What Is Bitcoin & What Does It Mean For The Future Of Finance
It was sometime earlier last year. It was after midnight. I had just come home after a long day of work, depleted and dejected. I found myself in bed learning about positive cash flow and passive income, probably because I didn't want to do what I did that day for decades to come.
That's when I serendipitously came across Bitcoin. I don't remember exactly how I stumbled upon it, but I do remember that I didn't sleep that night. Not one bit. I was empty of sleep yet full of curiosity, barely understanding what I was reading but reading like a madman nonetheless until the sun came up and birds started chirping and I had to go back to work. Of all the all-nighters I've done so far in my life, it's the only one I don't regret. Not one bit.
For this week's post, I want to cover three things. One, what Bitcoin is. Two, its pros and cons. Three, my outlook on its future. I'm not sharing them to convert you in any way. I'm sharing them because they opened my mind to how the world is changing and how I can be on what is hopefully the right side of history. And it's better if we're on it together. Let's dive in.
Just what the hell is Bitcoin, anyway?
Bitcoin is digital money. And there are lots of computers around the world that verify all its transactions. To verify, these computers have to solve math problems and complete "blocks," and each block is a collection of transactions. This process is called "mining." And "miners," the people who run these computers, are rewarded with Bitcoins for doing so.
When these blocks are created, they're added to a long chain of records called a blockchain. Because all the computers running the blockchain have the same data and can transparently see all the new blocks being created with new transactions, no one can cheat the system. And since Bitcoin is not issued or backed by banks or governments, it's decentralized. In short, Bitcoin is created, distributed, traded and stored using this decentralized ledger system known as a blockchain.
So, there you go. We have people buying Bitcoin as a store of value, which is why we often call it digital gold (bought as a commodity). We have people paying other people or businesses in Bitcoin to buy a cup of coffee or two pizzas or even a house (used as a currency). And behind the scenes, we have miners who are using massive computing power to do the bookkeeping for us and keep the Bitcoin network credible.
The whole idea may seem daunting at first, but once you start using it, it's quite similar to what we do with our money every day. Just like your bank account, there's a digital "wallet" where the balance of your Bitcoins is kept using public and private "keys." These keys are long strings of numbers and letters that are created through a mathematical encryption algorithm. Think of them as your unique digital signatures that cannot be replicated.
Your public key is like your bank account number and your private key is like your secret ATM PIN that only you want to know. One interesting thing to note here is that your public key automatically creates a new wallet address for you after every transaction. It's programmed that way to protect your privacy, keep you anonymous and make your public key not so public.
With the basics covered, let's take a moment to acknowledge the mysterious and pseudonymous creator of Bitcoin, Satoshi Nakamoto. We don’t know who you are but we thank you. Here's an abstract of the whitepaper. You can read the whole thing at https://bitcoin.org/bitcoin.pdf.
Now moving on to the four major pros and cons of Bitcoin as I see it today. Let's start with the good stuff.
Good:
1. Bitcoin is public, decentralized and uses secure cryptography to verify transactions. Its network is going to stay safe and secure unless the hacker has billions of dollars and is so bored being rich that they buy tons of supercomputers to outcompete the computing power of the Bitcoin network and decide to attack it for fun.
2. International transfers using the traditional banking system can take days or even weeks with multiple rounds of approvals between banks. Bitcoin transactions only take mere seconds or minutes with low transaction fees. As a peer-to-peer network without a central authority, Bitcoin makes transactions more efficient.
3. People who don't have bank accounts can buy and use Bitcoin as long as they have phones and an Internet connection. It’s why a lot of countries in Africa like Nigeria, Botswana and Zimbabwe have adopted Bitcoin. It empowers financial inclusion and frees people from having to rely on existing infrastructure. Fun fact: El Salvador will become the first country to make Bitcoin their legal tender on Sep. 7, 2021.
4. Unlike fiat currency which can be printed unlimitedly at the whim of governments, Bitcoin has a fixed supply of 21 million coins. It means Bitcoin is deflationary and as long as the demand is rising, its price will go up. This system is designed to reward early adopters and makes Bitcoin a great hedge against inflation.
Bad:
1. The math problems computers have to solve to mine Bitcoin are not particularly difficult. It's just the sheer quantity of problems. As quantum computers develop and become commercialized in the future, they can be used to hack the Bitcoin network. I'm sure the security of the Bitcoin network will grow with it and no need to worry now, but I think it’s fair game to keep in mind the potential of quantum computing.
2. The Bitcoin network is unregulated because it has no central authority. If someone were to get a hold of your private keys and move funds out of your wallet, say goodbye to your money. Crypto exchanges can help blacklist the alleged hacker's address and keep track of where your money is moving to, but there's not much you can do. This is why I think some regulations have to be put in place for investor protection.
3. If you forget your password, you can reset it by getting a code to your phone or verifying your SSN or communicating with your bank in person. Not with Bitcoin. If you lose your private keys, you lose everything in your wallet. There is no way to recover it. You are essentially your own bank, so whatever happens to it is your sole responsibility.
4. The world of cryptocurrencies is still early and not widely adopted. It's a volatile space filled with high rewards and I want to say higher risks. And given that cryptocurrencies are programmed software, there could always be unexploited flaws in the code. Maybe they exist and we just haven’t found them yet. Bitcoin is the safest one of all but it's still not an exception.
All things considered, I remain optimistic about Bitcoin. The Internet was the revolution of information. It changed how we absorb ideas and communicate with one another. Bitcoin is the revolution of money. Its technological genius is already changing how people think about money and has given birth to other cryptocurrencies that are truly promising (more on this later). I expect them to be widely adopted in the next few years.
Big companies and institutions are finally jumping in too because they don't want to miss the boat. Goldman Sachs, Fidelity, BlackRock, Morgan Stanley, Tesla, MicroStrategy. The list goes on. The same for billionaire investors. But most importantly, I think people are fed up with the bureaucracy and arrogance of central banks and slowly waking up to the irresponsible governments stealing our money with reckless money printing.
Now, I don't think Bitcoin solves all these problems. Nor do I think that it must be the choice of money for the future economy. I think what it has done is build a foundation for us to rethink how money can change for the better and I'm excited to see that happen. It’s history in the making, and I hope the wider crypto space can mature along the way so more people can easily understand it and join the movement. That’s all for now but I'll leave you with some charts to think about. They certainly gave me something to think about.