The information in this post should not be considered financial advise. Furthermore, I must warn you that the value of a unit of bitcoin has been flipping between bear market and bull market seemingly in correlation with an event in the bitcoin protocol called ‘halving’ described below.
If you are not aware just how bitcoin turns traditional money and finance squarely on its head then allow this post to tell you just how revolutionary bitcoin is. I will try to keep this brief.
A few things to know before anything else is that bitcoin is not a get rich quick scheme and it will never be promoted by any corporation as they cannot take a commission when someone starts to use bitcoin. Instead, promotion of bitcoin is largely by word of mouth.
So then what is bitcoin? Bitcoin is both a system of money and a payment network that not only did not ask anyone for permission to exist, it did not need to ask.
While systems of money have been in existence for thousands of years, like modern day national currencies, and payment networks like traditional banking date back to 1600s and more recently the likes of PayPal offering online banking services, it is the first time in human history that one system is both of these at the same time.
The biggest drawback in traditional finance is that it excludes huge numbers of people for a variety of different arbitrary reasons. By contrast, bitcoin not only does not exclude anyone from using the system, it cannot be compelled to exclude anyone. Anyone wanting to become a bitcoin user would only need to download the bitcoin wallet software. These two characteristics alone qualify bitcoin as a system of Universal Basic Finance but please read on.
So then what are the main functions of a bitcoin wallet? The primary function of a bitcoin wallet is to interrogate the bitcoin blockchain to discover how many units of bitcoin a user has available to spend. It can do this because the bitcoin blockchain is a record of what public addresses owned how many units of bitcoin and when ownership was transferred from one bitcoin public address to another, by way of timestamped transactions. The secondary function of a bitcoin wallet is to cryptographically sign a transaction for transferring an amount of bitcoin from one or more public addresses to one or more public addresses.
For a system of money to endure the asset that it uses as money must have durability, portability, divisibility, uniformity, be of limited supply, and have acceptability. Bitcoin measures up to these as follows.
· Durability: a full copy of the bitcoin blockchain exists on every full node on the network so the units of bitcoin themselves are 100% durable.
· Portability: as a user’s bitcoin wallet is not where a user’s holding in units of bitcoin is located, the portability of these units is a moot point. What matters instead is the portability of each user’s bitcoin wallet with its underlying private key that sometimes can be represented by a seed phrase.
· Divisibility: each unit of bitcoin is divisible not to just 2 decimal places like traditional money but to 8 decimal places, an extra 6 over traditional money. If this proves to be insufficient at any point in the future, it can be increased.
· Uniformity: every unit of bitcoin is the same as and indistinguishable from any other.
· Limited supply: the supply of new units of bitcoin is limited to a predictable schedule that will max out at 21 million units. This will make for an asset pool comprising of 2.1 quadrillion exchangeable units known as Satoshis, in honour of the anonymous creator Satoshi Nakamoto.
· Acceptability: this is the biggest question of them all. Each person will come to their own decision on whether bitcoin is a viable alternative currency to fiat. Fiat being money regulated and centralised under the control of the state, the opposite of cryptocurrency as it is designed on the principle of doing away with state control, state involvement and eliminating the need for third parties like banking institutions. Most that do make this decision in favour of bitcoin I think will never be going back to fiat, and that includes me.
Payments in traditional finance are made using, among other things, 6 digit sort codes, 8 digit bank account numbers and 16 digit debit card numbers, both outgoing and incoming. All this data must be enclosed in very heavily secured systems every step of the way. Unfortunately, such centralised security is breached on a regular basis. By contrast, bitcoin makes payments using a private key to public key pairing, also known as asymmetric encryption, both of which are found on user’s bitcoin wallet. The first of its two mechanisms make use of the private key to create a digital signature against a transaction with its content as input. The second of its two mechanisms make use of the public key, also known as the bitcoin public address, by which network nodes validate that a given digital signature used to sign the associated transaction is authentic or not, an outcome that is strictly binary.
While some transactions in traditional banking can only be performed when a bank branch is open, the bitcoin network is online and ready to receive transactions 24/7, every day of year.
If a bitcoin public address could be thought of as analogous to a traditional bank account and a private key could be thought of as analogous to a traditional bank then bitcoin is an entire banking industry that is the sovereign property of one human being. Furthermore, each bitcoin private key, when kept private, is not something that anyone else can lay claim to. So, when President Obama said that bitcoin is a Swiss bank account in someone’s pocket, he did not go nearly far enough since the number of bitcoin public addresses available on each private key is ridiculously high.
In contrast, a bitcoin payment can only be made from bitcoin public addresses that have any unspent amounts of bitcoin and cannot exceed the aggregate of the unspent amounts, which means that the recipient of any and every payment can know that they cannot possibly ever receive counterfeit units of bitcoin. I think that is astounding.
The need to make change that exists in a payment made using traditional money, does not exist in a bitcoin payment because bitcoin dispenses with the concept of physical denominations such as £1, £5, £10, etc.
Given the above, we can see just how much a revolution bitcoin is but please read on as thus far I have only written about bitcoin the monetary system whereas what follows will be about bitcoin the payment system and its use of an open blockchain mechanism operating a cryptographic algorithm in place of a trusted third party.
People can volunteer their machines to run the bitcoin algorithm whose function is to validate transactions which are held in a pool on unconfirmed transactions across all nodes on the network. The incentive for people to do this currently is to receive a reward of new units of bitcoin. The race to receive this reward is won whenever a cycle of the hash function of the algorithm discovers a hash output that has the requisite number of leading zeroes.
All the other machines on the bitcoin network running the algorithm will only accept a new block of validated transactions sent to it by the node claiming to have won if it has the winning hash output, adding it to the blockchain as the latest block.
The network will regularly revise the number of leading zeroes needed to win the race in order that a new block is added to the blockchain approximately every 10 minutes as dictated by changes in the computing power of the network.
The network will also regularly reduce this reward of new units of bitcoin by 50% every 210,000 block approximately every 4 years in an event called ‘halving’. This reward of new units will cease at the last ‘halving’ which will occur in the year 2140 that will leave the fee for each transaction as the only incentive for machines to run the bitcoin algorithm.
Everyone who is anyone significant in the bitcoin world thinks that whoever invented bitcoin the money and payment system created something that will literally transform our society very much for the better. To come full circle with my original comment that bitcoin is not a get rich quick scheme, what it replaces – the traditional monetary system – is a get poor slowly scheme for the 99.99%, being as it is debt based. This way I can say that it will never be too late to get into bitcoin because the value that currently resides in the traditional monetary system will progressively migrate into bitcoin.
The bitcoin blockchain came into existence on January 3, 2009 and the very first block in the bitcoin blockchain, called the genesis block, contains the text from a quote from the front page of the British newspaper ‘The Times’ that reads ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’.