What is a cryptocurrency and why it’s so great
Now, there was a time before bitcoin and there was a time after bitcoin. As you have probably noticed in 2017 bitcoin has gone viral. I’ve been in this much earlier than 2017 but 2017 was the year of bitcoin. As a linux fan, I’ve always waited for the year of a linux desktop and, sadly, it never happened. But boy, did bitcoin smash everything to pieces. Consider the following google trends comparison:
People who were looking to buy bitcoin were more than people who wanted to buy gold or to buy stocks. It even outperformed buy iphone, which is insane. Practically everyone has heard about bitcoin by this point and price skyrocketed nearly to 20k before calming down before the next rise (at the point of writing this did not happen yet, but I predict next run will be at least 50 thousand per bitcoin, we’ll check this time capsule in half a year 🙂 )
Since price is rising so badly many people scorn that bitcoin is a bubble. But, I’ll show the intrinsic value behind bitcoin and why it’s price is rising not only because everyone is buying but why it’s valuable also in itself. There are thousands of cryptocurrencies today but I’ll start with bitcoin to show why it was such a monumental cornerstone in the money revolution and what was so great about it when it came out that attracted its always growing userbase.
So, bitcoin is essentially online payment system. That appears to be nothing new. Long before bitcoin there was a paypal and similar services that operated successfully. Banks also make online payments successfully (to an extent). But there are some crucial differences, bitcoin firsts that introduced something nobody saw coming or expected:
All previous services before bitcoin had to run on some server. As a physical machine that you run to view this website other machine has to serve your requests to satisfy your payments. The problem with this is that in the internet everyone can find where your machine is located (if you’re not using some elaborate schemes like Tor etc.).
So, if some bad people wanted to shutdown some centralized payment system, like paypal – they know where to go. They could issue a law that would forbid paypal’s activity, sue paypal and issue a huge fine, make it bankrupt and so on. Paypal has to play by the rules and regulations. The state and environment in which paypal operates today is not necessarily the same it will be tomorrow, which brings an uncertainty and makes it fragile.
On the other hand, bitcoin (and most other cryptocurrencies) can run anywhere. My computer can run bitcoin node. My neighbour can run bitcoin node. Some guy in the mountains can run bitcoin node. Today, there are 11712 nodes that run bitcoin. Even if half of them were shut down bitcoin would continue to operate. There is no single point of failure. So, it’s much easier to trust than some centralized servers with imposed restrictions and changing requirements.
When you make a transaction with paypal or with bank you trust a bank to perform your will of transacting money. It can say no any time for most bizarre reasons. It might say “you’re doing a fraud, you’re Osama Bin Laden’s cousin” and you’re trusting them that they will take care of your money going to the recipient. That their servers will not corrupt the data you send. That their systems will not get hacked and your account will not be emptied by a third party.
Not so with bitcoin. Sure, people say bitcoin wallets are hacked, but if they are hacked they are hacked in your computer. If bank gets hacked, it doesn’t matter what you did in your computer – your bank account could be done. But, with bitcoin your private keys that unlock your funds never leave your computer. Once you understand how cryptography works (a huge subject on its own, just trust me on this, pun totally intended) you realize that nobody even has a slightest chance of messing with your bitcoin as long as private keys are safely tucked in your computer and nobody hacks your laptop. That’s why when owning bitcoin (and using secure operating system like linux) you can sleep well, knowing your bitcoins are safe as a baby in her mother’s hands and you don’t need to trust huge teams of people who may or may not know what they are doing with their money and can make innocent mistakes any day in their servers.
I’d love to use the word anonymity for bitcoin but I cannot. It’s rather pseudonimity. There are other cryptocurrencies out there that are truly anonymous, like Monero, Dash with its private send, Byteball’s darksend. But, I will say, compared to an average bank or payments service bitcoin provides much greater degree of privacy. For instance, to register at paypal you need to provide first name, last name, address and so on. However, in bitcoin the data you need to provide to the network about yourself is a flat zero. No need to send your id, no need to sign any papers. Just install the client and off you go. All you need to give for the people who want to pay you are the bitcoin address like 163iS81U8qZRig27HavLh6ZwixgPbVQrpU and that’s it. No address, no name. You might as well give them this address while you’re completely anonymous to receive your money. Not so with any other online payment system. Only cash can come close to such convenience.
Practically, every today’s conventional payment system imposes some limits on you. Like, you can only cash out thousand bucks before you verify your account. Or, you can topup only such and such amount per year. Or, it is much harder to send money across borders. In bitcoin there are no limits. Sending one bitcoin (12 thousand dollars by todays price) costs exactly the same as sending 100 bitcoins (1,2 million dollars). And it is irrelevant if the recepient of money is in Africa or a north pole. Nobody will ask you for your id, nobody will block your account for such payments. You probably will not even get investigated because nobody even knows who you are in the first place. The flow of value between persons was never so simple and easy and frictionless.
With current dollar or any other fiat currency we have no idea how much there is in the market. Some years we say that the prices are rising, the life gets harder. We have zero control or knowledge of our money supply. If we were working 40 years and were saving our money for our kids and say save up hundred thousand dollars. Let’s say that hundred thousand dollars is one percent of the entire dollar supply. It would really suck if someone printed just ten times more dollars than there are and they go into circulation, wouldn’t it? You would become 10 times poorer. You’d have the same amount of dollars but you would end up poorer because its supply increased.
Not so with bitcoin. From the very beginning of bitcoin the amount of it was clearly defined and there’s no way for anyone to ever create more bitcoins than it is intended to be mined in the original code. The cap is 21 million. At the time of this writing there are about 16,8 million in circulation. So, if you were to buy one million bitcoins today and put it in your tucked in wallet, you can rest assured that you have one twenty-oneth part of the entire bitcoin supply, period. Nobody can come and create another twenty one million bitcoins, making you twice as poor. And this will never change, the same yesterday, today and forever. And when bad people will print dollar infinitely you can sleep well knowing you will retain your savings and there’s nothing anyone could do about it.
Another great feature of a bitcoin, which is there in some extent in the fiat money is divisibility. One dollar is divisible to two decimal places, to hundred cents. Which may be okay, I guess, but bitcoin exceeds this by a whopping 8 decimal points, that is, hundred million satoshis (lowest possible bitcoin amount of 0.00000001). For dollar, two points may be enough, but one bitcoin now costs 12k dollars. Now, similar to bitcoin, gold also has quite a few of the bitcoin’s properties as a store of value, but I cannot send one hundred millionth of a gold bar to someone, which is much less convenient. Even if some bad people were to buy 99.99% of the bitcoin supply average people could still perform day to day transactions because it is that much divisible.
How hard is it to print paper money? Not much for people who do it “legally”, when they do it that is called “regulating money supply”, if you were to do it you’d be called a criminal. Gold and paper money are much easier to fake. I’ve heard of people who bought gold bars their entire life to save up money and when they needed them for something important, like spouse’s medical treatment and then all of them turned out to be fake. Much harder to spot fake gold, you need a technical jewelers equipment to do it. Likewise, people who get large amounts of cash sometimes go to the cashier and ask them to check the money. However, in bitcoin, it’s laid bare for everyone to see and you cannot send fake bitcoins to anyone. Surely, if you’re naive someone could tell you “I gave you 10 bitcoin” and show you a fake web page, but to verify the transaction yourself all you need to see is received transaction in your wallet with a few confirmations. If these are confirmed – these are real bitcoins and it cannot be any other way.
So, to summarize, bitcoin revolutionized money forever by bringing in these traits that did not exist before in any other payment system (at least all of them simultaneously):
- Cannot be shutdown due to decentralization of thousands of nodes versus single servers that can be shutdown
- You don’t have to trust any entity to perform a transaction unlike centralized services that can change rules any time
- Bitcoin introduced privacy to its users that was unheard of in centralized payment systems
- Bitcoin completely removed all transaction limits imposed by centralized services
- Bitcoin introduced a finite money supply with an unbreakable promise that there will be no inflation unlike fiat currency
- Bitcoin introduced huge divisibility factor for money unlike gold which cannot be broken in pieces easily
- Bitcoin introduced a way for users to be 100% sure that they received their money and nobody can do anything to reverse the transaction unlike chargebacks in centralized payment systems
So, is bitcoin a fad and has no intrinsic value on its own and is a bubble ripe to explode? I’ve laid the facts and now it is your job to decide on your own 🙂