What Is Bitcoin: Two Sides of the Coin
Google “What is Bitcoin” and you will likely come across definitions like, “Bitcoin is a decentralized digital currency that is not issued by any government or central bank.”
However, the distinction that Bitcoin is decentralized money is lost on most people, because who even spends time thinking about money being centralized in the first place? For most of us living today, money issued by governments is all we’ve ever known.
As they say, “Never invest in something you don’t understand.” Since you’re here, you’re most likely wondering if Bitcoin is worth investing in.
This article will help you get an overall understanding of Bitcoin (using as little jargon as possible) and why it has taken the world by storm, going from “internet money” used as token chips to buy pizza to an asset worth $60,000 as of 2021.
More importantly, it will explain why some people believe in it, and some don’t, so that you can make your own judgment as to its investment worthiness. At the same time, it will not delve into its technological nitty-gritty, because that requires a completely separate article on its own.
The Birth of Bitcoin: Why It Matters
In 2008, the Global Financial Crisis brought not just investment banks but entire countries to their knees. It was right after this economic meltdown that a mysterious person/entity who called himself Satoshi Nakamoto released a technical paper online introducing Bitcoin to the world in early 2009.
Nobody knew if he was waiting for the right moment to share his creation with the world, or if it was just impeccable timing, but Bitcoin could not have been birthed at a more opportune moment. Many people were enraged when the government stepped in to rescue the banks, as the printing of bailout money meant a debasement of the savings of average Joe.
“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,” he said on a programmers’ forum.
This debasement of money by increasing its supply, without a corresponding increase in goods and services produced, results in rising prices i.e. inflation. Inflation is bad enough for working professionals who, even with increasing wages, are finding it harder and harder to maintain a decent standard of living (not just in the US but all around the world) but can be especially problematic for those on fixed incomes, such as retirees or individuals living on social security.
Classical economists have long identified the problem with money that is issued by a central entity or government. Says the Nobel Prize-winning economist Friedrich Hayek,
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can’t stop.”
Through what has now become known as “blockchain,” Satoshi Nakamoto found a way to create a form of money that requires no central management, and therefore no centralized control and issuance. Transactions are recorded on a public ledger, and anyone can verify them.
Some believe that Bitcoin isn’t really a “new” form of money but how money was always meant to be, like gold: a powerful commodity that is not monopolized by any one party, and therefore cannot be subject to manipulation.
Oh, there’s one more tiny detail at the heart of Bitcoin’s design–supply is capped to a maximum of 21 million bitcoins. No one can make more of it, not even Satoshi Nakamoto himself. For investors, this is a key point–this means that it cannot be devalued through the creation of more bitcoins.
Key Narratives Surrounding Bitcoin
Just like how the emergence of the Internet has had massive implications on almost every aspect of modern society, the arguments for, and against Bitcoin, span the entire spectrum of life, from economics to finance, media, environment, technology and commerce.
Here, we highlight the key narratives surrounding Bitcoin, as well as the arguments on both sides of the coin (!) to provide you with a richer, more contextualized understanding as to Bitcoin’s potential.
The economical debate
Many mainstream economists are of the view that an economy based on a fixed supply of money can never work, because, among other things:
1. A fixed money supply means that governments cannot print more money to stimulate a sluggish economy.
Bitcoiners: If the health of an economy is dependent only on pieces of paper and not real-world resources like labor, raw materials, land and energy, why is the world now faced with the prospect of an economic recession, two years after the US government flooded the market with free money to “stimulate” the economy?
In short, a healthy economy is anchored in reality, depending on the production of real goods and services by real people expending their time, energy and efforts, and not on the volume of paper created out of thin air.
2. A fixed money supply i.e. a deflationary system means that the value of that money will increase over time, resulting in people hoarding the money rather than spending or investing it, which can reduce overall economic activity.
Bitcoiners: At first, it sounds reasonable. But again, is it anchored in reality? If you need shelter and food today, will you wait until next year to buy these necessities? If your family needs a vacation, will you tell them to wait a few years? In fact, a deflationary system results in more thoughtful, prudent spending, and encourages saving and investment, which can lead to genuine long-term economic growth that does not stem artificially from cheap, excess money.
The financial debate
Critics often point out the extreme fluctuations in Bitcoin’s value, claiming it lacks stability as a reliable medium of exchange or store of value, and is thus ill-fitted to be a legitimate currency. Fair enough, but the journey of a currency from being a mere store of value to becoming a widely used and accepted medium of exchange involves several stages of evolution and adoption:
· Store of Value: Initially, a currency might gain recognition and value primarily as a store of value. This happens when individuals or groups believe in its intrinsic worth and are willing to hold it for future use, confident that it will retain its value over time. This is where Bitcoin is now.
· Medium of Exchange: As confidence in the currency grows, people begin to use it for transactions in everyday economic activities. This is happening to Bitcoin…slowly, in certain regions especially Africa and Latin America, countries whose currencies are no longer working well for their people.
· Unit of Account: The currency then becomes widely accepted as a standard unit of account, providing a common measure for expressing prices, wages, and other economic values. This further solidifies its role in the economy. Merchants, businesses, and financial institutions start accepting it as a form of payment, enhancing its liquidity, stability and utility.
· Legal Tender: Governments may recognize the currency as legal tender, mandating its acceptance for settling debts, taxes, and other financial obligations. This formal backing by the government boosts confidence in the currency and encourages its use as a means of payment. This has actually happened in one country: El Salvador.
· Currency Reserve: In some cases, the currency may become a reserve currency held by central banks and institutions worldwide. Being a reserve currency increases its global importance, and it is often used for international trade and financial transactions.
· Global Currency: In rare cases, a currency can achieve a truly global status, where it is widely accepted and used as a medium of exchange in international trade and finance. The US dollar is a prime example of a global currency. For hardcore Bitcoiners, this is the end game.
As such, Bitcoin’s journey from a store of value to a widely used currency is not linear and can take decades or even centuries to unfold, but to dismiss it as a failed currency now would be premature.
The technological debate
According to some, Bitcoin is slow and archaic, and can only serve a single purpose–the transfer of value.
It’s true; Bitcoin was designed to function as money and nothing else, and to fulfill this calling, it has to be decentralized, and SECURE (imagine if the USD note could be easily counterfeited; it would not work as money at all).
It is because of these characteristics that Bitcoin can handle only a limited number of transactions per second (TPS), about seven to 10. By comparison, Visa can process up to 24,000 TPS.
As such, critics argue that Bitcoin has lost its technological edge to the newer cryptos that have been established in the past few years, all of which are faster (like Ripple) and can do a ton of other stuff as well (like Ethereum).
To this, hardcore Bitcoiners always reply, “It’s a feature, not a bug,” meaning to say that its low TPS is intentional, to ensure both decentralization and security (if you think about it, to have files that are stored across more than 100,000 computers around the world reflect identical records independently, without being told to do so by a centralized entity, is no mean feat, and this is the beauty of the blockchain.)
I know what you’re thinking…then how could it ever gain mainstream adoption to fully function as money?
Well, Bitcoiners herald the development of scaling solutions like the Lightning Network, which acts as a second-layer protocol to enable faster and cheaper microtransactions while reducing the load on the main Bitcoin blockchain. This innovation demonstrates how Bitcoin’s open-source and community-driven nature is fostering continuous improvements and adaptations to meet growing adoption and demands.
The environmental debate
Bitcoin’s security and transaction validation rely on a process called Proof of Work (PoW), which involves the solving of complex mathematical computations by mining hardware.
One of the fiercest arguments against Bitcoin is that all this mining activity consumes a lot of electricity, which is not a good look today, no matter how noble the end goal is, like creating a fairer, more inclusive financial system.
The truth is a lot greener than that. According to a study by ESG analyst and investor Daniel Batten, roughly 52.4% of all Bitcoin mining relies on renewable energy (not because the miners are necessarily Greta Thunberg fans, but because it’s cheaper than fossil fuel.) In fact, a super-enterprising Irish farmer has even found a way to power his Bitcoin miner using the methane gas released from decomposing cow poop on his farm.
In addition, proponents of Bitcoin argue that the overly narrow focus on Bitcoin’s energy consumption does not account for the broader context of the global financial system’s environmental impact. After all, traditional financial systems, including banks, data centers, and printing of fiat currencies, are infamously inefficient, consuming substantial amounts of energy.
Two Warring Ideologies
Now here’s some extra info that is not really a direct factor for investment consideration, but is nevertheless good to know if you’re dipping your toes into the world of crypto.
Within the world of crypto there are two main warring ideologies–there is Bitcoin maximalism, which is made up of staunch Bitcoin supporters who firmly believe that Bitcoin is the only true and valuable cryptocurrency. They view all other digital assets as inferior or even fraudulent, asserting that Bitcoin’s decentralized nature, robust security, and pioneering status make it the only worthy contender in the cryptocurrency space. Their favorite phrase? “Bitcoin, not crypto.”
On the other end of the spectrum are those who believe that Bitcoin’s biggest contribution was introducing the world to blockchain technology, but nothing more. Take the good (i.e. blockchain technology), throw out the old (i.e. Bitcoin) is their stance. Their fav phrase–“Blockchain, not Bitcoin.”
Which for the most part, explains why there are over 10,000 cryptocurrencies around today, all trying to build better, faster, more multi-purpose networks (the remaining part is, well, some are outright scams.)
You say, “Ok I don’t really care about all these geek fights, all I just wanna know is, is Bitcoin a good investment?”
Bitcoin as Digital Gold: Investment & Risks
With its limited supply, Bitcoin has been likened to the digital version of gold, in contrast to fiat currencies that can be printed without bounds.
Additionally, Bitcoin’s decentralized nature and cryptographic security (yes, Bitcoin is the only crypto that holds the enviable record of never being hacked) lend it a level of trust similar to gold’s historical role as a store of value.
As such, proponents argue that, like gold, Bitcoin can serve as a hedge against inflation and economic uncertainties, making it an attractive alternative investment for those seeking to diversify their portfolios and preserve wealth in a digital age.
In fact, Bitcoin has returned an annualized gain of over 200% between 2011 and 2020, far better than the best US stocks, noted financial analyst Charlie Bilello.
On the other hand, critics view Bitcoin as a manifestation of the “greater fool theory”–that its price appreciation is not due to any real value or purpose, but because early investors believe there’s a greater fool out there willing to pay an even higher price for it, hence they buy in now in the hopes to sell off and profit handsomely in future.
So should you invest? If you believe in the potential of Bitcoin, you can stomach the volatility (Bitcoin’s price plunged from $60,000 in 2021 to sub-$20,000 in 2022, and rose again by more than 75% to over $30,000 in 2023), it’s definitely an asset to look into if you have capital lying around to be invested.
But what is the actual value behind Bitcoin’s investment potential i.e. what is useful about it that is causing people to see its value?
Bitcoin as Currency: Real-World Use Cases and Adoption
Remittances and cross-border payments
One of Bitcoin’s biggest use cases is for remittances and cross-border payments. At the moment, if a foreign worker wants to send money home to his family, he has to pay banks about $6 to $8 for every $100. This may not be a lot for, say, someone from the US making a one-time purchase from Amazon, but for a breadwinner who has to send much-needed money home every month, that adds up.
In contrast, Bitcoin’s transaction fees seldom exceed $2 for any amount; whether you send $100 home or $1,000, you only pay a fee of less than $2. Why? Banks have to charge higher fees because of the enormous investment into security and operations to ensure that the transaction is carried out. But because Bitcoin operates on a decentralized network and hard-to-hack cryptography, it is able to safeguard security in a more cost-efficient manner.
Financial Inclusion and Unbanked Populations
Contrary to what some may think, some of the earliest adopters of Bitcoin are not the most technologically savvy, but those who have been shut out of traditional banks.
Bitcoin, being decentralized and thus permissionless, has the potential to provide financial services to unbanked and underbanked populations who lack access to traditional banking infrastructure, because there is no single entity that has the power to decide who gets to have an account and who doesn’t). With a smartphone and internet connection, anyone can access the Bitcoin network.
Actually, scratch that. An African startup called Machankura has developed an application that enables the sending and receiving of Bitcoin without a smartphone, or even an internet connection.
As awareness and infrastructure develops, it is likely that Bitcoin’s price will appreciate too.
Online Payments
Bitcoin is increasingly used for online transactions, especially in e-commerce, where merchants accept it as a payment method. Its decentralized nature and low transaction fees make it attractive for international purchases. For example, if you want to send money to your favorite content creator (or receive money from your audience/fans), you can bypass credit cards and banks, and send a few sats directly to them, without incurring any fees or having to send a certain minimal amount.
One of these platforms is the Fountain podcasting app, where you can get paid in bitcoins for listening to a podcast, and also for creating one.
E-commerce and Retail
Granted, this is not happening on a big enough scale yet. While it’s cheaper and easier to make monetary transfers with Bitcoin, it is not widely accepted on the ground by business vendors and merchants yet. Again, this is likely to change with increasing awareness and adoption around the world.
How Governments View Bitcoin
Naturally, some governments view Bitcoin with suspicion, associating it with potential risks to financial stability and investor protection. This has led to attempts at implementing strict regulations or even outright bans in some regions.
Most recently, however, the U.S. Securities and Exchange Commission (SEC) has taken a stance on Bitcoin as a commodity rather than a security. This has been heralded as a key breakthrough in the Bitcoin community–if Bitcoin is considered a commodity instead of a security, it therefore falls outside the scope of securities regulation and can therefore fully function as the trustless currency it was created to be.
Along the same lines, there is an increasing number of political figures speaking up about the merits of Bitcoin as a solution to our boom-and-bust economic pattern today caused by the existing monetary system.
For investors, this is an optimistic development.
In Conclusion
Bitcoin’s impact on the financial landscape has been nothing short of revolutionary. As the world becomes increasingly digital, its decentralized nature challenges traditional financial systems, offering a vision of greater financial sovereignty and freedom from centralized control.
In fact, its very existence has caused many to question the nature of money itself. As more people become aware of the benefits of a decentralized, deflationary monetary system, it is likely that Bitcoin will continue to grow in popularity, value–and adoption.
