Why, if bitcoin succeeds, it may die….
What is money? Money at its core is information or, more precisely, the information of the ratio of goods and services. E.g., the data of how many apples are worth one orange.
Throughout history, money has taken different shapes and forms; seashells were the first used currency, and then metal coins, paper, and in the 21st century, just numbers stored in a mainframe.
For anything to be used as money for the practical purpose, it should satisfy 4 conditions:
1. Store of value
2. Universally accepted medium of exchange
3. Ease of portability and durability
4. Low volatility
A brief history of bitcoin:
Aburger that costs $10 in 2010 will cost you $13.26 in 2022. Have you ever wondered why this is because the government has the power to devalue your currency. They have the power to decide if your $1 is able to buy goods worth $1, or $0.8. they do this by controlling the money supply. While any healthy economy needs healthy inflation. The problem arises when govt misuse this power. Suppose the government wants to spend money, but they don’t have they can just print more money and dilute the currency’s value. Somewhat of the above scenario happened during the 2008 financial crisis, the govt decided to bail out the banks responsible for the crises on the back of the general public.
Fed up with these shenanigans, a person/group who goes by the pseudonym Satoshi Nakamoto decided to form a new type of currency that would be controlled by everyone i.e, a decentralized currency
Before understanding how bitcoins work, you need to understand a few terms:
A cryptographic hash function is an algorithm that takes an arbitrary amount of data input — a credential — and produces a fixed-size output of enciphered text called a hash value, or just “hash.” There is a cryptographic hash function called Sha 256. No one can break.
Blockchain: it is just a way to store data in an immutable way. Imagine a magic notebook in which once written it cannot be changed and can be written only line by line and pages cannot be torn. And each page is called a block. Voila, you have a blockchain.
Bitcoin explained for noobs:
imagine a small city called ‘cryptoville’ in which people use an alternate mode of payment. In this city instead of paying people directly, they just put a message in the town’s WhatsApp group that “jack paid Rachel 50 BTC”.(while entering the group they have to declare how much money they have and at no point in time total money in the system can go net negative). The admins can only post the message and, once posted, cannot be deleted.
Ignoring the technical details, this is how all cryptocurrency works. There is a public ledger(the town’s WhatsApp group). And admins are called miners who authenticate the transaction in return for a small exchange fee. And the entire thing is protected using cryptography and blockchain, making it nearly impossible to hack.
Different cryptocurrencies have their own quirks and varying level of security. Bitcoin has set its limit to 21 million coins. dogecoin introduces a specific amount of coins in a specific time period(controlled inflation) . Stable coins like tether have their value pegged to currencies like USD.(1 tether =$1).
Bitcoins explained for nerds
Let it go. Technically it is difficult to understand, and it is so extremely well thought out that once even if you do understand, you will feel dumb. It’s not about knowing, it is about believing. Believing that bitcoin is the future is enough(still, if you wish to know, start with the white paper and follow Nic Carter).
Are there any advantages of using cryptocurrencies(like bitcoin or dogecoin not including stablecoin) over traditional currency?
1. Governments cannot edit the money supply according to their wishes, there is some merit to that.
I know it seems like a lot less advantage for something that some people call the future of all money. It’s not that cryptocurrencies are revolutionary. It’s the technology that powers them that are extremely revolutionary. We always needed a middleman(i.e- banks) to trust the system and authenticate the transaction. For the first time, a protocol was used for trust
But if bitcoin does want to become the future of money, it has quite a few hurdles to cross:
1. Scalability - Bitcoin has a transaction volume of nearly 500000 transactions per day. Meanwhile, visa alone has 150 million transactions per day. This clearly shows the amount of scalability required to use bitcoin as an everyday currency. But the problem is bitcoin has a fundamental limitation in increasing transaction volume. Imagine the WhatsApp group of cryptoville going from receiving 1000 messages per hour to 1 million messages per hour. Yeah, the system would break. There is a workaround to it, such as the lighting network, but a lot of work still needs to be done.
2. Excess Power consumption: bitcoin consumes around 0.5% of all the world’s energy. Now whether this much amount of energy is justified or not. It depends on the perspective if you compare it with the energy consumption of Finland(which is the same as the energy consumption of bitcoin). It is a lot, but if you compare it with the extraction of nickel, then it seems alright. If we consider nickel important for the economy, an argument can be made that an unhackable monetary system is equally valuable. But this shouldn’t be a problem long time as energy is getting cheaper and renewables are replacing nonrenewables
3. Agreement of price: how much bitcoin does an apple cost, and who decides it? Every new currency goes through this phase. Initially, there will be a lot of disagreements, but with trial and error, it won’t be a problem. Time will take care of it.
So, is Bitcoin the future of currency?
If it succeeds in helping you buy coffee with bitcoin instead of dollars. Then the governments will just pull the plug and kill it. Who controls the money has the power. And no government will let someone else take that power away from them. They will use all their power to stop it. And India is already halfway there. I am not saying that bitcoin will eventually die, but it won’t be allowed to succeed without a serious fight.
Recently Warren Buffett said, “if you offered me all the bitcoin in the world for $25”, his reasoning was it is an asset backed by nothing. It is still unclear what exactly is the purpose of bitcoin. It cannot be used as money because of its high transaction cost and it’s too volatile to be thought of as an asset(like gold). And it is backed by nothing other than people’s trust. All the countries back gold, but they don’t back bitcoin. And if for some reason, the majority of bitcoin holders think that bitcoin is of no value, then bitcoin will crash. But on the other hand of skepticism, it has stood resilient for 12 years, and the future remains to be seen.
What I personally think will happen is, that bitcoin won’t be replacing traditional currencies like the dollar or rupee, but it will form the backend of the conventional money system, making the monetary system more resilient. And bitcoin will become the currency of the internet. For all digital goods, bitcoin will be accepted and whenever metaverse takes off, cryptocurrency will probably be the default currency of metaverse. But hey, who knows perhaps I am wrong, and we will be buying coffee with bitcoin!!!