin. What will Bitcoin’s value be when that number hits 10%?
The Narrative is Changing
Bitcoin’s narrative changes over time. Nic Carter put together this excellent infographic (part of this article), which nicely illustrates the changing story.
By far, the most considerable trend shift has been the change from digital money to digital gold. For years people bemoaned how difficult it was to buy the proverbial cappuccino with Bitcoin. However, these lamentations have died slowly as Bitcoin’s narrative as digital gold has emerged in the last year or so.
People don’t spend gold, they save it. Hence the concern about not being able to spend Bitcoin dying down. Could the narrative change again? Absolutely, that’s just part of the game. What’s unlikely to change is Bitcoin. If there is one currency that is still going strong in thirty or forty years, it’s BTC. We’ve already got a decade under our belt; let’s see how far we can go.
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This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.