STORIES

Bitcoin: Changing our Understanding of Money

By Cory Hughes on July 6, 2017

You might have heard a little about Bitcoin lately. The cryptocurrency has been making headlines around the world after peaking at $2,800 last month. To many, Bitcoin is nothing more than a fad or a trend; a thing for internet nerds, but not for everyone else. The recent price spikes are not out of the blue. Bitcoin has been gaining steady traction and global adoption since early 2014. The best part: Bitcoin arguably hasn't begun to show its real potential.

Bitcoin is not just a system of digital money. It is the culmination of decades of work in two very specific areas of computer science: cryptography and distributed systems. Both have been around since the 1970s, and when combined, the two form not just the latest trend in digital technology but an entirely new ecosystem.

The current financial model the world follows revolves around debt based on stores of gold or promises to pay. They are controlled by a small group of bankers who have the power to manipulate entire markets and send the value of a competing currency into the ground. Then walks in Bitcoin, which revolves around the premise that you don't need a third party controlling your money. When you own Bitcoin, it is yours. No one can take it from you, stop payments or interfere with your freedom to choose when and with whom you exchange money.

The true power of the Bitcoin network comes from its decentralized nature. Moving away from third-party intermediaries who truly have more power over your money than you do, Bitcoin works on a decentralized system of trust—not trust in an individual or a company, but trust in the network. Bitcoin transactions from one user to another are documented on the blockchain, the distributed ledger of activity, with each transaction having to be verified by other users of the network. This is done by Bitcoin miners, who are rewarded with Bitcoin for participating in the network, verifying transactions and recording the ever-growing ledger. 

Bitcoin's strength, when compared to other currencies, is that it is deflationary in value. In a nutshell, your American dollars are only worth around four percent of their original value. After being taken off the gold standard, inflation has run a muck, and the Fed can print money at will. With Bitcoin, there is a finite amount that will ever be created. In 2009, the first bitcoin was minted. Since then, more than 16 million Bitcoin have gone into circulation. Due to the original programming algorithm, the amount of Bitcoin awarded to the miners is cut in half every four years, with a cap of 21 million Bitcoins total. Currently, mining rewards stand at 12.5 Bitcoins. It started at 50, then 25, and in 2020, it will be cut in half once again to 6.25 Bitcoins. This ensures that the last Bitcoin won't be mined until well into the 22nd century.

The halving of the mining rewards means an ever-decreasing new supply. With the total number Bitcoins limited to 21 million and advanced cryptography in place to prevent counterfeiting or duplication, this small number in an ever-growing population ensures value cannot depreciate over an ever-increasing inflationary supply. In other words, there simply aren't enough Bitcoins to go around. Fortunately, Bitcoin can be divided out to the eighth decimal place, meaning despite the short supply, there are more than enough microbitcoins for everyone. 

Many criticize Bitcoin as simply being a new speculative asset, and to some, that may be true. It is not true, however, for those who see Bitcoin for what it may become: the future. Bitcoin may be the single most displacing technology the world has ever seen. To decentralize money, and to be able to exchange value directly with other individuals, beyond all borders, with the internet as the only requirement, changes everything.  

When the computer processor was invented, people laughed. “What can you do with it?” everyone wanted to know. The answer confused them. “Anything you want.” No one got it, except for a select few. Bitcoin and the blockchain are the computer processor of the new age. Through them, we will be able to do things we have yet the ability to grasp. 

In as far as a currency goes, Bitcoin is the next step in the evolution of money as was predicted long ago. Commerce began with a barter system: commodities for commodities. Eventually, direct trade was substituted for precious metals in the form of coins. Those precious-metal coins then went on to become tiny pieces of paper that we all seem to love today. Each step forward in currency is a step away from the original source of value. Today, our paper money is backed by nothing other than our hope that the guy next door would take it. Bitcoin is the next step in currency evolution as it moves us through the already known paradigm, this time removing paper currency entirely. 

The first people to be exposed to paper money, who had been accustomed to precious coins, probably had the same reaction you did the first time you heard about Bitcoin: “That's not real money.” They were just as wrong then as you might be today if that was your claim. Most people do not recognize global shifts in culture until they look back in hindsight and wonder how they missed it. That is what is happening with Bitcoin as we speak. 

To understand Bitcoin in terms of global currency, you have to look at the market cap of all fiat money transactions that occur around the world. Bitcoin, due to its low cost and instant settlement of financial transfers, is gaining more and more users daily. Current projections around the cryptospace suggest Bitcoin will eventually make up around five to 10 percent of the global currency transfer market. In a multi-trillion dollar global ecosystem, and with a limited supply of 21 million Bitcoins, that puts the price of a single coin somewhere in the range of two to five million dollars per bitcoin. At around $2,200 a piece today, Bitcoin has the potential to change the lives of countless individuals as it appreciates over the next decade. 

Some people look at the entry price of Bitcoin and feel that $2,000+ for one coin is way too much, while others feel they missed the boat already. If Bitcoin continues to grow, however, nothing could be further from the truth. To embrace Bitcoin is arguably to get ahead of the next major shift in finance and computing technology. For the true believers, it is not just money, it is a movement. 

Photo credit: CafeCredit/Flickr.

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