Cryptocurrencies are completely changing the landscape of how finance is driven. One might indeed find it to be a complex subject.
This article demystifies certain concepts and terms behind Bitcoin specifically.
Before getting into the meat of the subject, let us quickly understand four key terms to form a solid foundation about Bitcoin.
It means a medium of exchange. You go to a market with 100 rupees and buy vegetables. An exchange is happening between the INR 100 rupees and the goods/services you are purchasing worth that much money.
In simple words- Some cryptocurrencies are controlled by no authority.
INR is controlled by the Reserve Bank of India.
USD is controlled by the U.S. Fed.
There is no such central authority that controls Bitcoin. It is a decentralised currency.
You cannot hold or touch Bitcoin.
Blockchain is the underlying technology behind cryptocurrencies.
Just how the internet is essentially a network which connects many websites, Bitcoin too has its own network.
It will be explained in greater detail, further in the read. 🙂
For now, all you need to understand is that-
Bitcoin is a decentralised cryptocurrency. It is digital and is based on blockchain technology.
- Utility of Bitcoin
There are two specific features of Bitcoin that makes it powerful.
- Medium of exchange
You have 100 rupees and you go to a shop to buy a packet of chips or biscuits. Fiat currency allows you to facilitate an exchange between goods and money worth that much goods.
It is a great medium of exchange because these are currencies which are easy to transact. This is also a key feature of Bitcoins.
Right now there are about 20,000 businesses which accept Bitcoins.
But, can Bitcoin replace fiat currency?
The answer is no. It is nowhere near INR and USD in terms of scale as a medium of exchange and hence poses no threat to cash like USD, INR and the likes of it.
- Store of value
Let us take an example to understand what store of value means.
Let’s say you deposit 100 rupees into your savings account at HDFC bank. The rate of interest you will get in your savings bank deposit is 2-3%
The inflation rate in the economy right now is close to 6.5%
By next year, this 100 rupees would become 96 rupees in terms of inflation in the economy.
Currencies like INR and USD have a poor store of value. What is giving power to Bitcoin is its store of value feature.
Rupees 100 invested in Bitcoin has year on year grown approximately by 150%
Another important thing to note is that- Bitcoin has finite supply, similar to gold. There are only 21 million Bitcoins. Therefore, the inflation of supply of Bitcoins will never be high. Hence it is a great hedge against currency printing.
Bitcoin is not trying to replace fiat currencies. It is simply trying to protect your money. Because unlike cash, as of now, it won’t lose its value by 4% in a year.
- How is Bitcoin different from Ethereum?
In absolute layman’s terms, let us take a simple example.
Imagine, we are living in 2050.
A lot of trade is happening, similar to how it happens in today’s market. Except, instead of using fiat currencies like USD, INR, Singapore Dollars, we are using cryptocurrencies.
Now, imagine I want to buy a certain type of potato from an African farmer. I tell the farmer, take 2 Bitcoins and send me X kilograms of potatoes.
This is a transaction in Bitcoins.
Now what would a transaction in Ethereum look like?
Let’s say, I want the farmer to send me the same quantity of X kilogram of potatoes.
But this time I want him to cut them in a certain fashion, to make my work easy.
When I place my order, this condition will be embedded in a smart contract technology.
Once the contract gets executed, the farmer will receive the money automatically.
Thus, the smart contract technology of Ethereum gives it intrinsic value.
I will shed light on the differences between Ethereum and Bitcoin in greater detail, in the next article, for now, remember this-
Bitcoin is money. Ethereum is programmable money.
- A comparison of Bitcoin with Gold
Unlike Bitcoin, which is a good medium of exchange and also has a great store of value, gold doesn’t check the box for either.
You cannot transact in gold. You cannot shave off 10 grams of gold to buy a coffee at Starbucks. It is a bad medium of exchange.
In terms of store of value, it has hardly given 10% return over half a century, which is not a great matrix for an asset that has lived so long.
- A comparison of Bitcoin with Cash
The key difference between Bitcoin and cash is that Bitcoin is decentralised.
We are extremely dependent on our Government.
Governments are run by humans.
Humans are driven by greed.
If a political party wants to win an election, their course of action would be to get the money somehow and later tackle the economic mess they created.
In Zimbabwe, the entire country went bankrupt and they then had to move away from their traditional system to the dollar equivalent system.
This is why people are believing in decentralised currencies. These are not controlled by humans and are instead controlled by open network rules.
Bitcoin works on a ledger system. If person X sells person Y a Bitcoin, the ledger is publicly available. It is very clear where the money is moving. It is like an accounting book. No one is controlling anything and everything is transparent.
Another concerning yet interesting point to note is that-
The amount of money being circulated in the economy right now is unprecedented.
Every time there is a problem, the Government starts printing more money, to do away with the problem.
During Corona, the U.S. Fed ended up printing trillions of dollars into the economy.
Now, how does this excessive money printing relate to Bitcoin prices?
A research paper concluded that whenever the government decides to print more currency, one must buy Bitcoin, as its price increases.
This is the link to the paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3920808
Hopefully, this article cleared out a lot of concepts for you 🙂
To understand in greater detail what the Government would require to do, to outpower Bitcoin, you can watch this video-