Bitcoin: An Alternative Financial System
What is Bitcoin? It depends on who you ask.
Satoshi Nakamoto, Bitcoin’s creator, called it a “purely peer-to-peer version of electronic cash” in 2009. JP Morgan Chief Jamie Dimon called it a fraud. Twitter and Square Founder Jack Dorsey thinks it may become the single currency of the internet.
Bitcoin has many faces to many people.
This isn’t as unusual as it might seem at first. Ask yourself: what is money?
Medium of exchange? Store of value? A formal token of delayed, reciprocal altruism? These may all be true in the right context.
As Bitcoin continues to expand both in awareness and actual usage, defining and owning “what Bitcoin is” will be a war fought by both friends and enemies of the technology. The stakes are high and the narratives will dynamically shape Bitcoin itself.
As I’ve researched Bitcoin and worked in the crypto industry over the years, I’ve come to think about it in a slightly different way than the typical labels.
Bitcoin as an alternative financial system
Calling Bitcoin “an alternative financial system” gets to its core value proposition, which is to offer another option to traditional financial infrastructure. Satoshi lays out “the problem” clearly in the first line of his paper introducing Bitcoin:
“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.”
When you focus on this aspect of Bitcoin — the option to have another choice — it helps you understand where Bitcoin fits into the larger world.
Without Bitcoin you only have the illusion of options. U.S. Dollars or Euros. JP Morgan or HSBC. PayPal or TransferWise. When you follow all these ‘options’ to their deepest roots, you found they led to the same place: government issued money and traditional banking systems.
Bitcoin truly gives you another option. It’s an alternative that is fundamentally different than the existing financial world and comes with a different set of benefits and tradeoffs.
That leaves us with some inevitable questions: how is Bitcoin fundamentally different and where is it most useful? Bitcoin’s usefulness is still being determined over a decade after its creation. It is and will be used in many different ways. But we’ve always known what makes Bitcoin different from the existing systems and we will explore two of them.
Bitcoin is not issued by a government authority
Most money is issued by governments. The U.S. Dollar is issued and backed by the full-faith of the U.S. government. The Venezuelan Bolivar is issued (quite often) and backed by the Venezuelan government. The value and trust of money is closely tied to the trust in its issuing authority.
If you hold government-backed currency, you are subject to that government’s policies and decisions — good or bad. Historically, those “monetary policies” can vary and aren’t always in the best financial interests of individuals holding the currencies.
One of the most important aspects of Bitcoin is that is not issued and maintained by a government. Instead, Bitcoin leverages open source computer code to maintain an automated, transparent monetary policy. There are pros and cons to this approach, but one uncontroversial advantage is the supply of bitcoins on the Bitcoin network are known and predictable.
Unlike many inflationary currencies (always increasing in supply), Bitcoin is disinflationary (decreasing inflation over time) and eventually stops at 21 million total bitcoins under current protocol rules. This disinflation can be attractive to people in high-inflation countries or those otherwise uninterested in the value erosion related to inflation.
The benefits and tradeoffs of Bitcoin’s monetary policies, including its fixed total supply, are heavily debated. But one thing is clear: it is starkly different from existing options, including government-issued currencies. This gives people a way to opt out of the existing system or simply have another option alongside it.
Bitcoin has its own settlement network
If you want to send $1 USD to somebody — how do you do it? Bank transfer? Wire? Venmo? ApplePay? Many of us have used some or all of these at some point. Short of cashing out your holdings into physical dollars and handing it directly to somebody, you have to make transactions using the traditional banking system.
In the U.S. and most of Europe sending money domestically works pretty well. In other regions with unimpressive bank technology or strong capital controls — it isn’t always great. International payments are a common headache for just about anybody around the globe due to higher transaction fees and slow clearing times. This is because of a large and fragmented network of underlying traditional systems, which can differ meaningfully by country. Add local laws and regulations to the mix and you’ve got a very complicated global banking system.
Bitcoin is a peer-to-peer protocol that is native to the internet. It is maintained by people running Bitcoin’s software across the globe who are incentivized by the network itself, not a central bank or government. If you have a Bitcoin wallet and an internet connection, you can send Bitcoin anywhere you want very easily. Actually, you don’t even need internet.
This is incredibly useful because Bitcoin’s network operates completely independent of the existing financial infrastructure. This gives Bitcoin the opportunity to be cheaper or faster than traditional alternatives in some cases. Other times Bitcoin may not be cheaper or faster, but still valuable as an alternative financial network, including in cases of people worried about their wealth being seized or devalued in the traditional systems.
Alternative, Not Always A Replacement
Just because Bitcoin is an alternative, doesn’t mean it has to completely replace the traditional systems. This is a common misconception held by both cryptocurrency advocates and traditional finance professionals.
Bitcoin will be optimal under certain conditions and the traditional system will be optimal for others. You can simultaneously believe that the U.S. Dollar is a strong form of value, that your bank works well and that Bitcoin has tremendous potential. Over time, I hope more people on both sides come to adopt this narrative of coexistence. As tools and technology improve in both Bitcoin and banking, it may become obvious.
The best scenario is one where the strengths of both systems are available and leveraged by people everywhere to choose how they transact and exchange value globally.
This article originally appeared on Zabo’s blog.
Alex Treece is the Co-Founder of Zabo. You can follow him on Twitter @alextreece1.
