What is Bitcoin? 1.0
Millions on millions of people have heard of Bitcoin (BTC). Still, they probably more have questions regarding what it is and what is its purpose?
The rabbit hole is significant. I’ll attempt to unpack various elements of Bitcoin in the early editions of this newsletter; however, for now, we will approach Bitcoin purely from a monetary perspective.
Bitcoin is a peer to peer electronic cash. It is a form of digital money that can be transferred between people or computers without any trusted middleman, and its issuance is not under the control of any single party.
Bitcoin is simply a form digital of money that can be sent from person to person without needing permission, authorisation or verification of an intermediary party such as a central bank. In the same way, I can give someone a £5 note without anyone's permission, and I can do the same with Bitcoin. With more considerable sums of fiat (government-issued currency), we need approval and authorisation from a trusted middleman such as a central bank.
On a £5 note, there are distinct combinations of numbers and letters that make up the code of each note. To some extent, Bitcoin is just code, but the Bitcoin code is, apparently, a work of art (I am not a coder).
We knowingly or unknowingly use money for three purposes:
A store of value: Money that maintains its value for an extended period is known as 'hard money.'
A medium of exchange: A vehicle used to align a mutuality of wants. For example, if I have many oranges but I want apples, then I have to find someone with apples who wants oranges. As a social construct, when a currency is adopted and trusted, it acts as a medium of exchange to increase the efficiency and possibility of commerce.
A unit of account: Ronseal does what it says on the tin.
For society to thrive, we want and need money to have specific characteristics”
Durable: Bananas are not a good form of money because they rot. The hardest money is that which has high durability, such as gold. Gold was once used for money and is incredibly durable and difficult to produce / mine—the supply of gold increases by roughly 2% a year.
Portable: This is where gold falls. Society realised that gold is difficult to transport—high costs to store and move, particularly internationally. Gold has significant risks such as security and loss when considering international transportation. With Bitcoin, you can send billions of pounds worth internationally at a fraction of the cost in an even smaller time frame without permission from a central bank. This portability is suitable for individuals and institutes, significantly increasing commerce and final payment.
Divisible: A dollar is divided into 100 cents, and a pound is divided into 100 pence. A Bitcoin can be divided into a unit of cryptocurrency known as Satoshis. Each Bitcoin is divisible down to eight decimal places, which means that a single satoshi is equal to one-hundredth millionth of a Bitcoin. To put it another way, 100 million Satoshis make up one Bitcoin. The satoshi is named after Bitcoin's 'founder', Satoshi Nakamoto. Satoshis are referred to as SATs.
Acceptable: For a currency to emerge, it needs to be used and more widely adopted. To be adopted, it needs to be trusted by institutes, governments and the public at large - the market.
Stable: Think supply and demand. Silver was once used as money, but once the supply of silver became readily available, silver's value declined and became what is known as 'soft money'. Gold is mined at 2% a year because it is hard to mine. This difficulty effect, combined with limited supply and scarcity, makes gold valuable. As we saw during the recent pandemic, paper money (fiat) is not difficult to create/print. Governments worldwide exponentially increased the money supply, increasing debt levels - and now we are experiencing the consequent inflationary effects. To bring this back to Bitcoin, there will only ever be 21 million Bitcoins available, making it the 'hardest' money ever in existence. It is not possible for more Bitcoins to be created.
The Bitcoin rabbit hole is real. I want to write about matters you are itching to delve into, so please send your questions regarding Bitcoin, Blockchain and Cryptocurrency investing via the form below. I will identify areas of correlation and include them in future content.