Introduction to Bitcoin, Its Future & Beyond
“A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers. Eventually mainstream products, companies and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start. What technology am I talking about? Personal computers in 1975, the Internet in 1993, and I believe Bitcoin in 2010.” An excerpt from an essay for the New York Times “Why Bitcoin Matters” by Marc Andreessen.
Why is there so much hype about Bitcoin? What superpowers does it have to be compared to the likes of Internet or Personal computer? Is it that revolutionary?
Before I answer this question, let us take some time to appreciate the role of the Open source revolution in making Technology and information affordable to everyone. From Wikipedia to the chrome browser that you are most probably using to read this article, open source has contributed a lot to mankind by taking technology to the masses. Ever wondered why many budget smartphones cost less than the software license of Microsoft operating system? You should be thanking the android open source OS for that since you are getting the android OS in your smartphones for free.
Open source has not just made Technology and information affordable but also has made it accessible. Take Wikipedia for example. Wikipedia has made access to information across the globe free of cost and it was possible only because it was open source. Linux has created a global network of collaborators who are better at collaborating and creating better standards than a closed group of people working in a corporate office. No wonder 90% of the supercomputers work on Linux Operating systems today. That is the power of Open Source.
I think I have made enough arguments on the benefits we enjoy due to open source. Now I will begin my explanation about a similar open source project that is trying to revolutionize money just like how Wikipedia revolutionized access to information. Bitcoin should be seen as an open source version of money and has the potential to disrupt the financial world similar to how Internet has changed the world, we live in.
What is Bitcoin?
It is very difficult to limit Bitcoin to a one-line definition. It cannot be compared to any single object/concept that we already know. Imagine someone must explain the internet now. The formal definition would be “a global computer network providing a variety of information and communication facilities, consisting of interconnected networks using standardized communication protocols”.
From the perspective of a general crowd, this definition would not serve any purpose for explaining the concept of the Internet. But having said, when inquired everyone might have their explanation about the Internet mostly based on the use cases. For someone, it might be a way to send emails or to bank with a mobile phone and for a few others, it might be a requirement for chatting on WhatsApp or watching movies on an OTT platform. So, though people may not have the actual knowhow of how the technology called internet works, many have developed an understanding from the use cases it serves.
So rather than dwelling too much on the technicalities, let me explain Bitcoin by listing down its features and few key use cases of its adoption
1. Bitcoin is like the US Dollar because it is a unit of currency and unit of account. Example: Bitcoin is an accepted form of payment in multiple online platforms like Wikipedia, Expedia, Microsoft.
2. Bitcoin is a protocol like HTTP/TCP and rules of the protocol are well defined.
3. Bitcoin is a store of value like Gold, whose supply is limited. There can be a total of 21,000,000 Bitcoins only.
4. Bitcoin is a payment network like a Visa/Mastercard powering transactions between two entities.
5. Bitcoin is analogous to Email. Bitcoin enables peer to peer transfer of monetary value without intermediaries like how Email enables direct communication.
6. Bitcoin is programmable money as you can use programming scripts to define and how the Bitcoins will be spent based on some conditions.
Why do we need Bitcoin?
Just like the Internet, we can have many applications that can be created using Bitcoins. Let me list a few use cases that might help you understand Bitcoin’s advantages.
1. As a replacement for the US dollar.
Did you know that the US can print as much dollars as they want? They need to have gold reserves or require anyone's permission to print more dollars. French finance minister Valéry Giscard d’Estaing once complained that the USA enjoyed an “exorbitant privilege” thanks to the US dollar’s role as the world’s primary reserve currency. Every other country must work hard, produce goods to earn USD. But the USA can freely print USD without restrictions.
The graph below shows how the amount of USD printed by the US is growing exponentially.
Another 2 trillion dollars have been printed out of thin air this month which is not shown in the above graph. This is detrimental to all the countries that hold USD reserves as the real value of the assets they hold reduces relatively with more supply.
Bitcoin promises a return to old times, when the money supply was based on a decentralised commodity called Gold. It would mean benefits are spread across the world and not accrued to one single country. Bitcoin if it can deliver on its promises can become the de-facto global currency. The journey is long, and it is too early to say with confidence, but Bitcoin has the right qualities to make the claim in a few years, once it has gained enough mass adoption.
2. As a replacement for Card payment network
Every day we send 1000’s of emails free of cost, but every time we make a transaction through cards, the merchant needs to pay 1.5% – 2% irrespective of the amount. Ever wondered why there is a transaction fee for a credit card bill payment. Isn't it just a data transfer stating deduct x amount from my bank account and add it to the merchant’s account. Shouldn’t this be free as it sounds like just sending an email to someone. Though it is not simple enough to compare like this, the fee is extremely high, and it is high because it is tightly controlled by few oligopolies. Bitcoin promises an open standard where the payer decides the transaction charge he wants to pay, and the benefits are passed to everyone who is a participant in the network rather than a single trusted third party like visa or Mastercard.
3. Replacement for Swift
SWIFT is a vast messaging network used between banks and other financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions.
According to the investment bank Credit Suisse, the traditional cross-border payments industry is ripe for disruption. “Interbank payment systems such as SWIFT are old, inflexible, slow, and increasingly prone to cyberattacks at a time when banks are under tremendous pressure to cut costs and protect customer data from hackers, which blockchain could achieve,”
On the other hand, Bitcoins are similar to Email and anyone can transfer a part of his bitcoin holdings across the globe by just being connected to the internet. The entire transaction takes place in less than 10 minutes and the settlement can be confirmed in 1hour (There are other cryptocurrencies that promise even faster settlement time). This provides a beautiful alternative to Swift network that takes much longer and is prone to cyber-attacks.
4. Native internet currencies
The biggest problem with digital transactions is that we have taken an existing offline design and tried to force fit to our digital needs. But the shortcomings are clear. We don’t have a mechanism to make micropayments (less than 1-2rs) without incurring charges more than the transaction amount. Cryptocurrencies promise micropayments which means we will be able to pay charges based on the number of pages read, pay per song, pay per movie (or even pay per seconds of movie watched) by loading our browser wallet with cryptocurrencies.
5. Store of value
Barring a couple of years, Bitcoin has been the best performing asset every year since its launch in 2010. The supply of bitcoin is limited (21million). As the adoption/applications of Bitcoin spreads, there is an increase in demand. Because of the fixed supply, the increase in demand is met by increase in price of the Cryptocurrency.
6. Absence of Central entity/owner
Bitcoin is a trust-less system. It is an open network and we are not dependent on any central entity for maintaining the network. This means there is no single point of failure. Added benefit is that the creator of Bitcoin has always been anonymous. Even if today someone were to claim he is the real Satoshi Nakamoto, he will not be able to go against the community and implement changes in the protocol against community interests.
Future & Beyond
Just like the internet, we will be finding newer use-cases as the technology matures. Being a bleeding edge technology, there is no doubt that the investments in Bitcoin are risky. It is a highly volatile asset and is prone to high price drops. So, keep your exposure limited based upon your risk appetite. But if Bitcoin succeeds, and even achieves 10% of the use-cases mentioned above, then what you are betting is the next Internet and the value should skyrocket to say the least.
“Power resides where men believe it resides. It's a trick. A shadow on the wall. And a very small man can cast a very large shadow.” Varys, Game of thrones
The value of USD, Gold, Silver etc is based on a shared illusion. Large majority of the population believe they have value and hence they have value. The Bitcoin community, though small when compared to these behemoths, has been growing at a rapid pace. But when this growing community gains enough adoption and reaches a critical mass of users who believe in bitcoin, then Bitcoin will have a take-off and there would be no looking back from then. Onwards and upwards!!