It’s easy to get enmeshed in the Bitcoin hype and forget the original purpose of its creation.
Do a search on Bitcoin, and you’re likely to get bombarded with articles regarding price action, price predictions, entry points and sell points; then there are the chart patterns, bullish analyses, bearish sentiments, who is buying and who is selling… we’ve become an audience of Bitcoin enthusiasts entrenched in a promise of wealth, and fearful of a disastrous consequence should the price drop. Such activity does reflect the true nature of Bitcoin. To grasp its essence, we need to shovel away the mounds of wealth obsession cluttering any google search on Bitcoin and re-examine its roots.
In the introduction to the white paper, Satoshi Nakamato clearly explains the reason for its creation. He states:
“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.”
Internet commerce was the target he wished to revolutionize. The breadth of this market cannot be underestimated as internet commerce has grown by 44% in 2020 to $861 billion dollars. This is already a gargantuan portion of the total 4 trillion U.S. retail market.
Satoshi also calls our attention to our dependence upon the trust-based model of exchange. A trust-based financial system is a system where we are reliant upon third parties to manage our exchange. We must “trust” the third party to do our bidding with our money when we exchange it. When we send money from our banking account, for example, we are trusting in bank to do a number of things:
- Maintain an accurate record or ledger of the balance of our account,
- Ensure that the money in our account is identifiable as our own,
- Ensure that there is a degree of privacy within our accounts and that the balance of our account will not be shared with others,
- Ensure that others will not have unauthorized access to transact out of our account, and
- Ensure that transactions will take place as expected.
There are other expectations as well, such as our money being insured by the Federal government up to $250,000 in the event of a crisis, or that the bank itself will be able to service our requests. All of these items add up to a lot of “trust” in a third-party entity to do our bidding. The same is true for brokerage exchanges or other custodians of our money.
Bitcoin is trustless because it takes out this middleman. There is no need to trust institutions to do the above biddings, as the technology itself ensures that these functions will be secured by the Bitcoin network. There also is no need for the government to Federally insure up to $250,000 in our Bitcoin accounts (as is the case with Federally charted banks); because through cryptography, the same technology that protects our nuclear codes, our Bitcoin is protected through the blockchain.
There is, however, a higher level of responsibility on us for the Bitcoin we hold; for example, if you Bitcoin accidently send your Bitcoin to an incorrect address, the transaction is irreversible and most likely will not be retrieved. Therefore, if you are making a Bitcoin transaction from your crypto wallet to another, you have to make sure the address is accurate. Another way that people have been known to lose Bitcoin is by holding their Bitcoin in an exchange wallet, rather than securing it a wallet of their own. Exchanges can be hacked because the keys to opening a wallet on an exchange are controlled by individuals other than yourself. Your keys, your Crypto.
In the United States and other developed nations, many of us have enough faith in our banking system as not to fear its demise. But in places like Cyprus, people’s faith had broken down in past. The people of Cyprus experienced an unexpected financial meltdown in 2013 and turned to Bitcoin for safety.
When people lose faith in the currency they depend upon every day, there is a rush to get the money out of that particular currency type. This can cause a domino effect sending the value of the country’s currency into a downward spiral, resulting in hyperinflation—where the cost of a dozen eggs may quadruple in a short period of time.
This example of people turning to Bitcoin in a time of a country’s financial crisis is not isolated. As recent as last year, Argentinians flocked to crypto exchanges like Ripio (Argentina’s largest crypto exchange) to purchase cryptocurrency as safe haven against high inflation.
In fact, when Bitcoin was spawned on January 3rd 2009, Satoshi Nakamoto even referenced the following text in the genesis block (the first block ever mined): “The Times Jan/03/2009 Chancellor on brink of second bailout for banks.” If you recall what was happening at the time, the world was on the verge of a total economic collapse. Governments around the world provided stimulus to banks and corporations, all in the name of preventing another great depression.
Fast forward to today, and we are in a similar economic environment. Central banks around the world, in an effort to keep their economies from collapsing are hellbent on injecting money into the economy in the form of money printing through stimulus checks and quantitative easing, a method where central banks purchase bonds, which in turn further increases the total money supply.
Fiscal stimulus and monetary injection through quantitative easing is not without consequence. By increasing the total money supply, the value of our currency is depreciated. Our buying power is diminished. The leaders of our fiat regime shill the need for such injections, but too much fiscal spending in lieu leads to crisis… as already exemplified with Cyprus and Argentina.
This is why Bitcoin is often referred to as a safe haven against an inflationary monetary system. Since there will only be 21 million bitcoins ever produced, the supply of Bitcoin is fixed. The protocol does not allow for arbitrary printing giving Bitcoin a unique appeal, this means it cannot be manipulated as fiat currencies can be through money printing.
Being a lifeboat and an alternative to institutionalized finance is not the only benefit of Bitcoin. The white paper also describes the inefficiency garnered by the current economic systems whereas:
“Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes… With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need.”
The above aftereffect of the existing system creates the need for merchants to be able track their customers. If a credit card payment on delivered merchandise was reversed, for example—if the merchant did not know who the money was received from, they could never make attempt to retrieve the payment. Such inefficiency, when totaled up, equates to a substantial amount of time and resources that institutions must put into KYC (Know Your Customer) regulations, which aren’t necessary in the Bitcoin peer-to-peer system.
Granted, since transactions cannot be reversed, users must be extra cautious when transacting in Bitcoin… but the benefits of eliminating the need for KYC, or having to use a third-party for transactions, and also the confidence and protection that comes with cryptography may outweigh all the baggage our current fiat system carries. In fact, the total infrastructure of the fiat system becomes unnecessary: skyscrapers, Corporations containing departments upon departments needed monitor activity, settle balances… the list is endless. By eliminating the need for such infrastructure, we enter into a new world of peer-to-peer exchange freeing us from the confines of traditional capital. We enter into a world with less friction, greater stability and independent control of our wealth.
With the tsunami of cryptocurrency news that is flooding the internet daily, most of which is centered on hyping the latest craze, an obscene amount of focus is on Bitcoin’s or price… yet let’s remember that Bitcoin is here to revolutionize the existing technology of a moribund fiat system. When we hear the terms HODL, many of these HODLers are doing so not just for their future wealth, but rather for an idealistic belief in blockchain technology itself—how it can help make the world a better place by giving people a viable means to transact more productively, and without the need for surveillance to ensure the transaction properly took place. We are still in the nascent stages of these benefits that cryptocurrency can offer. Like a young tree we need to continually water the roots of such technology. And we do this best by maintaining our focus on the essence of why Bitcoin was created, not by obsessing over where its price is going.
Disclosure: Long Bitcoin
