Stop Thinking You Understand Bitcoin
I’m going to start this whole thing off by saying: I’m not an expert, just a programmer that has always had a deep interest in finance and economics; and apparently knows how to do more research than the average Medium author.
I know that Bitcoin is the latest buzzword (maybe a close second to GameStop) in the Medium writer’s dictionary and you can’t help but write down your thoughts on the “internet money” and how it’s not going to work out. Or maybe you’re in the bullish club, writing comments with “have fun staying poor.”
It’s honestly just sad. I cringe at all of it.
The vast majority of people who are jumping into Bitcoin are doing so for the hype. If you were to go up to the average Bitcoin investor and ask them what the main point of Bitcoin is, they probably wouldn’t know.
Or maybe you’re “smarter” and would rather invest in Ethereum. The number of comments I read on Twitter that say “I’m not a coiner, but if I was, I’d be in Etherium” is just sad. Again, why Ethereum? Just because it’s smaller? More room for growth?
If you’re going to be making bold statements about crypto, you should first understand why crypto is a thing. At the end of the day, crypto has three main advantages over fiat currency (normal money like USD): it’s decentralized, it’s programable, and it’s future proof.
No Government, No Billionaire, No Hedge Fund
If you were to have really done your research, you should’ve come across the whitepaper that started it all: Satoshi’s Bitcoin Whitepaper. For those who are unfamiliar, every cryptocurrency that is created has a whitepaper that defines the goals and reasons for that cryptocurrency. If we read the first two sentences in the introduction, we’ll get the main reason why Bitcoin was created:
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.
Our current financial system is centralized. The United States Dollar is controlled by the United States Government. When you swipe your credit card, there are a few third parties that take their cut before the money you just paid lands in the hands of the store. What if those third parties decide they don’t like that store? They can just deny those transactions and put the store out of business.
How about an example more in-tune with current events. Let’s say there’s a stock that you want to buy (GameStop for example). Let’s say you go to your brokerage (for simplicity, we’ll say Robinhood), and it turns out the brokerage (*cough* Robinhood *cough*) is blocking you from buying shares of “this company” (GameStop).
When the vast majority of traders interested in GameStop use Robinhood, guess what happens when Robinhood unblocks the stock?
Regardless of your opinion on the intentions of the Robinhood incident, there’s no denying that the system was centralized around one company. It only took one broken link to render the entire chain useless.
Bitcoin takes advantage of a technology called a blockchain. The easiest way to describe a blockchain without writing a whole separate article is if you imagine you have 5 friends. Each friend has a list of how much money each person has. If you were to suddenly claim that you had 3 billion dollars, the other 4 friends would correct you since their lists all say otherwise.
You would have to convince 3 of the 5 lists (over 50%) that you have those 3 billion dollars. Now imagine that on the scale of millions of computers worldwide. The only way to tell everyone that something legit happened is if someone does the proper calculations that the transaction is authentic and then everyone adds that to their list.
That’s obviously a super simplified version of a blockchain, but it holds the main concept of a blockchain. You’ll notice in that example, there was no one person who had control. This applies directly to a blockchain. There’s no individual or government that controls it. No one can block all transactions from a certain store. No one can inflate the supply. Everything is collaborative and democratized.
Adding Functionality to Money
This second point is something I think most people miss. While Bitcoin was the original cryptocurrency, it was limited. That’s where Ethereum comes in.
Let’s say I want to make a bet with you. I bet that when I flip a coin, it will land on heads. You accept (because you’re not a wimp) and we flip the coin. It lands tails, meaning I owe you money. But what if I’m a sore loser? What if I refuse to pay up?
In a centralized world, we would incorporate a non-biased third party to hold the funds of our bet and delegate them to the winner of the coin toss. But that brings a whole new set of issues. We need to both trust the third party, we need to make sure it’s not biased, and we’ll probably have to pay that third party its cut for helping us.
All of that just for a coin toss.
If we’re in a decentralized world, how would we accomplish this? Having a third party do that job would be giving centralization to our system. This is where smart contracts come in.
Ethereum was the first cryptocurrency to support these nifty smart contracts, and with them, we can withhold funds without a third party being involved. We would simply program a smart contract to say that if the coin lands on heads, I get the money, and if it lands on tails, you get the money. No third party needed.
Now take this over-simplified example and apply it to the real world. Smart contracts are so powerful. Think of applications like services, loans, or insurance. No need for a middle man.
Adapting to the Times
The thought that a financial system setup for a world hundreds of years ago should still stand flawless today is ridiculous. Financial systems need to be constantly adapting as our world adapts. Guess what? Cryptocurrencies have that too.
We went over how Ethereum added features like smart contracts that Bitcoin couldn’t. But Ethereum is far from flawless. Ethereum’s biggest problem right now is scalability.
Without going into too much detail, every transaction I do on the Ethereum network requires a gas fee. With the spikes of demand from Ethereum, gas fees have risen to ludicrous prices. Transfering just $2 worth of Ethereum could cost $20-$50+ worth of Ethereum. That’s not very practical, is it?
While the team behind Ethereum has been working hard to introduce Ethereum 2.0 for years now (hopefully 2021 will the year it becomes a reality).
In addition, alternative cryptocurrencies (or altcoins) have been rising. Two examples of these alternative networks are the Polkadot and Cardano projects. I’m personally a huge fan/supporter of Cardano because it’s so innovative and has the next-level infrastructure to support it. So I’m going to talk about some solutions Cardano has incorporated.
First, Cardano uses a proof-of-stake system instead of proof-of-work (which is what Bitcoin and Ethereum use) which is much more power-efficient and sustainable. The easiest way to describe it is that proof-of-work is a bunch of computers racing, while proof-of-stake is computers taking turns. When the computers are racing, all the energy except for the winner was wasted.
Second, once Cardano is complete, it will be much more decentralized than systems like Bitcoin and Ethereum. While those projects are decentralized, there still is a set of programmers who create them. With Cardano, all changes will be controlled through voting. Even less centralized control and a huge win for the people.
Third, Cardano can run transactions parallel. This means that it is more scalable than Ethereum. Again, I’m super over-simplifying here. There’s so much more math, science, and nerdiness to dig into. We’re just grazing the surface.
I could write an entire article about why Cardano is amazing (I probably will) but I digress. The point is that there is no one solution. If a currency fails, build a better one. Cryptocurrencies continue adapting. There is no finish line, just water stations to refresh yourself so you can keep jogging.
Crypto is the Future, Like It Or Not
I know it feels so distant right now. Crypto is just a fad. You can’t actually buy stuff with it. A currency is no good without people using it to buy and sell things. But the ability to buy stuff with crypto is coming fast.
Several companies, like Gemini, Blockfi, Binance, Bitpay, Coinbase, Crypto.com, and others are coming out with crypto credit and debit cards. Visa just announced they're getting into the crypto game. Paypal and Square are directly integrating it into their systems, meaning millions of merchants will accept crypto overnight. Buying with crypto is coming, and it’s coming FAST.
But even if nobody used crypto to buy things, I would still believe in crypto. With the ability to program on top of your money, crypto will revolutionize the banking, loan, and insurance industries. There’s a reason why J.P. Morgan mentioned they’re working on their own crypto project in 2019!
So there. That’s why I believe in crypto. It’s not a get-rich-quick scheme; it’s a sustainable, scalable, decentralized method of finance that is revolutionizing the world we live in. Or, as others put it so elegantly:
“Have fun being poor.”
If you’re interested in getting into crypto, I recommend you check out my article on crypto exchanges. Feel free to ask any questions you have about crypto and I will do my best to answer them!
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.