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Nowadays, cryptocurrencies have become a global phenomenon that is known to most people. It’s still somehow considered an issue for geeks that most people don’t understand, yet banks, states, and many companies are aware of the importance of cryptocurrencies.
This chapter explains what cryptocurrencies are. Let’s go back to where it all started.
What is Bitcoin?
At its core, Bitcoin is a digital currency, which is also often referred to as a cryptocurrency. Bitcoin is like any other currency, but you do not need a bank to store it. The amount that you own is recorded on a distributed ledger, also known as a blockchain. The distributed ledger is not tracked or owned by any single entity, but comprised of individuals and organizations that own computer nodes that track and verify the ledger.
You could send money to whoever you like, including at many businesses, without having to go through a 3rd party, like you would with traditional money. You can do this through your smartphone, your workstation, or even on any web browser. It goes directly to your recipient and is not verified by a 3rd party, such as your bank or a payment processor. And if the recipient does not accept Bitcoin, you can exchange it for traditional fiat money like dollars or euros.
Since it’s digital, you can send it, spend it, or transfer it fast and easy. It does not require your bank to be open for you to send or wire money, and can even be sent overseas.
The difference to fiat money
Is Bitcoin different from traditional money? The answer is yes. However, before discussing the ways on how it is different, let us first talk about what fiat money is. Fiat money refers to the official currency of a state or country. A good example of fiat money is the US dollar or the Euro.
Just by understanding what fiat money is, it is easy to differentiate it from Bitcoin. Unlike fiat money, Bitcoin is not owned by any government. It is also not controlled by any individual or group of individuals. Although it functions as a substitute for money, it is not considered fiat money. In fact, Bitcoin as well as other cryptocurrencies are not even considered legal tender. Legal tender refers to that which a debtor can compel his creditor to accept payment in order to satisfy as obligation. Before you can send any Bitcoin to anyone, you must first have a sufficient amount of Bitcoin in your wallet. Hence, before you can send bitcoins to anyone, you must first receive Bitcoin. Once you have Bitcoin in your account, then you can use and send Bitcoin to another person.
Why the immense hype?
Bitcoin has been around since 2009. In its early days, Bitcoin was sold for less than 50 cents. It was only traded between a small group of passionate early adopters. To them, it represented a bold new technology that could change the world. But it was still a undiscovered technology used only by a few cyberpunks and by some who felt the traumatic consequences of reckless subprime mortgage loans given out by the banks that led to the 2008 financial crisis.
There’s a well-known incident that happened 2010. Laszlo Hanyecz spend 10,000 Bitcoins on two pizzas. Bitcoin had a purpose and making transactions worked. Years later, when the man was interviewed and was asked if he regretted it, he didn’t. Today, those 10,000 Bitcoins would be worth almost $100 million.
Another well-remembered incident happened including James Howell, of Newport, United Kingdom. He had mined around 7,500 Bitcoins when his laptop broke down and decided to sell it on eBay. He kept his hard disk where he had the private keys of his Bitcoin Wallet inside one of the drawers of his house. A bit later, in 2013, when he cleaned the house inadvertently, he threw it away.
Now James is determined to go to the landfill and dig until he finds that hard drive, even if he declares himself, is an expensive and risky task due to landfill gas.
Power to the people. Be your own bank.
Banks have more power over your money than you might think. For one, they store your money in an account and lend it out at higher rates than they pay you. As anyone with a savings account can attest, interest rates aren’t high and barely keeps up with inflation. This is the cost of doing business unfortunately. After all, you need to store your funds somewhere.
What’s worse is that banks have control over how you access your money. You might have to pay a fee for the privilege of keeping your account open. Or, you get charged a fee when you get your money out of an ATM.
Furthermore, your bank tracks record when you can access your account and spend your money. Your bank might have daily withdrawal limits at ATMs. It may also limit how much cash you can take out at a branch.
Still, these are just annoyances. Where it could pose danger is if your bank declares bankruptcy, and even if they are FDIC insured, it will cause you to lose money just to retrieve your money.
Bitcoin solves problem. You fully own your Bitcoin. Nobody else does. You keep control of your funds at all times – worthy to mention – if you keep them in your own wallet.
No one can tell you how to use Bitcoin or stop you from using it. That puts an enormous amount of financial power back in the hands of individuals, rather than institutions.
Why are there other currencies?
In summary, Bitcoin offers the following
- Portability, durability, programmability, scarcity, fungibility, accessibility, authenticity, decentralisation
- Protection against rampant inflation, or the unrestricted printing of more money by governments, especially in politically turmoil environments (e.g. US-China trade war)
- Less reliance on banks and governments as it gives more control of money back to the individual