We hear a lot about Bitcoin, it’s current price, it’s all time high, if it’s rising or crashing and if in fact it is the future of money.
Bitcoin has been described as a hedge against inflation (it clearly isn’t) as well as digital currency(we’ve had that for years) that would free us from confiscatory banking fees, yet no one I’ve spoken with has ever used it to buy something or pay anyone for anything. So, nearly 14 years into the Bitcoin “revolution” we’re asking what good is Bitcoin anyway?
Bitcoin is a digital currency that can be used to buy goods and services over the internet without the need for a financial intermediary between the buyer and the seller. At least that’s what we’ve been (sold) told.
Bitcoin: A digital ledger
Bitcoin transactions are recorded on a decentralized ledger that is managed on a computer network. The ledger is updated autonomously and requires computers controlled by human operators to operate and connect to. Yet, transactions on the Bitcoin blockchain are painfully slow.
Since its launch in 2009 by Satoshi Nakamoto, Bitcoin was supposed to change the world of online finance by allowing users to bypass banks and other financial institutions. Today, that doesn’t seem to be the case. Do you know anyone or any business that regularly uses Bitcoin to pay for anything instead of hoarding it in the hopes that it will increase in value? I sure haven’t.
That’s not to say they aren’t out there-I’m sure they are. But why, for example, would someone spend one bitcoin on something if the value might skyrocket the next day. Conversely, why would you accept bitcoin as payment if the value might plummet the next day?
I’m already digital
My finances (scraping by) are mostly digital. My checking account is a form of digital currency. I use it to pay all of my bills online for free, and payments received are deposited into it electronically. It’s all just ones and zeros that are moved around over the internet.
Credit cards are a digital line of credit that I can use for a variety of transactions at a low cost to me because credit card providers charge a transaction fee to the seller, which is passed on to me in the form of a slightly higher price for my purchases.
Debit cards are a type of digital currency that allows for fee-free payment from one’s bank account. I never carry cash and can’t remember the last time I set foot in my bank or even approached an ATM to get cash. I don’t need to.
PayPal is my go to app for transactions because it protects my credit card and bank account from scammers and identity hackers. And don’t forget about Venmo and other digital transaction platforms all over the world. So, how revolutionary is Bitcoin, really?
According to The Economist, Brazil has launched the Pix payment system, which allows consumers and merchants to send and receive money using a QR code without sharing the details of their wallet, fintech provider, or bank. It has been enormously successful. The Unified Payments Interface (UPI) of India and other similar schemes, many of which are in African countries, have also gained widespread acceptance.
So let’s take a step back and look at some use cases for Bitcoin as well as some advantages and disadvantages of the world’s most valuable cryptocurrency.
How does Bitcoin work?
Currency unit
Bitcoin is a digital token that is issued by the Bitcoin network. The symbol for Bitcoin is BTC or XBT. It is also represented by the ‘₿’ symbol. It can be divided into 100 million satoshis, the lower denomination of the currency. Information about Bitcoins is stored on a decentralized ledger. This includes the token transaction history and digital address identifiers, among other data.
Blockchain
The Bitcoin network is a decentralized network of computers that operates the Bitcoin ledger. Each computer connected to the network (a node) carries a part of the transaction database (the ledger), and some nodes may have the complete dataset.
The ledger itself is operated on a type of database called a blockchain. Transaction data in blockchains are stored in ‘blocks’ linked together by timestamps. The network chains several blocks together while recording new transactions over time. In the Bitcoin network, each transaction is encoded using cryptographic techniques. Data encryption keeps data relatively secure from hackers.
Mining
As the Bitcoin network works independently, it is dependent on the work done by the network nodes to complete a transaction. Each computer has to locate the addresses of a Bitcoin transaction on the ledger by solving cryptographic puzzles.
The process is called mining. In simple terms, it is looking for a number called an SHA-256 value to add it to a corresponding block in the blockchain. Before adding a transaction, at least 3 nodes have to approve the transaction.
As more transactions accumulate, there is a need to add a new block. A node that successfully adds a new block is rewarded a fixed amount of Bitcoins. This algorithmic scheme is called ‘Proof-of Work’ (PoW). PoW algorithms favor computers with high processing power that can perform many cryptographic operations per second, allowing them to approve transactions more frequently.
The overall supply of Bitcoins is limited to 21 million coins. While most of the coins have been mined, the remaining coins are expected to be fully mined in 2140.
Ownership and Storage
Bitcoin tokens are linked to a pair of addresses controlled by a user.
- A public address that everyone can view on the blockchain (think of it like an email address)
- A private address that is only viewable to the owner of the public address (think of this like a password needed to verify a transaction on this address)
To send or receive Bitcoins both addresses need to be used. While a public address is fixed, a private user address is generated in a way that makes it difficult to recreate it through another computer.
The private address is needed to verify ownership of a specific Bitcoin token on the network. Therefore, any user needs to keep this in a safe location.
Advantages of Bitcoin
Since Bitcoin is a decentralized currency, it offers several advantages for users over traditional money.
Financial Independence
Bitcoin allows people to bypass banks and financial institutions subject to government regulations. Therefore, Bitcoin becomes a gateway for online transactions in regions where banking rules and regulations are very restrictive. Bitcoin is especially invaluable for persons and businesses that have difficulty accessing international currencies.
Transparency
Bitcoin technology, including the ledger, is open source. Anyone can view the Bitcoin ledger to see transaction history or confirm a pending transaction.
Security
The decentralized network can keep a persistent record of the blockchain network. If one computer leaves the network or gets compromised, other computers can continue verifying and recording the transaction. Cryptographic processes also deter hackers from easily accessing transaction information.
Anonymity
Addresses on the blockchain are not associated with usernames. So transaction information does not directly reveal the parties involved. However, it’s worth noting that anyone can make their list to keep a record of suspicious bitcoin users.
Disadvantages of Bitcoin
Power Consumption
The bitcoin network is notorious for its high power usage. Studies have shown that it consumes up to 100TWh of annual electricity. This is equivalent to the electricity consumption of countries like Egypt and Ukraine. If the power is equated to fossil fuel usage, it has a high carbon footprint.
Bitcoin isn’t a hedge against inflation
According to economist Paul Krugman, while the inflation rate for most citizens is in the upper single digits, it is well over 100 percent for people who have their money in cryptocurrencies due to their whipsaw valuations.
Fans of cryptocurrencies ask for patience, claiming that they are a relatively new mode of payment that is still in its early stages.
Really? Bitcoin, the most well-known and most valuable, has been around since 2009. Yet instead of decoupling from the stock market and the Fed rate it is now tied to it.
Why can’t you use Bitcoin to pay for groceries at your local market? Because the vendors are not confident in the ability of Bitcoin to maintain its value.
Susceptibility to hackers
Hackers have started using more sophisticated techniques to breach the Bitcoin network. While there have been upgrades in recent years, users using legacy systems risk losing all of their digital holdings on the blockchain.
Legality and Lack of Mainstream Acceptance
Bitcoin’s market value is highly volatile. For every person getting rich through Bitcoin investing, several people have lost their savings or fallen prey to Bitcoin scams on peer-to-peer trading networks.
Governments advise cryptocurrency traders to be careful when buying them. Countries like China and Pakistan have made it illegal to use cryptocurrency.
Additionally, Bitcoin has a long way to go toward mainstream adoption in many countries. Factors include a lack of awareness about Bitcoin and how to access it, low penetration rates of digital banking, and an unwillingness to buy Bitcoin because of market risks (scams and speculative trading).
What is Bitcoin Used For?
To Buy Stuff
Bitcoin is apparently another way to buy things on the internet. One of the first things purchased by Bitcoin in the real world was a Papa John’s Pizza worth 10,000 BTC! ($41 at that time). Those pizzas today would be worth more than $300 million.
Since then people have been buying many things through bitcoins like fast food (online deliveries), entertainment services, groceries, digital media, property, and much more. Again, why they would is anyone’s guess, but I sure wouldn’t. Would you?
Here’s a list of places that accept Bitcoin in case you are curious.
Donations
Internet information and knowledge advocacy organizations like the Wikimedia Foundation, Electronic Freedom Fund, and the Internet Archive have been accepting Bitcoin for some time. Other organizations include charities such as UNICEF and the Rainforest Foundation. So Bitcoin is now a way to help others make the world a better place.
Investing
When Bitcoin’s price started to soar (ultimately reaching a record high in November 2021), many cryptocurrency enthusiasts flocked to stash their currency holdings on the blockchain. Of course, these things never last, and the price crashed. So there is some risk in crypto investing.
That has not stopped many from trying their hand at making a fortune.
New blockchains like Ethereum and Solana allow DeFI investing and staking options that represent an alternative route to minimize risks. However, you should always be careful before investing in any cryptocurrency.
Buying Other Cryptocurrencies
Today, many crypto exchanges trade several cryptocurrency pairs or allow withdrawals in Fiat currencies. Bitcoin is 100% guaranteed to be one of the primary cryptocurrencies featured in crypto exchanges. So if you are shopping for some altcoins, you can use bitcoin to buy some for yourself. Make sure you research the type of cryptocurrency and the transaction fees of the exchange you are buying.
Gambling
Yes, you read that right. Bitcoin casinos are a thing. Once again, we don’t recommend gambling. But this is where some folks prefer to risk their bitcoin. Of course just holding bitcoin is a risk. Just ask Michael Saylor.
Illegal Stuff
Unfortunately, Bitcoin’s anonymity and decentralized mechanism have allowed criminals to take advantage of it, tarnishing its reputation in mainstream media. Transactions can be used to launder money or buy illegal items and services without the interference of banks. Their activity has created an online space called the dark web where they can operate almost undetected.
On a positive note, governments and law enforcement agencies have been working hard to track malicious agents using Bitcoin. And Bitcoin’s transparency is useful in identifying addresses associated with criminal activity.
Final thoughts
Bitcoin is a radical departure from traditional online payment systems as it gives people unprecedented levels of freedom. Although it has yet to go mainstream in many regions, people and businesses are steadily entering the Bitcoin fold. It is being used in many ways, and it’s likely here to stay. Perhaps you have already started using it, too? Let us know your thoughts on Bitcoin in the comments below!
Disclaimer: The author is one of those hoarding bitcoin in hopes that it will increase in value.
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