Bitcoin or the gold 2.0

A high-level, non-tech, social-economic-oriented article about Bitcoin. This article doesn’t aim to explain in details how bitcoin works but rather what it is.

Ancient Money

To meet our goal to understand what the f… is Bitcoin, we have to go back 3,600 years ago when our ancestors used different kind of natural elements as a mean of exchange. The first identified money was cauris. These little shells was used by several tribes and nations across Asia, Africa and Oceania to commerce with each other and thus were seen as a sign of wealth and prosperity.

Around 600 BC we started using gold minted coin as a primary medium of payment. Gold has every characteristic a money needs to have: it’s rare, recognizable, portable and because of these reasons it has an intrinsic value. Gold has since then been a standard. But this was true until the modern age and particularly until the 1944’s Bretton Wood’s Conference where the United Nations reshaped the world monetary system and agreed on Dollar becoming the World’s Reserve currency, obliging other countries to align their currency on dollar.

Money is trust

In 1971, Richard Nixon suspended the convertibility of other moneys into gold and forced every government to back their own currency. So what was left was only trust and paper money, the so-called fiat money.

Somehow, the shifting worked. People trusted their government backing these bunch of papers and telling them that this was money. Today still, we rely on these papers to pay goods and services although they have no intrinsic value. And we can do it because we trust our government to sustain it and tell us that it is a medium of payment. We are in a simple psychological pattern: because everybody uses Euro, Dollar or Yuan and because you don’t want to be left out of the system, you’re willing to accumulate these so called currencies to be able to negotiate, pay and trade with other individuals.

You have to understand that this is one of the main Bitcoin’s accusation. When you hear or read that Bitcoin is not money, why would the bills and pennies be considered as such since they have no intrinsic value? If everybody entrust Bitcoin to be the principal medium of payment, the evolution towards a new decentralized trustless payment system would automatically occur.

A decentralized digital payment system

Nowadays, all that paper money is mainly stored in big banking databases. When you’re transferring money to someone, you just input numbers in your computer waiting for the other person to receive it. This is just a matter of movement of digits in a database that is owned by the bank. No gold nor paper is moving between banks. Conclusion: banks are digital payment systems enabling and securing money transfers from one individual to another.

Paypal is similar: it is a fully integrated digital payment system with the whole money stored and centralized on Paypal’s servers.

Bitcoin is almost the same: it is a digital payment system but the principal difference is that it’s not owned by any third party, no authority, no entity, no regulation or no bank. Mark the words, when transferring money through your bank, you rely on her to carry out the funds’ verification and the transfer to the rightful account. Since Bitcoin is not owned by anyone, the verifications and the transfers are done through the bitcoin network thanks to cryptography and consensus protocol.

Moreover, the decentralized feature of the bitcoin network eliminates a single point of failure. Imagine your bank being hacked by a malicious group or person that could take over the data stored in the bank’s servers and erase it or modify it. With Bitcoin relying on the nodes of the network to store the history of every transaction and on the cryptographic hashes to secure every block of the blockchain, it becomes unhackable and unalterable.

A node of the bitcoin network is a computer that stores the bitcoin blockchain containing all the transactions that happened since day 1. Anybody with a computer, an internet connection and sufficient storage space could become a node.

This setup also enables the system to never shut down. Think about Napster who was shut down due to massive complaining and charges from the music industry. Their central database was easy to take over by the federals. When BitTorrent was launched after that, they came up with a bright idea: every computer would be able to share through internet and a peer to peer network any file, song, movie or e-book hence making the whole system impossible to be shut down or took over.

Bitcoin : a digital currency or the gold 2.0

Bitcoin is also a digital currency, same as fiat currencies (Euro, Dollar, Yuan). But the real difference is that Bitcoin can’t be created from thin air. When Dollar or Euro can be created by the people and authorities that have the rights and permissions to do so, Bitcoin can’t. In this context, Bitcoin is a scarce digital asset. It is only created through a predefined algorithm and through cryptography, mathematics and a vast network of computers agreeing on which transactions should be validated on the bitcoin blockchain.

Remember that what made gold valuable for 3000 years is the effort endorsed by the people to dig it out. Bitcoin lays on the same process. For a transaction to be validated, the network (i.e. the miners) has to find a cryptographic hash that takes approximately 10 minutes to be found. Once it is found, the network is rewarded with new bitcoins poured into the system. It costs electricity, chips and materials to be able to run and find the hash and can thus be compared as gold because it takes efforts for the network to be rewarded. This is what we call the proof of work which underlies the Bitcoin’s incentive mechanism.

Anybody can send money with Bitcoin, even if the other person is located 10,000 km away and even if you don’t know her. It takes approximately 10 minutes for the money to be sent and 60 minutes for it to be unalterable and unhackable when it can take up to 10 days for a traditional bank money transfer. You don’t need a bank account to process money with Bitcoin. What you need, is an internet connection and a Bitcoin wallet.

A bitcoin wallet is a digital wallet that can be created on bitcoin.com to send and receive Bitcoin.

Investment product or real solution for the unbanked?

Since 2017’s hype, especially within the financial realm, Bitcoin has been seen by the public as a speculative class of assets. The wide ups and downs of the USD/BTC pair (US Dollar / Bitcoin) attracted money sharks and traders from global financial places. Bitcoin’s fame was propelled by new millionaires’ holding Bitcoin and by success stories and great moves from traders. But this side of Bitcoin is hiding the real impact that it’s trying to make over the world.

The first issue that is attempting to solve Bitcoin is to give the 2.5 billion unbanked people of this planet a medium of payment.

When people from the richest countries see bitcoin solely as an investment product, a large part of Bitcoin’s community see it as a digital currency eventually giving them access to digital payments and money transfers at small cost and instantaneously. This is even more true for developing countries showing high corruption rates. When people start to fear and mistrust their government they can now rest on Bitcoin as a promising alternative. We can see it as a powerful tool to avoid corruption, bankruptcy and lack of transparence. In this fashion, Bitcoin offers plenty of use cases for these people.

Indeed, the bitcoin blockchain is a tremendous innovation allowing people to reach a consensus on anything. This enables people to trust each other without knowing one another. Anywhere we need trust or a third party to certify the truth, there’s an application for the blockchain.

Adverse governments

That is also one reason for governments to dislike Bitcoin. Their claim is that Bitcoin is mainly used for terrorism, darknet drug market and as a money laundering mechanism. But cash is also used as such. In fact, any mean of payment that is untraceable and easily transportable can be used as such. Thus governments want to go cashless: first to avoid this money laundering system but especially in order to trace and enclose every people in a cashless system where no one can go out of it. For instance, if there’s a crisis, people wouldn’t be able to run to ATMs and withdraw their money : it is a way for them to control who owns their currency and where it’s going.

A possible shifting in the future for the governments is to create their own digital currency backed by a blockchain. This would mean a cashless system used by everybody but still controlled by a central authority watching and surveilling the moves of its people. By definition a blockchain is a decentralized, secured, transparent and distributed database. It aims to remove control from a central authority or third party. If governments choose a centralized way of controlling money supply and movements across the network, that is not a blockchain, it is a just a centralized coin, just as it is today.

This is an important point: thanks to the blockchain, bitcoin provides monetary sovereignty outside government policy. That is why a lot of developing countries like Zimbabwe, Nigeria or South Africa are deeply opening up to this cryptocurrency.

Technical Limits

One remaining technical challenge for Bitcoin is scalability. Today, the bitcoin blockchain can settle 4 to 7 transactions per second, when Visa can handle around 1,650. Bitcoin’s ultimate goal is to allow anybody to transfer money at very low cost, really quickly and anywhere in the world. Because it needs computational power to process a transaction, the fees per transaction are today too high to enable somebody to pay a coffee with Bitcoin. Hopefully, initiatives from the bitcoin’s community to solve these problems are emerging and one technology known as the Lightning Network has been holding the attention. In the future we will be able to process a million transaction per second and use a fast, costless and efficient payment system.

The missing tool for a collaborative economy

Other challenges are rising for bitcoin but it has already proven what it is capable of and what issues it is solving. By aiming to provide a digital payment system for the 2.5 billion unbanked people, Bitcoin has shown the world that cryptography, consensus protocol and decentralized databases are the powerful enablers for a paradigm shift rendering the power to the crowd instead of a given central authority or third party.

In a world where the social, circular and collaborative economy is flourishing, having a technology that allows anybody to share, trade, pay or sell anything within a secured and transparent network seems to be the missing piece of Jeremy Rifkins’ “zero marginal cost society”.

Lots of bitcoin enthusiasts are spreading the word and many tech investors and experts such as Tim Draper or the Winklevoss twins are strongly commited in developing the blockchain world.

“We need better cross-border payments … because it’s good for development, it’s good for financial inclusion, so Bitcoin can help us” said Benoit Coeure, the European Central Bank executive board member in January 2018.

Bitcoin is on the threshold of further transformation and if you believe in the technology behind it, the so-called blockchain, and if you believe in the inevitable common collaborative economy we’re heading to, then you should dig a bit more into the crypto world where not only Bitcoin has shown great promises but revolutionary blockchain-based applications have stimulated the tech community and transformed business models.