Let’s speak about money for a bit before we go into Bitcoin. What precisely is money? Money is, at its foundation, a representation of value. Throughout history, value has taken many various shapes, and humans have used a variety of things to symbolize money, such as commodities, livestock and, of course, gold. We also recognize that in order for anything to symbolize value, people must have to trust that it is valuable and that it will remain valuable for long enough for them to redeem it in the future. We used to rely in some physical ‘thing’ to symbolize money, but that is no longer the case, and we have switched our trust paradigm from trusting some ‘thing’ to trusting some ‘one.’
BREAKING AWAY FROM THE GOLD STANDARD
People didn’t carry around gold bars or other kinds of value about in the past, thus paper money was devised. A bank or the government would offer to take control of your gold bar in exchange for receipt certificates, which we refer to as notes. If you ever needed to get your gold back, simply return the notes to the bank and exchange them for your gold bar.
However, the abolition of the gold standard in 1933 destroyed the link between the paper receipt and the gold it represented. To summarize, governments assured their citizens that the government would be responsible for the value of the paper money. To put it bluntly, forget gold and instead trade paper. People have continued to trade with paper backed entirely by the government’s word ever since then.
So, why did that continue to work? Because of faith. Despite the fact that there was no underlying commodity to back paper money, people trusted the government, and fiat money was established. Dollars, euros, pounds, and other currencies now have worth because the government says so. Without a doubt, the value of today’s money is the result of a legal status provided by central authority.
There are problems to fiat money. It’s centralized, with a central authority controlling and issuing money, and it is not restricted in amount.
PROBLEMS WITH FIAT
Fraud & exploitation. When banks have a mandate to generate money, or value, they control the flow of value in the world, giving them nearly infinite power. Employees at Wells Fargo, for example, used fraud to meet ambitious sales targets, including establishing millions of accounts without client authorization.
Loss of control. We give the government sovereignty over money, a store of value. Government, particularly despotic government, can decide to freeze your account and prevent you access to your funds at any time.
Hyperinflation. The problem with having infinite authority to print endless amounts of money is that it erodes the value of citizens’ money and causes hyperinflation. Consider Venezuela, Zimbabwe, or Russia in 1990s.
Bitcoin is an alternative, depoliticized store of value whose monetary policy exists outside of the traditional national currency-driven economy. Something that becomes a viable hedge, another option, in the same way that gold has historically served that purpose in the analogue world. In this period of uncertainty, unparalleled monetary stimulus, and a plethora of geopolitical dangers circulating across the world, the argument that this is, in essence, a type of digital gold is an appealing one.
WHAT MAKES IT SO SPECIAL?
Bitcoin eliminated the ‘double spend problem’ by eliminating the requirement for centralized authority. Bitcoin is, at its foundation, a transparent ledger with no central authority. The value of bitcoin is based on its technology and the network effect, often known as Metcalfe’s law. Facebook, for example, has value because it has a big network impact, with millions of daily users, as do most social media sites.
Let’s make a comparison between Bitcoin and a central bank. Because most money is now digital, the bank keeps its own record of balances and transactions. However, such a ledger is not transparent and is kept on a centralized server. You cannot investigate it, and only the bank has total authority over it. The Bitcoin ledger is totally open. Anyone can look at it at any moment to see what transactions and balances are taking place. The only thing you won’t be able to determine is who owns those sums and conducts those activities. It’s pseudo-anonymous.
Bitcoin is decentralised. Every computer in the system keeps a copy of the ledger, which is also known as Blockchain. Nobody has ever been able to hack Bitcoin. Banks, on the other hand, get hacked to the tune of billions of dollars. For example, Alpha Bank, Piraeus Bank, Eurobank and the National Bank of Greece had to cancel 15,000 credit and debit cards after a tourist services portal was hacked.
Bitcoin is digital. You own a specific address record in the ledger when you hold a bitcoin. It enables digital trade for nearly 2 billion individuals worldwide who do not have access to the financial system. You have ultimate control over your money when you use Bitcoin. No government or bank has the authority to freeze or seize your assets.
Bitcoin, in the end, is a digital gold or Gold 2.0. The ultimate bearer’s asset, very secure and incapable of being hacked, controlled, stolen, lost, mishandled, corrupted, or halted. This is where the value resides, and millions of people believe in it, and with trust comes value, as we all know.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
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