Welcome to Crypto 101: Why Bitcoin? So, why bitcoin? Why should you care? Let me start with my favorite thing about bitcoin and cryptocurrencies: it can provide financial freedom. Do you have control over your own money? Really? That money is in a bank, right? What if you want to do something a bank deems not ok?
Let me give you a few examples.
At the end of 2017, the price of cryptocurrencies shot up very quickly and many people gained interest in cryptocurrency. As a result, credit card companies and banks were rejecting crypto purchases and they would even close some accounts.
Another example is the banking state in the cannabis industry. With many states in the US legalizing marijuana, legitimate businesses are popping up. However, because of federal regulations, marijuana vendors and growers don’t have access to traditional banking services so they have so much cash on hand.
Are you in control of your money?
So again, do you really have full control of your money?
You have control over your money UNTIL the institutions that process your transactions say otherwise. Banks and payment processers like VISA will always have the last word. What I just described is what is known as banking controls. Restrictions on purchases are something that banks usually have to do by law. However, in situations where laws are not very clear, banks would restrict purchases THEY don’t agree with.
What's useful about Bitcoin?
So, what is useful about bitcoin? Over the past 50 years there have been several currency crises around the globe. In Venezuela, inflation has increased to 10 million percent! The bolivar is essentially worthless. So the use of bitcoin in Venezuela has soared from almost nothing in mid-2018 to more than half a million dollars of transaction volume a year later. Bitcoin was almost a lifeline. I’d say that makes bitcoin pretty useful.
More recently, cryptocurrency has been a helpful tool in funding protest movements. One of the speakers at a recent Black Lives Matter protest talked about bitcoin as a non-oppressive alternative to the financial system. There’s also a software program called Bail Bloc which mines Monero to bail people out of jail. Indeed, bitcoin and cryptocurrency is enabling free speech and we can use it as a tool in preserving our fundamental freedoms.
Another is in investments. Some aspects of investment receive a limit by regulations, like who can invest on the basis of accredited status. Most people need to go through a licensed broker to invest, and this is fine. Navigating markets isn’t easy after all. However, many argue that people deserve the freedom to invest directly regardless of the assets they hold. Bitcoin and cryptocurrency make this possible.
How is Bitcoin different from traditional finance?
So, how is bitcoin different? There’s an important economic principle involving trust. We need trust to transact between two people. If I buy an apple off of you, you have to be confident I’ll pay you, I need to be confident that you will give me the apple. Sometimes we can’t establish trust between two parties. Let’s say they don’t know each other, or they live a great distance and need someone to help facilitate the transaction. Third parties are called in to help facilitate a transaction, they help establish trust through various services and end up being the middle man, or intermediary in the transaction. The less direct trust, they add more of these middlemen. The more of these middlemen that are added, the higher the overall costs of the transaction.
And the opposite applies. The less trust that needs to be established, the less costly the transaction will be. If you pay HK$10 of apple insurance because she can’t trust me to pay up, that cost probably gets passed onto me as the buyer.
Bitcoin can offer trustless transactions, we’re talking about the fact that you don’t have to place trust in any other individual when conducting a transaction.
The difference with Bitcoin is you’re not trusting a third party, you’re trusting the fully transparent Bitcoin software. You trust the code, you don’t have to place trust in other people upholding their end of the deal. You don’t have to worry about that because the blockchain contains rules. People are unpredictable, blockchain transactions are not.
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