A Walk in Time; Discussing Bartering to Bitcoin
Bitcoin
A 1999 interview conducted by the National Taxpayers Union Foundation with Milton Freidman revealed his prediction of the start of bitcoin, or digital cash, and how it would influence governments. He states “The one thing that’s missing, but that will soon be developed, it’s a reliable e-cash. A method where buying on the Internet you can transfer funds from A to B, without A knowing B or B knowing A. The way in which I can take a 20 dollar bill and hand it over to you and there’s no record of where it came from. And you may get that without knowing who I am. That kind of thing will develop on the Internet.” Friedman is considered one of the most influential economists and thinkers of the 20th century. In 2008, a brand new form of currency was created to facilitate the new age of technology. An anonymous individual or groups of people using the pseudonym Satoshi Nakamoto announced Bitcoin as ‘a new type of peer-to-peer cash system’ that had one unique characteristic that made it truly free; unlike all other forms of money used in history thus far, it was decentralized and had a predetermined supply of 21 million Bitcoins. As Satoshi states in the abstract of the Bitcoin whitepaper,“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Many believe the idea and creation of Bitcoin stemmed from the bank-caused financial crisis that almost destroyed the global market. Since the end of the 1980s, there have been created various digital currencies which attempted at achieving the status of Internet money. Most currencies (fiat) are backed by a government or institution, however, Bitcoin is powered through a combination of peer-to-peer technology or a network of individuals, much like the volunteer editors who create Wikipedia, and software-driven cryptography. This takes the need for “trust” out of the equation.
To best understand how Bitcoin works, it is easier if divided into two parts. On the one hand, you have bitcoin the token, a snippet of code that represents ownership of a digital concept — sort of like a virtual IOU. On the other hand, you have Bitcoin-the-protocol, a distributed network that maintains a ledger of balances of Bitcoin-the-token. Both are referred to as “Bitcoin.” The system enables payments to be sent between users without passing through a central authority, such as a bank or payment gateway. It is created and held electronically. Bitcoins aren’t printed, like dollars or euros — they’re produced by computers all around the world, using free software.
Bitcoin runs on blockchain. Blockchain is an open-source code that creates a shared public ledger. Each transaction is a “block” that is “chained” to the code, creating a permanent record of each transaction. Blockchain technology is at the heart of more than 2,200 cryptocurrencies that have followed in Bitcoin’s wake. These transactions are then mined and verified on the blockchain by miners. Miners are members of the peer-to-peer platform that independently confirm the transaction using high-speed computers, typically within 10 to 20 minutes. Miners are getting paid for their work as auditors. They are doing the work of verifying previous Bitcoin transactions. This is what creates Bitcoin proof-of-work concept. Instead of trust, the miners use proof to confirm transactions. Bitcoins can be obtained in a few ways: by exchanging your own financial resources, receive them from another user, or mine them themselves. In order to mine competitively, miners must now invest in powerful computer equipment like a GPU (graphics processing unit) or, more realistically, an application-specific integrated circuit (ASIC).The more computing power the computer has (precisely, the higher is the proportion of the power it contributes to the mining pool), the stronger the chance of overtaking other competitors. Having been verified by the mathematical system “Proof of work,” new Bitcoins are collected in a database. They cannot be mined more often than once every 10 minutes. Bitcoins cannot be mined indefinitely. Their supply is fixed up to 21 million, and the last Bitcoin is supposed to be mined in 2136.
Bitcoin can be used to pay for things electronically if both parties are willing. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally. However, Bitcoin differs from fiat digital currencies in several important ways.
Bitcoin and Decentralization
Centralization is defined as the concentration of control of an activity or organization under a single authority. Bitcoin’s most important characteristic is that it is decentralized. No single institution controls the Bitcoin network. It is maintained by a group of volunteer developers and run by an open network of dedicated computers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money. The Bitcoin system has no administrators, instead, it is an open-sourced, math-based exchange on a peer-to-peer basis. Users are protected by cryptography and rely on an algorithm based on public and private key pairs. Today, decentralization is widely accepted as one of the key value propositions of cryptocurrencies. In a decentralized world, Game-theoretical incentives take over the role of a central governing authority. Nick Szabo, the creator of Digi-gold and part of the group CypherPunks, states “Decentralization is what allows Bitcoin to substitute an army of computers for an army of accountants, investigators, and lawyers.” A decentralized network run and secured by thousands of computers around the world can guarantee availability. In fact, Bitcoin has achieved more than 99.98% uptime since its inception and 100% uptime over the past six years. With no government or central banks monitoring Bitcoin, skepticism is often an issue. The use of Bitcoin is very safe, as it is impossible to corrupt math or cryptography like you can physical entities. Cryptocurrencies’ rise in value also reflects the societal skepticism of central banks and government planners’ motives, ethics, and/or competence. With so many privacy issues and complete control over our data, it is no surprise that many consumers, including millennials and Generation Zers, are uncomfortable putting sensitive data, money, and personal property under the control of a central authority.
Bitcoin also solves the “double spending problem” of electronic currencies (in which digital assets can easily be copied and re-used) through an ingenious combination of cryptography and economic incentives. In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. With Bitcoin, wealth is then disseminated in such a manner that is essentially the opposite of fiat, distributed to any party who wishes to be involved in its production and circulation rather than being reserved for a few elites who are closest to the spicket. The integrity of the transactions is maintained by a distributed and open network owned by no-one. According to the IMF, International Monetary Fund, the world has experienced an average of about ten systemic financial crises — including banking crises, monetary crashes, and sovereign debt crises — per year since the floating exchange regime was introduced in the early 1970s. It is clear that the system needs some fine-tuning. One cannot freeze a Bitcoin account, microtrack, sanction, or be hyperinflated by the government or any other institution.
Scarcity and Durability
The key to the maintenance of a currency’s value is its supply. A monetary supply that is too large can cause prices of goods to spike, resulting in economic collapse. A money supply that is too small can also cause economic problems. Keeping an adequate supply of money is important. Milton Friedman noticed that when money supply grows faster than production it causes inflation, which generates costs for individuals and inflation tax. To reduce inflation Friedman proposed the k-percent rule, which means keeping the constant growth rate of money supply. One of the most interesting qualities of Bitcoin is its fixed supply. Bitcoin is set to have a max supply of 21 million and is tightly controlled by the underlying algorithm. Bitcoins are designed based on a decreasing supply algorithm. The number of new bitcoins created will see a 50% reduction every 210,000 blocks until bitcoin issuance halts completely at 21 million. Since bitcoins are in limited supply, their value generally tends to rise. Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply. Central banks can issue as many as they want, giving them the power to attempt to manipulate a currency’s value relative to others. Holders of the currency bear the cost of this change. As Satoshi said, “Escape the arbitrary inflation risk of centrally managed currencies!”.
Privacy
“Big brother is watching you...Nothing was your own except the thoughts inside your head” is a popular quote from George Orwell back in 1984. One of the most important features of Bitcoin is its privacy. As Milton Friedman had predicted, foremost among the early adopters were “the gangsters, the people who are engaged in illegal transactions”. In Bitcoin’s early days, the most use was seen on the dark web. On the Silk Road, customers could shop on the dark web and purchase drugs, weapons, or other illegal services using Bitcoin. However, as many people are now realizing, privacy is about more than being able to buy illegal things. With all electronic payments, there’s a third party in the middle whether it is Venmo, Visa, or Wechat. These companies are able to spy on individual transactions and activity. With Bitcoin, transactions are recorded on the blockchain which is visible to all. This is the point of a public ledger. All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent. While senders of traditional electronic payments are usually identified for verification purposes to comply with anti-money laundering and other legislation, users of Bitcoin, in theory, operate in semi-anonymity. Since there is no central “validator,” users do not need to identify themselves when sending Bitcoin to another user. When a transaction request is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary bitcoin as well as the authority to send them. The system does not need to know his or her identity. In the absence of financial privacy, individual freedoms can be denied as every purchase made can be tracked, surveilled and censored.
Speed & Fees
One of the most important features of bitcoin, or any digital currency, is its speed. Cryptocurrencies offer much faster speeds than, say, a wire transfer. These days, many cryptocurrencies offer instant or near-instant transactions, which are far superior to 24–48 hours it can usually take with fiat. Compared to other digital payment methods such as credit cards and PayPal, Bitcoin comes with lower transaction fees. Though such fees are variable, it is rare for a Bitcoin transaction to cost more than 1% of its value. Compare that to 2% to 3% for most other digital payments. Standard wire transfers and foreign purchases typically involve fees and exchange costs. Since Bitcoin transactions have no intermediary institutions or government involvement, the costs of transactions are kept very low. This can be a major advantage for travelers who are crossing borders often and do not want to deal with exchanges. Additionally, any transfer in bitcoins happens very quickly, eliminating the inconvenience of typical authorization requirements and wait periods.
Transaction fees are included with your bitcoin transaction in order to have your transaction processed by a miner and confirmed by the Bitcoin network. The average bitcoin transaction costs around twenty cents. To wire transfer money, for example to China via Western Union or other third parties, it would cost nearly $20. Bitcoin transactions that cross international borders are no different from Bitcoin transactions that stay in-country. There are not any international transaction fees or red tape to navigate, as is often the case with credit card payments, ATM cash withdrawals, and international money transfers. International credit card and ATM fees can range up to 3% of transaction value, and sometimes higher, while money transfer fees can be as high as 15%. While most other currencies have international red tape, cross-border Bitcoin transactions are easier simply because Bitcoin is more popular around the world.
Globalization
Technology is at the heart of globalization. Throughout history, technological advances have fostered globalization. While there are certainly pros and cons to globalization as many economists and political scientists would argue, the benefits that open, borderless, trades could bring is worth noting. As stated before, Bitcoin has lower fees, is borderless, and decentralized. These characteristics make it a top choice for a global currency. One of the most intriguing characteristics of Bitcoin is that it is borderless. With the internet and new technology, communication with other countries around the globe has greatly increased. One of Bitcoin’s key phrases is that it “banks the unbanked.” In many parts of Africa, Latin America, and South Asia, most people have no access to credit or digital payments. With Bitcoin, that infrastructure comes for free. There are roughly two billion people in the world who do not have access to a bank or an identification card. To access Bitcoin all that is needed is simply internet access.
This year there have been new reports of countries using cryptocurrencies to get around sanctions as well. North Korea, Venezuela, Iran, and Russia are all starting their own form of cryptocurrency in some way or another. In July, ABC News in Spain reported that it uncovered a scheme by which Maduro, president of Venezuela, and his associates, were using a digital wallet app to turn tax revenue from domestic airports into Bitcoin and other cryptocurrencies that were then transferred to exchanges in Hong Kong, Hungary, Russia, and China. Venezuela is not the only one using Bitcoin to get around sanctions. Sanctions inflicted by a U.S. trade restriction stretching back to the 1960s have permanently hindered Cuba’s access to goods and services, including essential online payment systems. Now, with mobile internet firmly established, Cubans appear to be turning to cryptocurrencies like Bitcoin to subvert the U.S. trade embargo. In a report by US News, one Cuban man, 35-year-old Jason Sanchez, told how the non-sovereign power of Bitcoin saved his cell phone repair business by enabling him to purchase spare parts online via crypto. Whether avoiding these sanctions is seen as a benefit or a negative aspect of Bitcoin is up to opinion, but one cannot dismiss the potential the bitcoin and other digital currencies bring to the economic world.
Conclusion
As it can be seen, money has changed along with society throughout time from shells, to metal, to coins, to paper, to now digital. Currency has been whatever has made the most sense and was realistic at that time in history. Over the course of history, the material substance of money has become less important to the point that these days people talk easily about the possibility of a cashless society. The powerful combination of computers and telecommunications, of smartphones and social media, of cryptography and virtual economies, is what fuels such talk. And that progression makes sense because what matters most about money is not what it is, but what it does. Successful currencies, after all, are those that people use. They lubricate commerce, allow people to exchange goods and services, and thus encourage people to work and create. Alongside its exceptional monetary properties, Bitcoin is a protocol, computer network, and more, providing flexibility and function that no existing form of money can offer. Some experts believe that, in the coming decades, national governments will rework their currencies with state-sanctioned means of exchange that have some cryptocurrency features, like built-in scarcity and virtually impenetrable counterfeiting protections. Others believe that fiat currency and cryptocurrency will continue to exist in parallel, but that cryptocurrencies will fail to expand beyond the niche currently occupied by gold and other precious metals, that of an alternative investment whose primary purpose is to hedge against inflation. China now has mostly digital payments and the number of these digital payments is growing at nearly twenty percent annually. Bitcoin is leading in a new paradigm in various aspects of society and creating a new example for future technological achievements to inevitably be compared to. Bitcoin is not perfect, but it has many features that can help us as a society much more than we even know.
Author: Chace Young
