3 things you may not know about Bitcoin

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3 things you may not know about Bitcoin

Posted On16/05/2020
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The health crisis that’s sweeping the world and keeping us in our homes looks certain to trigger a major global economic crisis. It’s very likely that this will be the biggest economic event of our lifetimes.

Amid worldwide lockdowns most economic activity has ground to a halt. Central banks everywhere are printing money to try and keep us afloat but in reality that money is being used to bail out stock markets and big corporations. In the meantime people are being made redundant and small businesses are closing by the million.

It would be prudent in circumstances like these to look again at anything that claims to offer an alternative to the financial system that our bankers and politicians are mismanaging so badly.

Bitcoin exists outside of the traditional financial system and it is said that this massive economic disruption is exactly the environment it was built for. Like gold, Bitcoin offers us a way to store our savings outside of that fragile – and possibly collapsing – system.

So here are three things that you may or may not know about Bitcoin:

1. Bitcoin cannot be stopped

Bitcoin runs on a distributed, peer-to-peer computer network. It has no central servers, no company, no head office and no CEO.

The protocol awards new coins to miners who deploy vast amounts of computer processing power to secure the network. Miners sell those coins on the open market to pay for their energy costs, which in turn distributes the new coins to buyers. The network financially incentivises humans to keep it running.

In addition there are tens of thousands of lighter Bitcoin nodes run by regular users that check that the protocol rules are being followed and reject any mined blocks of transactions that violate the protocol rules.

The end result is that no person, corporation or government can shut the network down. They can interfere with our access to the network – the RBI (Reserve of India) has made life very difficult for Indian cryptocurrency businesses, for example – but the net effect on the network itself is small. Bitcoin just keeps running.

In the words of Bitcoin’s inventor, the pseudonymous Satoshi Nakamoto: “Governments are good at cutting off the heads of centrally controlled networks like Napster, but pure Peer-to-Peer networks like Gnutella and Tor seem to be holding their own.”

 

2. Bitcoin is the first ever scarce digital good

People in the music and film industry know all too well how easy it is to copy and distribute digital files. Once a song or film is in the digital domain it can be replicated unlimited times at virtually no cost. File sharing and CD/DVD copying has decimated these industries and forced them to completely reinvent distribution and compensation systems.

One of the key puzzles that Satoshi Nakamoto solved with Bitcoin was how to create artificial digital scarcity.

A combination of public-key asymmetric cryptography and an algorithm called Proof of Work means massive computing power and energy consumption is needed to ‘forge’ new blocks of transactions, ‘mint’ new coins and secure the network.

Conversely some simple software on a basic computer allows anybody to easily check ownership of any coins as well as how many coins there are in existence.

If something is to act as money it needs three attributes – it needs to be a Store of Value, a Unit of Account and a Medium of Exchange. Digital money can’t provide any of these things until it’s scarce.

Of course a centralised entity like a bank can create and keep track of digital scarcity, but that requires trust.

Satoshi Nakamoto said: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

 

3. Bitcoin will not destroy the planet

Bitcoin mining consumes mind-boggling amounts of energy and in these days of climate emergency it’s only right that we scrutinise this aspect of Bitcoin very closely.

Consider the first two points in this article in this context: firstly Bitcoin cannot be stopped, so even if we were to declare it an environmental disasater and ban it, nobody could enforce that ban and the network would carry on regardless.

Secondly, it’s this massive energy expenditure that creates and enforces the digital scarcity, which is Bitcoin’s core value. Without it the ‘trust without a third party’ problem remains unsolved.


Energy use

On the generation side, a recent study concluded that 78% of the Bitcoin mining network runs on renewable energy. This is entirely logical because the competition among miners is fierce and only those with the cheapest electricity costs can mine Bitcoin at a profit, which by and large is surplus renewable energy.

Another plus is that renewable energy producers now have a way of monetising their surplus energy. When solar panels are humming or wind turbines are spinning and there is less demand than production, they can sell their surplus energy to Bitcoin miners or even install mining equipment on site themselves. This can make renewable energy more profitable, which in turn increases invesment in renewable technology and installations.

Global economics

On the macro side, the stated aim of Bitcoin is no less than the separation of money and state. Its goal is to give the power of money back to the people.

Bitcoin has a fixed monetary supply – there will only ever be 21 million bitcoins. This is a dis-inflationary monetary policy with a higher stock-to-flow ratio than gold.

If Bitcoin achieves its aim of becoming an independent world reserve currency, it will end up alongside real gold in central banks’ vaults backing up national currencies.

A dis-inflationary world reserve currency would dramatically restrict banks’ and governments’ ability to print money, which is mostly spent on vast militaries and endless wars. The world’s militaries are by far the world’s largest polluters, reining them in would bring enormous environmental benefits.

 

Personal economics

On an individual level, we’re so used to inflation constantly draining the value of our savings over time that barely notice that we’re incentivised to spend and consume our wages, not save them.

If we could keep our savings where they’d be expected to rise in value over time, we’d start measuring today’s purchases against the potentially higher future value of that money. Frivolous purchases would get deferred or ditched and important purchases would be prioritised.

Dis-inflationary savings turns people from consumers into savers.

Multiply those individual incentives and decisions by millions of people and we can start to see how dis-inflationary money could finally bring consumer culture to an end, along with the planetary-scale environmental destruction that goes with it.

 

Taken together, all these factors suggest that a successful Bitcoin would be a massive net environmental gain for humanity.

Maybe as a species we’ll finally learn to live within our means.

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Further reading

If you’re interested in reading more about Bitcoin, here are some good starting points.

Disclaimer: This is not financial advice. Always do your own research before deciding to invest money or move your savings.

If you do decide to buy Bitcoin please protect yourself with these three golden rules:

  1. Only Bitcoin.
    – Ignore all other cryptocurrencies and tokens. You can buy a fraction of a Bitcoin, it has 8 decimal places.
  2. DCA.
    – Dollar/Rupee Cost Average – buy small regular weekly/monthly amounts to even out the price volatility and reduce risk.
  3. Control your keys.
    – Take custody of your own coins, don’t leave them on an exchange.

Image sources: from the Internet, and hereby acknowledged.

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