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What is a bitcoin? ep. 4

bit·coin /ˈbitˌkoin/

noun TRADEMARK IN UK noun: bitcoin; plural noun: bitcoins a type of digital currency in which a record of transactions is maintained and new units of currency are generated by the computational solution of mathematical problems, and which operates independently of a central bank. "bitcoin has become a hot commodity among speculators" a unit of bitcoin. "bitcoins can be used for online transactions between individuals"

Wikipedia has it as:

"Bitcoin () is a cryptocurrency, a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.

Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people using the name Satoshi Nakamoto and was released as open-source software in 2009. Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services."

Well as you can see already it is a good thing we got some of the basics out of the way in the previous posts in this series. So lets try and add a little more context and details to whats above.

Bitcoin, what most people think of, is just a replacement for money. This is only one aspect and benefit of what bitcoin actually is. Bitcoin itself is the value placed on time and data that's sent to the blockchain. The value of that data is then governed by the open market and what users are willing to pay. For example, lets say I want to setup a supply chain system using the bitcoin blockchain. After I have it all setup I send out the data, pay the miner and tx fees and now my supply chain is on the blockchain, forever, locked in time. As my supplies change I make the changes to the data and anyone, anywhere at anytime can view when, where and how the supplies have traveled. In order to continue to access the data and make changes I will need to use Bitcoin to pay the fees. If I plan on doing a vast amount of these transaction I will need a large amount of Bitcoin. How much I'm willing to pay for this privilege is currently determined on the exchanges.

Another way to look at this is storing value. What are you willing to pay to ensure your value is secure, transferable across borders, immutable, can not be seized and friction-less? Since bitcoin is such a unique asset with so many quality factors it makes it one of the best ways to store your value that's ever been created. Having the ability to use this comes at a cost. If you want to travel over seas, to different countries you will need to take into consideration getting your fiat exchanged to the countries native currency. This comes at a high cost and is a pain. Similarly if you want to send money to family oversees the banks hold funds for many days and also charge large fees. With bitcoin you can do these things effortlessly with very minimal charges and it is straight from you to them. Nothing in between, no banks, no broker. You can see the huge advantage this has over current solutions such as PayPal and Western Union. Now add on the fact that there are only 21 million bitcoin that will ever be created. Each bitcoin can be broken down by 8 decimal places (.0000001) these decimal places are referred to as satoshis, sats. So you do not need to own 1 BTC, you can own satoshis. So we have a very limited supply, huge advantages, whats the price? That is up to the market to decide.

Bitcoin is created by the miners. At first after a miner solved a block 50 Bitcoin would be given as a reward to that miner. Every 4 years that reward is cut in half. In 2020 the Bitcoin reward with be just 6.25 Bitcoin per block. So Bitcoin is not an inflationary asset, it is a deflationary one. Thus adding more value. This is due to supply and demand, every 4 years as the demand increases for ability to use and transact on Bitcoin, the supply gets cut, driving up prices. The idea is that as Bitcoin use scales up and more transactions are included in each block that the miners will begin to make the majority of money on fees as the reward subsidy shrinks.

This chart shows how previous BTC events related to the price.

So here is how I look at it. A Bitcoin is like a safety deposit box. You then determine the value you are willing to pay to keep that safety deposit box secure. If you bought the security at a cheap price and someone needs it more than you, how much are they willing to pay you for that security and so on. As the supply is very limited that price is very speculative at the moment. But if you are wanting to secure millions of dollars in value, whats the cost worth?

How can all of this equal out to using it as a currency? Bitcoin has a ways to go before it can be viewed as an everyday currency. But if we look ahead to the future I can see it working like this; Once Bitcoins value has stabilized the pricing of retail items can then easily be displayed in Satoshis, so lets say a gallon of milk currently costs $3.49 USD. In today's Bitcoin value that equals 26,513 sats (.026513). When you go to pay you simply enter the transaction amount on your bitcoin wallet and scan a QR code. That instantly completes the transaction between you and the retailer and the sale is done. How does the retailer benefit?

  1. Charge-backs go away.

  2. Fees virtually go away.

  3. Easy auditing and inventory control.

  4. Theft from register operators goes away.

  5. Non-reversible

Benefits of bitcoin?

  1. Freedom in payments

  2. Low/ 0 transaction fees

  3. Control and Security

  4. No charge-backs

  5. Virtually impossible to steal

  6. Transparent transactions

  7. Non-taxable

Drawbacks of Bitcoin

  1. Currently, lack of understanding and adoption

  2. Ease of use

  3. No real protection for buyers

  4. Wallet addresses are hard to remember and easy to lose

  5. Volatile market

  6. No physical form

  7. Still in its infancy

I hope this clears up some of the fog around what bitcoin is and is not. I will of course slowly start going deeper into these things as the series continues, so stay tuned.