In this section, we look at the advantages of bitcoin as a store of value and payment system and how it is better than traditional monetary systems.
The Features of Bitcoin
- Bitcoin is decentralised.
- One of the most important key features of bitcoin is that it is decentralisedA network design that is driven by peer-to-peer interaction and isn’t managed or governed by a central party or authority and is run on a distributed network of independent computers across the globe.
- As such, it does not have a single point of failure.
- It is not controlled by any single party and no one can shut it down.
It may cease to work if the internet and electricity grid across the world are shut down, which would present a whole set of societal problems ‘more dire’ than bitcoin not working.
- This makes the bitcoin network highly robust and resilient against hacks and security threats.
- Bitcoin is international.
- Bitcoin is not a company nor is it registered to any single base of operations in any country.
- It operates free of any border restrictions.
- It is free of banking restrictions and anyone can buy and use bitcoin, including those who are not eligible to open a bank account. This allows the 2 billion unbanked adult population of the world the ability to participate in international commerce and trade.
Anyone with a smartphone can immediately start to use bitcoin.
- It can be sent in any quantity to anyone anywhere in the world, much like how you would send an email.
- This makes bitcoin suitable for international remittances, online shopping and charity donations.
- Bitcoin is instantaneous.
- Bitcoin transactions are completed in a matter of seconds.
- Bitcoin doesn’t rely on third-party intermediaries like banks and financial institutions and makes frictionless payments possible.
- Bitcoin makes waiting for hours or days for an international bank draft or cheque to clear a thing of the past.
- Bitcoin is always open.
- Bitcoin runs on a network of computers that never sleeps and is in operation 24/7/36524 hours a day, 7 days a week, 365 days a year.
- A user can send bitcoin to another person or business entity at 4 am on a Sunday without being subject to the operating hours of a bank.
- Bitcoin is cheap to use.
- Bitcoin transaction fees are extremely low and quite often negligible (in comparison to high telegraphic transfer fee imposed by banks).
- Bitcoin eliminates unnecessary middlemen fees and costs in traditional financial markets, presenting better value and efficiency to existing products and services.
- Bitcoin offers a cheaper and secure way to send money to family members in another country without paying high percentage fees charged by remittance companies like MoneyGram and Western Union.
- Bitcoin is very secure.
- Bitcoin relies on high-level cryptographya method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it based on the SHA-256The Secure Hash Algorithm with an output size of 256 bits designed by the National Security Agency (NSA) first published by the National Institute of Standards and Technology (NIST) in 2001. for a high level of security to maintain its function in the real world.
- Bitcoin transactions are a lot more secure than conventional online transactions made via online banking or with credit cards as personal information is not passed to the servers for processing or be intercepted by malicious parties.
- For merchants, payments made in bitcoin are reliable and trustworthy as there are no counterfeit bitcoin or credit card fraud to deal with. A customer simply either has a bitcoin or he doesn’t.
- Merchants will also not be subjected to credit card transaction fees if goods and services sold are paid in bitcoin.
- Bitcoin is highly divisible.
- Bitcoin is divisible to 8 decimal places, making 1 satoshi or 0.00000001 BTC the smallest denomination possible for bitcoin today.
- This makes micropayments of under a penny in value possible, which is not possible with gold, precious metals and existing monetary systems.
- Bitcoin is very portable.
- Bitcoin is in digital form and completely virtual, and hence does not have a physical presence.
- Unlike precious metals and fiat currencies, there is no difference in carrying around a dollar’s or a million dollars’ equivalent value in bitcoin.
- Bitcoin is transparent.
- Bitcoin transaction records are transparent and publicly accessible and can be checked on the blockchain at any time by anyone.
- Bitcoin transactions on the blockchain are shown with sender’s and recipient’s wallet addresses and other important information such as date and timestamps, making them easy to track. Transactions do not show any personal details or private information, making bitcoin pseudonymous than anonymous and private enough for daily use.
- Bitcoin is deflationary.
- Bitcoin is designed with a finite total supply with a consistent predictable diminishing supply. Unlike fiat currencies which can be inflationary due to over-printing that dilutes the money supply, bitcoin is deflationaryCharacterised by or tending to cause an economic situation where there is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. by nature.
- As bitcoin supply diminishes and demand for it grows as we have witnessed in the last decade, its value will continue to grow in tandem over the long term. This makes bitcoin suitable as a store of value.
Comparison of Bitcoin Against Other Asset Classes
In the following table, we summarise the utility features of bitcoin as a payment system in comparison with other more traditional asset classes – currencies and precious metals.
|1. Control Structure||Decentralised (miners)||Centralised (governments)||not applicable|
|2. Operating Hours||24/7/365||Subject to banking hours||not applicable|
|3. Cost of Use||Cheap||Expensive||Expensive|
|5. Security||Very high||Low (credit cards)||not applicable|
Table. 1.7a Use features of bitcoin in comparison with fiat currencies and gold
Key Take-Away Points
- Bitcoin is not merely a digital currency.
- It is also a trustlessDoesn’t require trust or requiring minimal trust from the participants in the system ledger of transactions that is transparent and highly secure, making it a complete autonomous payment system that is cheap and fast for local and international transactions.
- Fiat currencies have also been digital for a number of decades now.
- When you purchase something online and send funds to the seller using a credit card or via Paypal, that is essentially fiat currency moving digitally across the internet.
- When you transfer money from one bank account to another, that’s ones and zeroes moving around electronically to make changes in the final account balance.
- The big difference between bitcoin and fiat currencies is bitcoin cannot be created out of thin air.
- Bitcoin only seems to be created out of thin air by the Bitcoin software that releases it, but as we have seen in Section 1.5, mining bitcoin involves resource-intensive proof-of-works that comes at a high cost.
- Fiat currencies on the other hand, can be printed at will by central banks and governments in what is known as quantitative easing An expansionary monetary policy where new money is introduced into the money supply by a central bank..
- Bitcoin cannot be minted at will without putting in the works. In that manner, it is not very different from the way gold is mined. Energy expense is a mandatory part of the production equation.
- Bitcoin cannot also be derived out of existing bitcoin the way banks do with fiat currencies and loans with the implementation of fractional-reserve banking The common practice by banks of accepting deposits and making loans or investments, while holding reserves equal to a fraction as low as 3% of the actual cash on hand that is available for withdrawal, literally creating money out of thin air. In other words, for every $100 that the bank has in cash reserves, it is allowed to give out $97 in loans, keeping only $3 in the vault.
- Due to fractional-reserve banking, if all account holders were to visit the bank and demand to withdraw all their savings at the same time (say in the event of a financial crisis), the bank would not be able to comply and complete a full withdrawal for everyone.
- When understood from that perspective, it becomes apparent that fiat currencies are actually more virtual than bitcoin.
In the next section 1.8 Should I Buy Bitcoin, we discuss how bitcoin can be a great asset for anyone, as a payment method or as an investment.