Bitcoin’s SHA-256 Algorithm Gives You More Guarantees Than Any Bank in the World
It abstracts you from the corruption to which humans always give in.
Installed at the heart of the current monetary and financial system, the banking world is totally opaque. As the current system was conceived, its proper functioning implies that populations can have blind trust in central banks, but also private banks.
However, history proves that this is impossible.
Recently, JPMorgan has once again been pinned down by the American authorities. This time, JPMorgan was guilty of an illegal activity known as spoofing.
For eight years, 15 traders of the largest American bank have caused participants in precious metals and Treasury markets to lose more than $300 million. JPMorgan immediately admitted responsibility for the actions of its traders. The bank agreed to pay just over $920 million to end the affair.
The facts, which occurred from 2008 to 2016, thus saw JPMorgan manipulate gold prices in particular to its own benefit.
Bank-related scandals are not the exception, but the norm
This case would not be dramatic if it was an isolated case. Unfortunately, it is only one case among many others in the banking world. During September 2020, HSBC, JPMorgan, or Standard Chartered, were found guilty of moving billions of dollars identified as potentially related to money laundering or other crimes.
Yet, these banks had been warned of the highly questionable nature of these funds.
But again, the banks decided to do as they pleased. This is the image that always comes up in the banking world. There are laws, and then there are bankers who allow themselves to act above the law. The sanctions that fall are derisory in comparison to the crimes committed. Most of them are never discovered in my opinion.
The cases I have just told you about are nothing compared to the biggest scandals in the history of the banking world.
Banks think they are above the law
In the mid-2000s, Wachovia Bank, which has since been taken over by Wells Fargo during the 2008 financial crisis, was found responsible for laundering $380 billion. Wachovia Bank had laundered money for years from drug cartels in Mexico.
In 2004, Standard Chartered Bank began having problems with the Fed and the New York regulator over its lack of anti-money laundering practices. The bank signed an agreement to change its practices.
Between 2005 and 2006, Standard Chartered went beyond this agreement by deciding to work with Iranian clients. The bank was eventually fined $670 million in 2012 for its transgressions.
Of course, this fine did not change the practices of Standard Chartered, which continued not to apply anti-money laundering policies to work with clients in Burma, Zimbabwe, Iran, Cuba, Sudan, and Syria.
Convicted of having laundered something like $250 billion over all these years, Standard Chartered received a cumulative fine from the British and American authorities of $1.1 billion in 2019.
In 2018, Danske Bank was found guilty of having laundered, via its Estonian subsidiary created in 2007, $229 billion from 2007 to 2015. To date, this is the biggest money-laundering scandal ever discovered in Europe. The laundered funds came mainly from Estonia, Russia, Latvia, Cyprus, or Great Britain.
There are so many examples of such scandals that I could write a book on the subject. That’s telling!
And don’t think that the banks not mentioned here are beyond reproach. I didn’t mention Goldman Sachs, but you should know that the bank was recently condemned in the 1MDB scandal. In my opinion, there is not one bank to catch up with another.
The problem with the current system is that it forces blind trust in the banks
The problem with the current banking system is its opacity. Everything rests on the blind trust that we should be able to have in those who are at its head.
Given the human penchant for corruption, this cannot work.
When he created Bitcoin at the end of 2008, Satoshi Nakamoto had this in mind, as he later explained in Internet discussions:
“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. Their massive overhead costs make micropayments impossible.”
The year 2020 will have shown you once and for all, if it had to, that there was only one answer to all the evils of the economy according to central banks: to print more and more fiat money out of thin air.
As far as the banks are concerned, you can see that history proves that they are not trustworthy. I’ve just told you about the money laundering scandals here, but you should know that their behavior concerning vague credits is hardly more honorable.
Bitcoin is the answer to the evils of the current system
Bitcoin boldly responds to all these issues:
- An offer that is limited to 21 million BTC no matter what.
- A monetary policy that is written in its source code that runs on every node of the Bitcoin network. Bitcoin’s monetary policy is programmatic, which means that it is not linked to any human decision.
- A monetary policy that highlights the virtues of quantitative hardening. The issuance of new Bitcoins is reduced by half every 210,000 validated blocks no matter what happens. This makes it possible to give more and more value to the Bitcoins already in circulation.
Bitcoin solves the problems of the current system by avoiding giving too much power to a few unrepresentative humans.
At the heart of the creation of new Bitcoins is its consensus algorithm based on Proof-of-Work. In this algorithm, it is the SHA-256 cryptographic function that makes all the difference.
The SHA-256 cryptographic function offers you more guarantees than any other bank
A cryptographic hash function such as the SHA-256 will take input data and produce an output of fixed length. This output is usually represented by a string of characters in hexadecimal format. These functions are deterministic which means that if you input the same string several times into a given function, you will get the same output each time.
More importantly, a cryptographic hash function has the distinct advantage of being a one-way function. This means that it can be easily computed but very difficult to reverse. In the English literature, these functions are also called “trapdoor functions”:
While the calculation of the hash of a string with a cryptographic hash function is very fast, the reverse calculation is very complex and time-consuming. Indeed, there is nothing more efficient than a silly and nasty systematic approach in which it will be necessary to test all possible combinations at the input of the hash function to find the same output.
When we talk about a mathematical puzzle to be solved to undermine a new block of transactions, this describes the operation by which the miners must use their computational power to find the input value of the SHA-256 cryptographic function from the output value given to them as the input of their puzzle.
Proof-of-Work requires a lot of machine resources to run. It is this energy required to mine a block, and thus produce new Bitcoins, that makes the Bitcoins so valuable.
It is impossible to create new Bitcoins without any effort out of thin air as the Fed can do for the U.S. dollar. Bitcoin is clearly the hardest money in the world.
In all the processes of Bitcoins issuance, human arbitrariness does not intervene. In fact, Bitcoin abstracts itself from the risk of corruption inherent in humans. Bitcoin, therefore, gives you incredible guarantees:
You know in advance what you are dealing with, and you also know that nothing can change what is foreseen in the Bitcoin source code that is constantly running all over the world.
It’s this kind of guarantee that makes an incredible difference in the uncertain world we live in. The banks, because of the flaws in the current system that leaves the door open to the corruption that humans always give in to one day or another, will never be able to offer you these guarantees.
Buying Bitcoin means first and foremost realizing that an algorithm such as the SHA-256 is much more reliable than any human at the heart of the banking system.