Disclaimer: This is not financial advice. I am not a financial advisor. What follows is my personal, subjective, biased opinion.
There’s a persistent rumor in the cryptocurrency space that even the Queen of England wanted to get on board. Apparently, it didn’t go too well…
Thinking more deeply about this joke, a big factor in why we can spend the money that’s in our wallet actually is whose face is on it. Or which flag. You and I agree that the $1 bill with George Washington on it has a certain value and hence, we can use it as currency. If you now offer to sell me a pretzel for one dollar and I agree that that’s a reasonable substitute compared to what else I could get for Mr. Washington’s face, then we can make that trade.
Bitcoin is about to change ALL of that. And that’s why we’re here.
The memory of my first trip down the cryptocurrency rabbit hole is still very fresh. I’ve spent countless hours clicking, scrolling, and reading, never knowing what to believe. Hopped up on caffeine, I vibrated in my chair, anxious about where to put my money and whether I’d ever see it again. And yet I came home with only more questions.
At The Crypto Times, I hope to spare you at least some of that trouble. In 1668, Thomas Hobbes wrote in Leviathan that “knowledge is power.” That’s precisely why it’s such a great weapon to deal with curiosity, skepticism and fear. The key to understanding anything, whether that’s a natural disaster, historic event, or huge price action of a new currency, is to learn what lies behind the facade that’s in the news.
That’s why I want to show you seven core features and themes of Bitcoin and cryptocurrencies. It’s a short introduction for beginners to make crypto feel a little less cryptic.
This is the first and by far biggest buzzword you’ll come across in this space, all the time. “We’re doing a decentralized X” is the new claim to fame. It’s the slogan of most new blockchain companies, after which they go on to explain why making their product decentralized is the best thing since sliced bread.
Decentralized is just a fancy word for “without middlemen.”
If you and I meet in the park, I give you a dollar and you give me an apple, then we just made a trade, one-on-one. Another fancy word for this is peer-to-peer. We didn’t need a bank to secure or guarantee the transaction, because, well, we were both there. That’s what decentralized means and Bitcoin is just that for exchanging money.
You can transfer this idea to basically anything. Decentralized housing? That’s AirBnB without the company. Decentralized ride sharing? Uber without the app. And so on. The question that remains for us to answer is: Where does it make sense?
One of the most popular arguments old financial institutions and important figures in the traditional finance space make against Bitcoin is that people will abuse it for money laundering, buying drugs, and financing wars. But wait, what could criminals have used before 2008, when Bitcoin wasn’t around? Oh, that’s right, the money we have now.
Crime is a subset of society, not currency. Criminals will choose whatever economic tools make the most sense. That doesn’t mean they’ll stop being criminals if one suited tool disappears. If anything, Bitcoin is a great opportunity to prevent money from being used for such causes, because it’s actually transparent.
A history of all transactions is stored on the blockchain, which is public, available to everyone in the network, and easy to understand. This way, even you and I can see any account’s entire balance history, where their money went and where it came from. Of course addresses are encrypted, but with according measures, special security agents — think a sort of Bitcoin police — could be granted access to that data in suspicious cases. The same goes for traditional security agencies.
Then again, I know a few people who don’t seem particularly interested in a transparent financial system: those at the top of the block-less chain. I wonder why.
Think about how often you spend cash and don’t automatically get a receipt. At least in Germany it’s common practice. At the bar. At the restaurant. At the dry cleaner’s. That’s kinda sketchy, isn’t it? No confirmation of payment whatsoever. Maybe that’s why credit card fraud is a $200 billion per year “industry.”
Aside from the public transaction history that’s built into Bitcoin and all other cryptocurrencies, which makes tracking your money easier, the way this transaction history is created is also a lot more secure than trusting a stranger with your money or credit card info.
All transactions in the Bitcoin network are added into blocks, which are chained together. Hence the name blockchain. Each block references the previous block with a unique, mathematical fingerprint, that’s calculated using a complex algorithm. This makes it impossible to cover up your transactions or spend more money than you actually have.
Therefore, Bitcoin will not just help us keep a much better overview of where our money goes, it’ll also make our use of money more secure. And that’s a good thing.
If your bank sees your balance declining too much, or you have a couple of weeks in the red, they freeze your account. When PayPal’s algorithm flags one of your transactions, they freeze your account. And if eBay doesn’t like how much profit you make, they freeze your account.
With Bitcoin, no one but you controls your money.
You’re the only one who holds the keys to your account. As long as you keep your Bitcoin safe — you can even store it offline — and make backups of your passwords that you store in a physical location, no one can limit how much you spend and earn.
That’s a lot more responsibility, but it comes with a lot more freedom too.
Since anyone with an internet connection can participate in a blockchain network like Bitcoin, the system is limitless. It knows no physical, national or geographical boundaries. It’s always liquid and always available. There are no exchange rates, very low fees and very little chances of a total system failure. After all, you’d have to shut down the entire internet!
Imagine being able to send money to your relatives far away directly, or straight to someone who needs it in a third world country, without conversions and banks taking forever to process your transfer.
That’s one of the most powerful features of cryptocurrencies and it’ll slowly transform how we use money forever.
Another buzzword you’ll often see is “store of value.” It’s often used when people say Bitcoin is “digital gold.” It indicates that one of the primary uses of Bitcoin is to maintain the value of your money. So far it’s been a great way to not just “store” your value, but to greatly increase it.
Interest rates around the world have been close to zero for almost a decade. If you put your money into a savings account, it won’t even outpace inflation, leaving you with less buying power than you’ve had before. Some banks even have negative interest rates, forcing you to pay money to keep yours in their safe. That’s insane!
Since Bitcoin’s supply is limited, it will never exceed 21,000,000 coins, its increase in value is likely to continue, at least in the long term. The community is a bit divided as to whether it should be like this, or if a more liquid, currency-like Bitcoin is the way to go. In theory, both are possible.
Until now, it has proven to be a great way to save for the future, whether you want a comfy retirement, a college fund for your kids, or just a Lambo ;)
The quote is often misattributed to Einstein, but it’s interesting nonetheless:
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t pays it.”
Whoever said it, they’re right. And compound interest is just one of the many design flaws in our monetary system that rarely make it fair. Bankers, sports stars, and movie celebrities are paid astronomical sums without taking on any risk. Meanwhile, doctors, nurses, political decision-makers, and teachers often walk away with a lot less while carrying way more responsibilities.
That’s not fair. And while Bitcoin’s governance mechanism is far from perfect, it’s taken more steps in the right direction than traditional politics have for years. Take the way Bitcoins are created, for example: mining. In this process, whoever commits a lot of computing power to forming, maintaining and updating the blockchain is rewarded with newly minted coins. This is called “Proof of Work” and while it’s still environmentally wasteful, it’s a move towards meritocracy. A move away from printing money at will and towards rewarding people for their efforts, not their status.
Again, it’s far from perfect, but it looks like continuing down this path can bring a lot of fairness into a really broken system.
Something Larger Than Ourselves
Here’s what Naval Ravikant, one of crypto’s premier thinkers, said about the subject in his first periscope:
“Once you figure it out, it’s hard to think about anything else. It’s hard to think that there’s any other thing that’s going on that’s as important. Now, of course it’s probably not true; it’s a big and complicated world and there’s lots and lots of important things going on. [But] anyone who’s interested in the intersection of politics, economics, technology, [and] finance will just find cryptocurrency and blockchains to be this really interesting rabbit hole.
I think humans have created something that’s larger than ourselves. It’s like when we first invented markets. When you invent something that big, it’s hard for anyone to figure out how it works. We are all now collectively trying to figure out how to describe it and what its properties are. It almost feels like there’s this organism larger than ourselves that we’re all working on co-evolving.”
It all takes a while to settle, but once the gears start clicking into place in your head, your eyes will slowly open to the massive potential of this technology and why it’s important that you understand it. Regardless of which side you take, or how much you’re interested in investing.
Maybe one day, even the Queen will get the memo.
This is part 2 of 5 of our Bitcoin For Beginners series.« Go to part 1 || Go to part 3 »