The essence of Bitcoin and Blockchain technology
Blockchain - the answer to life, universe and everything.
Bitcoin - synonym for immortal because this thing have died 191 times and still keeps coming back.
Cryptos - digital gold everyone wants to HODL, to get rich, buy LAMBOS and go to the MOON. (The only problem is LAMBOS can’t fly 😛 )
Unless you’ve been living under a rock, you must have heard of these words. Bitcoins, Blockchain, Cryptos have been the major buzz words this year. And there are quite a few reasons for them to jump from being esoteric jargons to being on everybody’s lips.
- The market cap of the cryptocurrencies have gone from $ 18 billion to more than $ 280 billion today in just 11 months.
- Bitcoin (BTC) has gone up by 800%.
- Ethereum (ETH) has gone up by 5000%.
- Litecoin (LTC) has gone up by 3000%.
2017 has been the biggest year yet, in the crypto community. We have seen heavy investment into blockchain technology like never before. Almost 3 billion dollars has been invested into ICOs. (Initial Coin Offerings)
It is because of this humungous and unexpected rise, it is being compared to the Internet Bubble that happened in the late 90s. And as most of us know, when that bubble burst, many companies failed and a lot of investors lost their money. Some of the companies survived, such as Amazon, eBay and Google. I will not make any judgement on whether Bitcoin and the whole Cryptocurrency market is a bubble or not. Here is a video however, that says a lot about making such comparisons and having any judgement about it being a bubble or not.
This year, there has been a full upward trend in terms of prices. As more people are making money, more people are getting attracted towards this market. I have been a witness of this attraction all around me, I have seen this online, within my family and friends, at my workplace.
- Coinbase, a bitcoin exchange, surpassed 10 million users.
- /r/Bitcoin, is adding 2k subscribers each day.
More people becoming part of the community, leads to its growth. The only condition is that these people should not just flock in like sheep. They should be aware of the the basics, the essence of this technology, how it all started and how the system works. But this is not happening in most cases. People are entering this sector, investing their savings, without actually knowing what the blockchain technology means, why it was made in the first place and how does it works. They all want to get rich easy and quick.
Out of all cryptocurrencies, Bitcoin by far is the major player and holds a market share of 55%. People might not know about blockchain technology but they know about Bitcoin. Bitcoin’s exceptional rise is the primary reason, majority of people have entered this market. This means if you are talking about crypto currencies, you have to begin at Bitcoins.
There have been many discussions around the subject that Bitcoin doesn’t hold any intrinsic value and whether its current price justifies for its intrinsic value.
- Is it over valued or is it massively undervalued?
- Is it going to change the world ?
There are a lot of questions surrounding it but the most important of them all is : “Why Bitcoin was made ?” Answering and understanding this, will give you the idea about its intrinsic value.
Why Bitcoin?
Satoshi Nakamoto, the creator of Bitcoin wrote this :
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.
In his short excerpt he used the word “trust” 6 times. Everything comes down to trust. It is a very fragile thing that keeps the world together. Like the ISP you are using to read this article, you have trusted them for they won’t be accessing your private data, simply because they said this.
People don’t appreciate trust enough but it’s everywhere. It is because of trust your best friend is your best friend. You trust your government that is why you pay your taxes. You trust your politician that is why you vote for them and trust them to make decisions on behalf of you.
When it comes to money, you trust financial institutions — central banks, investment banks, hedge funds, insurance companies etc. But what happens when this trust is broken, remember the 2008 Financial Crisis. It caused a monetary loss of $4.2 trillions and immeasurable emotional loss. People lost their savings, their homes, their jobs because they trusted big corporations.
Trust evolved as a survival mechanism and is hard wired in our brains. (If you have time, check out this cool game by Nicky Case — Evolution of Trust) We have this innate immense ability to trust others, which was required for our survival as a species.
When a single individual breaks your trust, suppose your girlfriend/boyfriend cheats on you. It leads to huge emotional trauma. However its nothing compared to when a whole corporation, you have trusted with your future on does it. In the case of your partner cheating, you might get over it within a few days or weeks or months. But when the bank you have trusted with yours saving just goes AWOL on you, that is something you are never prepared for .
What if there was a system, a way where you don’t need the variable of trust in the first place. In the real world, when I give a $100 note to Bob then I no longer have that note. In case of the digital world, where money is just bits of information when I give that money to Bob, Bob gets that information but I also have that information. So both of us have that money. We still need some third party to authorize the transactions, which will remove the information(money) from my account and add it to Bob’s account. That is why we needed a third party in digital transactions.
Computer scientists have long struggled to do this transaction without a third party and in October 2008 there was a breakthrough when Satoshi Nakamoto released the famous paper titled — Bitcoin: A Peer-to-Peer Electronic Cash System.
It utilised something called blockchain, an open book (in simple terms) in which anyone can enter information. Each piece of information is verified by cryptographic rules and on confirmation the information is permanently written in this book for eternity. It was free distributed and open to all and anyone on the internet can use it without having to put trust in anyone.
This was revolutionary. It was clearly a disruptive technology as it removed the variable trust. The first use case of blockchain is monetary systems and the Bitcoin system is designed to solve it and potentially replace it.
Intrinsic Value of Bitcoin
People argue that bitcoin is no different from fiat currency (like USD, INR, EUR etc). It has value because people give it a value. In case of fiat currency, the central bank or the government give it a value. People trust the government, so people trust their currency.
Both bitcoin and fiat are durable, portable, divisible, uniform which are essential properties for money. But bitcoin is much more than that.
That is where, bitcoin intrinsic value comes into play. It does not require any governments, any banks , any institutions to give it a value. It does not depend upon anyone. You can’t cheat or hack the system, as it is designed on mathematical cryptographic rules.
Storage of value.
So what happens when governments fails, when people lose trust in the system. What happens then?
Take the example of Venezuela, it used to be one of the richest countries in South America, but now is going through the worst financial crisis of all time. Inflation rates rose up to 69% in 2014, 181% in 2015 to 800% in 2016.
That means a $ 1 burger in 2015 would cost $ 8 dollar in 2016. All your savings has now decreased by 800%. At the same time bitcoin rates have gone up by the same percentage.
Inflation is inevitable in our economic system, because we don’t have a limited supply of money. Central Banks and governments control the supply of money. They can print more money (out of thin air). But they need to keep it monitored otherwise they will end up like Venezuela. Due to this reason, prices will keep on rising and it has been the way through out history.
Inflation is not bad if the wages also rise with the price rise of goods. It all comes down to trust again, whether the government make policies in favor of the majority or in favor of the elites, the corporations or the rich minority.
This is where Bitcoin can act as a storage of value. Bitcoin has a fixed supply of 21 million, thus you can’t create more than that. It means if people lose their bitcoins your bitcoins value increases. Satoshi himself wrote :
‘’Lost coins only make everyone else’s coins worth slightly more. Think of it as a donation to everyone.’’
Source : Dying bitcoins
Same reason why 1 Bitcoin in Zimbabwe is $13000, almost double what the actual price is. People in Zimbabwe trust bitcoin as a currency due to hyperinflation of their own currency. They sees it as a storage of value.
Reminder : I am not suggesting that you should convert your savings in Bitcoins. It is highly volatile market. I had it to edit the total market cap from 240 to 280 billion. 40 billion invested in 12 hours. That is how volatile the market it. Invest at your own risk and do your own research. People in third world countries have no choice.
Transfer of Value
If you are need to transfer money to somebody you need a centralized party like a bank or service like PayPal. These third parties charge you some hefty fees and transaction time can vary from hours to days. Bitcoin transactions take less than 10 minutes to confirm and at a very minor transaction fees.
Money in open ledger — An ideal world.
Imagine a world where every transactions take place in Bitcoin. You will know where your money is going. You can see where your taxes are being used. Corruption entirely eliminated. You can see whether your donated money is being utilized by the charity for a cause.
Right now, the system is not perfect and has its own problems like high power consumption, scalability, price stability, conflicts in the community. Nothing starts as a perfect system — the first airplane, the first light bulb, the first computer had their problems. Same is the case with first crypto currency. But the whole community is working together to solve it and the future is bright.
It is very early to say that Bitcoin is the future global e-currency to replace the fiat currency. But one thing that can be said for sure is that the money should not be dependent upon the trust variable and hence should not be in control of governments and financial institutions. If Bitcoin doesn’t solve the necessary problem some other crypto currency will do it, the technology is here to stay.
This quote from the book “The age of cryptocurrency” sums it all up.
In the end, I will conclude with Satoshi’s words :
‘’If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry’’
P.S. Thanks for reading this far! If you found value in this, I’d really appreciate it if you recommend this post (by clicking the ❤ button) so other people can see it!.
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