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Money, throughout history, has been a tool used for human coordination. The best money is the one that preserves value across time and space. The qualities found in good money can be seen in the table below.
Gold
Gold is simply an element on the periodic table but has been used as money and a store of value for millennia. Gold possesses many of the attributes humans look for in money: scarce, fungible, divisible, difficult to corrupt. However, it is also quite burdensome to transact, transport, and store safely which directly led to its successor: fiat.
Fiat
Fiat is money issued by a government and is only valuable due to government decree/force. Fiat, like the US dollar, was once backed by gold but since 1971 is only backed by the enforceability of the government. Now, fiat (money) is a tool wielded by governments in which a select few can determine how much money exists, how much they can print, to whom it goes, and how much to confiscate from others. This power imbalance has led to considerable wealth inequality and, time after time, failed currencies.
Cryptocurrency (Bitcoin)
Cryptocurrencies, specifically Bitcoin, are just the latest iteration in the 6000 year history of money. Bitcoin is digital money that operates without the need of governments or banks. It is essentially gold that can be transported over the internet in a direct peer-to-peer fashion. It is a permissionless, decentralized parallel financial network that anyone can use with a scarce, seizure-resistant token that no person or government can control or manipulate.
What is "crypto"?
Cryptocurrencies (crypto) are digital currencies that rely on math and cryptography for their security and usability rather than a central third-party like a government, bank, Visa, Paypal, etc. They are a breakthrough in human coordination and trust! They remove the need for a middle-man in any transaction.
What problem are they solving?
Modern-day banking was created because humans could not safely transact with someone they did not know/trust. To fix this problem, banks inserted themselves in the middle of the transaction to ensure that money would actually get to where it needed to go.
But with the ingenious design of Bitcoin, trust is no longer required! Total strangers can transact and still be certain that the transaction will execute as intended no matter their age, country, government, or anything else.
Crypto transactions are propagated through, verified by, and cross-checked for accuracy by a decentralized, global set of actors that secure the blockchain. A blockchain is simply a decentralized ledger/accounting system in which anyone and everyone in the network is constantly keeping the track of who owns what.
More literally, a blockchain is a series of time-stamped chunks of data (called blocks) created and verified by the P2P network of Bitcoin computers. The time-stamping enables transactions to be audited and provides proof of if and when a transaction took place. The P2P network and lack of central authority remove the need to trust anyone to complete your transaction. The cryptography provides immense amounts of security behind each transaction, making them incorruptible while still making them easily verifiable by others.
Properties of Bitcoin
From the outset of the white paper, the goal of Bitcoin was to eliminate many of the problems and inefficiencies created by the traditional financial market: intermediaries, unnecessary fees, settlement times on the order of days, corruption, and the inevitability of fraudulent transactions. How does it do that? By exhibiting these qualities and traits:
- Decentralized: There is no central entity that could censor transactions, charge fees, alter to the existing rules, or be attacked or extorted by governments or bad entities. There is no Federal Reserve of Bitcoin to manipulate the money supply. There is no board of directors that can decide to charge higher fees. There is no CEO to sue. Bitcoin is P2P and open-source software, like BitTorrent. It spreads like a grassroots movement or a virus.
- Drilling down deeper specifically into the decentralization of a blockchain, we learn that a decentralized blockchain is determined by the ability of the weakest node in the network to verify the rules of the system. If your favorite blockchain is highly performant yet requires incredibly expensive or permissioned software/hardware to verify the chain, then only those select few individuals will be able to attest to the veracity of the data. That significantly hinders the blockchain’s ability to be adopted globally by the masses. Luckily, Bitcoin is open-source code that can be run on an average, everyday laptop. It is about 300 gigabytes which may take several hours to sync.
- 21 million capped-supply: Bitcoin is truly revolutionary because it is the world’s first instance of digital scarcity. Only 21 million bitcoin will ever exist, of which ~90% has already been issued. There has never been an asset, especially digital, with provable finite scarcity.
- Censorship-resistant: No one can dictate what you choose to do with your money. Bitcoin is apolitical. If you want to conduct a transaction and have paid the small miner’s fee, the network will process it.
- Immutable (or irreversible): This is critical to any system in which value is being transferred. Users want to be certain that when they send $10, that transaction will be processed, their recipient will receive that money, and that the transaction can never be reversed in the future by someone in power. Meanwhile, Bitcoin’s cryptography (public-private key system) guarantees that only the owner of a certain “key” can send the funds associated with that address ensuring sufficient funds in the transaction and security that no one else can spend your bitcoins.
- Impossible to counterfeit/digital scarcity: This is the monumental breakthrough afforded by Bitcoin’s Proof of Work (discussed below) model that has created for the first time digital scarcity. Before Bitcoin, everything on the internet (pictures, files, documents, etc.) could be duplicated at no cost. If you received a picture and then sent it to a friend, you didn’t send the actual picture, but rather you just sent them a copy of the original. You still had a version of the picture in your possession. Due to this reason, the concept of digital money did not work without a central middleman, but luckily, bitcoin solved this dilemma known as the “Double-spend problem.”
- Transparent: There will only ever be 21 million bitcoins created based on a predictable and known supply schedule that is always and forever publicly verifiable and auditable. No government can change that. This is paramount to the value of bitcoin! A fixed supply that everyone knows ahead of time is far more egalitarian than an infinite supply of money that is created behind closed doors by a small group that decides where it goes. With bitcoin, no government can devalue your wealth through inflation, Quantitative Easing, or any other economic experiment in vogue at the time.
- Permissionless/anyone may use bitcoin: Anyone can exchange bitcoin with anyone, anywhere, and anytime. The Bitcoin protocol, for the first time in history, allows users to send money like we currently send packets of data (emails, web links, pictures, etc.). It is the digital equivalent of having the ability to directly hand a $5 bill to your friend in Europe or anywhere else. No middlemen. No hidden fees for processing the transaction. No exchange rates. No company harvesting your transactions in order to sell that information to advertisers. Most of us are forced to transact and save in a particular currency based on where we were born. For many, this is a terrible deal through absolutely no fault of their own and is based on the government regime they live in. Imagine if the people of Venezuela, Turkey, or Zimbabwe had a choice in their day-to-day currency. Would they use those currencies or something else? Bitcoin at least gives them a choice.
- Pseudonymous/”incognito” - Bitcoin is not totally anonymous like many believe. In fact, as explained previously, Bitcoin’s blockchain LEDGER makes all transactions public to anyone. However, Bitcoin accounts and their transactions are not directly linked to any personally identifying information like a social security number or house address. Each user has a Bitcoin wallet with a wallet address containing a long string of letters and numbers. While this provides some level of privacy, in many cases, it is possible to trace the wallet address back to a real individual and bank account based on user activity or if an exchange’s data is hacked.
- Global: No one country owns Bitcoin and it isn’t limited by the physical borders of any country.
- Fast: Bitcoin allows anyone to send and receive payment 24/7/365 with settlement in minutes as opposed to days. There are no banking hours, no 9-5 stock market times, or holidays. Users are free to transact on their own schedules.
- Cheap: It’s relatively cheap to send bitcoin to anyone in the world especially when across national borders. Current fiat remittance fees vary from 7-20% depending on the nations involved. Bitcoin transactions are typically less than $3, making them far cheaper for medium to large sum payments. In fact, In January 2020, an undisclosed entity moved $1.1 billion worth of bitcoin for just $80 or a 0.00000007% fee.
- Divisible - Bitcoins are divisible up to 8 decimal places (the smallest increment known as a Satoshi). This means that you do not have to own or spend whole bitcoins. This allows users the freedom to send any amount they want and even spend bitcoin on very small purchases when the price is very expensive in U.S. dollar terms.
- Digital: Most money is already digital. However, much of it is hampered by the outdated legacy system and swath of rent-seeking middlemen. Again, sending bitcoin is the digital equivalent of directly handing cash to the recipient without it being routed through different banks, payment processors, clearing houses, government borders, and taking several days to finally clear.
Where to Buy?
Coinbase and Gemini
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