Updated: Sep 1, 2020
Created by Satoshi Nakamoto in the ashes of the Global Financial Crisis of 2008, Bitcoin sought to be a solution to handle peer to peer digital payments. The concept is simple, remove the middleman. P2P. Alice can transact directly with Bob with no need for a bank to get involved. It’s a trustless, immutable transaction. Digital payment systems had tried to do this in the past, but there was always one key problem that could not be solved. The Double Spend Problem.
In a trustless transaction, how do we know that Alice has the funds that she has promised to Bob, and has not already spent them somewhere else? Enter the blockchain. The blockchain solves the double spend problem by distributing the ledger on every computer using the Bitcoin network around the world, instantaneously. Alice cannot cheat Bob because EVERY computer already knows what her real balance is! This is called a distributed ledger.
“Miners,” or super computers, compete to solve a complex algorithm that contains the digital signatures of every transaction on the network to win block rewards. The computer that solves the problem wins the block reward, Bitcoin! This computing power keeps the network safe from hacks and the transactions secure. The miners generally solve the algorithm every 10 minutes, therefore creating a new block with all the previous transactions.
The block reward cuts in half roughly every four years, therefore creating a deflationary system. New Bitcoin cannot just be printed into oblivion by a central banking system, it is released into the ecosystem in controlled amounts, decaying with time. With fiat currency, inflation decreases your spending power. With Bitcoin, a deflationary system, the value of Bitcoin increases over time. Simple economics of supply and demand.
That being said Bitcoin is not without its flaws. The mining process requires an incredible amount of energy, as super computers must exhaust electricity to mine. With current prices, many of the old miners are unprofitable, meaning that their electricity costs are far more than what they earn in block rewards. It is said that the total yearly energy consumption of Bitcoin world-world in more than some countries!
Bitcoin has also faced many regulatory concerns. In the early days, most exchanges, or places to buy and sell or trade Bitcoin, did not require KYC (Know Your Customer). Due to this lack of oversight and regulation, some exchanges were used for money laundering. In recent years, regulations have tightened up and almost all exchanges now require KYC.
Exchanges, often holding millions of dollars of client deposits, have become a honey pot for hackers. If a client is holding funds “on exchange” or in a “hot wallet,” the custody of the funds is in the exchanges’ hands. Although Bitcoin itself has never been hacked, poor security has lead to many exchanges being hacked, either through internet pirates or inside jobs. This is why it is a good idea to take custody of your own funds in a “cold” hard wallet (think USB) or a software wallet (think app) that is not connected to an exchange.
Bitcoin is helping change the world by bringing banking to the unbanked. Over 2 billion people in the world don’t have access to a bank account. The either don’t qualify, don’t have a physical address, don’t have enough money to make a physical deposit, or any other reason. Bitcoin can be owned by anyone with a smart phone. It can be sent to anybody, anywhere in the world, for practically free, in a matter of seconds. It is permissionless, meaning you don’t have to apply at a bank to open an account to transact in Bitcoin. This is game changing for developing economies!
In addition to Bitcoin, there are a wide range of DeFi, or Decentralized Finance, tools being built to help people 1) borrow money at a fraction of the rates that banks charge, and 2) lend out money and make real interest! You can become your own bank! Banks these days take your deposit, lend it out to others at 17% interest, and pay you 0.02% APY. And get this, through fractional reserve lending, they in many cases only hold 1% of your deposit! They don’t even hold your money and are lending it out at 17% interest! Banks are not your friend. They are money making entities, not for the depositors, but for the CEO’s and shareholders. I cry foul.
With DeFi, you can earn up to 8% APY on your deposits. Also, by creating a CDP (Collatorized Debt Position; putting up $100 in collateral to borrow $50, you would do this to create a $150 position you could use however you please) you could take a loan at around 8% as well. This, in my opinion, is a way better solution to the bank! The Celsius and Digifox wallets are two of the best options to start earning interest in my opinion.
However, as great as it does sound, being your own bank has its drawbacks too. You must make sure that you protect your private keys, or your seed phrase. If you lose this, you lose your funds. You are the custodian of your own funds. There is no trusted third-party, such as the bank. The exchange would be a trusted third party if you leave your funds there. Some exchanges, such as Coinbase, are FDIC (Federal Deposit Insurance Corporation) insured up to $250,000. But remember, having your funds on exchange does pose some risks as well. Also, you must make sure that you send transaction to the right person and transfer funds to the right accounts. If you make an error, most times it is irreversible. Reversing it would require splitting the entire blockchain. Banks can often undo erroneous transactions.
Whether you want to join the Bitcoin revolution or remain with the corporate banking system, the choice is yours! If you do decide buy Bitcoin, (I am not a financial advisor and cannot legally give financial advice) I would buy a small amount at first, get some skin in the game. Watch it, see how it works and reassess your position.
Coinbase is a great place to start! You can start today by downloading the app from Google Play or the App Store to purchase your first Bitcoin! Don’t worry, you can buy fractions of a Bitcoin too ;) You'll get $10 for FREE if you buy $100 or more using the Coinbase link above.
For more information on how to use Coinbase, check out our blog post, Coinbase - The Best Place to Get Started With Crypto!
If you are a fan of Bitcoin, or would like to support the Bitcoin Revolution, check out our Bitcoin Collection to get some sweet merch!