Written by: Leen Jason
I am sure everyone has heard buzz words like Bitcoin, decentralization, cryptocurrency and blockchain. However, no one really explains it in a simple manner that can be understood by anyone. These new terms are even more confusing for the elderlies, or anyone born before the Generation X era and boomers. In this article, I shall explain what Bitcoin is and why you should care about this ‘digital gold’.
To start things off, we must understand what constitutes a currency and its characteristics. There are 6 main characteristics of a currency, which are:
Durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability
Durability means that the currency must be able to withstand wear and tear. For the currency to be applicable, it should not be easily damaged as the value of the currency will drop once it is damaged.
Portability means that the currency can be transported easily. For it to be used in our daily lives, unable to carry enough to be used would be a hassle and impractical.
Divisibility means that the currency can be divided and split into smaller amounts. If a currency is constantly valued at a large number, it might not be able to be used for buying smaller value items.
Uniformity means that all types of denomination of the currency must be valued equally in terms of purchasing power. For instance, a dollar has equivalent value to another dollar with a different serial code.
Limited supply means that there is a constraint for currency circulating in the market. This is to preserve the value of the currency. However, this can be controlled by the central banks’ monetary policy and may increase or decrease.
Acceptability means that the currency can be traded for actual goods and services by other parties. There is no use for a currency that can’t be used to buy actual products, right?
Now that you have a general understanding of what a currency is, you must be asking “How does this relate back to Bitcoin?”
To simply put, for the past 10 years, Bitcoin’s value has risen and has solidified itself as a cryptocurrency and is getting more traction over the years. The fact that you are trying to learn what Bitcoin is right now while reading this article proves that Bitcoin has been somewhat ingrained into the minds of the masses and will be important for the upcoming decades.
Then, what is Bitcoin? How can it be a form of currency? Is it even trusted?
Bitcoin is a form of currency made using the new technology called blockchain. Blockchain is a technology that allows data to be stored in a way that multiple parties can access it without having to trust or give access to one another. Instead of relying on a person storing all the data for something, now everyone becomes the person that stores the data and keeps it updated. Since everyone has constant access to it, to hack such a thing, it needs to hack everyone in the network instead of just a singular person, which makes it safer. Furthermore, blockchain gives power to everyone as it can’t be tampered easily, and everyone has equal power to just transact stuff in the blockchain. This means blockchain makes things decentralized.
Bitcoin is a currency with this technology in place, hence it is hard to be hacked as the invaders need to infiltrate everyone across the world that holds Bitcoin, and no one can change the code of Bitcoin easily. The amount of Bitcoin in each account or wallet is tracked and validated by others, which means no one can magically create Bitcoin out of nothing whereas it needs to be approved by others.
Now we know that Bitcoin is sort of a digital currency, but why would anyone want to use it?
Bitcoin was created by an anonymous person or a group of people that called themselves ‘Satoshi Nakamoto’. They created a currency in a decentralized form in 2009 because of the financial crisis in 2008 because the banks lent too much debt without proper risk management. Then, the banks were bailed out by the government printing money and caused the ‘Great Recession’. Many people were fed up with how they have no control over their own money and suffered from the mistakes of the banks. Hence, Bitcoin was created so no one can fully control Bitcoin.
Does Bitcoin check all the characteristics of a currency?
It is durable as it is on the internet, and no one can delete it. It is portable as all you need is your phone to move it around. It can be divided up to the 8th decimal place. It is uniform as each bitcoin is equivalent to another bitcoin. The supply of Bitcoin that can be fully circulated is 21 million and no one can change it, which means there should be no inflation of Bitcoin. Many places and countries like the United States, Canada, European Union, Australia, Japan and more has accepted Bitcoin and several other cryptocurrencies as a form of asset and considered legal. In the states, companies are slowly opening the usage of cryptocurrency as companies like Microsoft, Burger King, Subway, and others have allowed payment in Bitcoin.
Why should you care about Bitcoin? Is it a good investment?
If you are not interested in using Bitcoin as a form of transaction, it is understandable as you still have your fiat currency to do so. However, if you believe in the era of decentralization and people not liking governments having total control, especially financial wise, Bitcoin may be a form of investment that you should consider. Moreover, Fidelity, one of the largest financial services companies in the US that has $4.5 trillion of assets under them, has gathered this table down below.
This shows that Bitcoin (BTC) has the least correlation with other asset classes, which means theoretically it is one of the best assets to be considered for diversification as its price movement does not follow other asset classes.
Of course, the volatility may be concerning, but if you believe over the long run, it can withstand the test of time and people will demand more BTC, you should consider having it in your portfolio.
What have you learnt?
After reading this article, I hope that you have a basic understanding of what Bitcoin is and why you should care about the technology of blockchain. This article is very surface level and I encourage the readers to research more about Bitcoin themselves. I believe that blockchain and cryptocurrency is still very new and it is never too late to start learning. Please do learn more about blockchain as it is not only used in cryptocurrency but can be applied to many other sectors or in our daily lives like transaction of houses, checking qualifications of citizens, tracking inventory of supply chain etc. It is an industry that is constantly being updated and always something new to learn.
