The Ignorance Around Bitcoin Within The General Public
Let me begin by saying that I will only talk about Bitcoin. I agree that there are a lot of scams in all of crypto. The internet is filled with one sided news listing everything bad with "crypto". Altough no one ever talks about the positives. This is dangerous because we citizens should be completely informed when taking decisions.
My goal is to educate, not to shill.
"Crypto is a scam"
A lot of crypto is. But does that mean everything in crypto is a scam? Just because a lot of websites can be spyware, illegal and scam does that make all websites a scam?
No right, you have to look into every project and understand it before making that judgement. Today we will discuss Bitcoin because its the most popular and that's the only one I'm qualified to talk about.
Is Bitcoin a scam? Its a decentralized network owned by no one. Who even would be the scammer here? Its a de-institutionalized tool of decentralized consensus, and it delivers on that. (I know you have follow ups but please read on)
"Bitcoin solves a problem that doesn't exist"
I wouldn't point to one thing and say "that's the problem" because money and finance are complicated. Some things were invented for genuine good but no longer serve that purpose. So lemme put forth core ideas of Bitcoin (I will not get into other cryptos for now. although I think most are scams)
Fractional banking is the idea that allows banks to work on a fraction of reserves.
Let me explain with an example: Say there's an economy with 1$, you as the owner of that 1$ deposit that 1$ to a bank and the bank gives you a "note" of ownership that your money is deposited in the bank.
Now, how will the bank earn money? It'll use your 1$ and invest or loan it out on an interest and earn from that.
That's super cool if you can do that. Although what fractional banking does is it allows the bank to only keep 1/10th of the reserve. Meaning the bank can loan out 9$ more than it holds and introduce it to the economy.
The bank will earn interest on money:
- it doesn't own
- doesn't exists and also inflate the economy.
You as the original holder of that 1$ lost your wealth because the 1$ economy just became 10$ economy but you still own 1$, but the bank made money off money it doesn't have. This is what people mean when they say our world economy is a debt based economy. 97% of all money is debt.
In today's world, almost all billionaires like Jeff Bezos, Elon Musk and Bill Gates don't give themselves salaries, because salaries are taxable income and they don't want to pay tax.
So instead they give themselves 0$ (or very little salary) and take millions of dollars of loans. That loan comes from a fractional reserve, meaning 90% of it didn't exist before.
They do that because loan isn't considered taxable income. And is often considered a tax deductible. They can pay off older debt with new debt because no one would deny loan to a billionaire.
Every time a billionaire is paid:
- the bank earns interest on what should've been tax
- the government doesn't earn tax from billionaires
- it reduces your money's worth.
How bitcoin helps here
The core idea that bitcoin puts forward here is you cannot spend what you don't have. Bitcoin has a hard cap of 21 million bitcoin. You cannot create more. You cannot do fractional reserve banking. You cannot loan out what you don't have.
In a bitcoin economy you have to pay with real money, instead of credit created out of nothing.
A lot of people say that the fiat standard is useful. The idea here is that before 1972 money was a representation of gold. Gold was the real money and has been the go-to money for most of humanity.
The convenience of banking was you can deposit your gold and get a "note of ownership" that your gold is deposited and now you can easily deal with fractions of gold and just trade paper.
In 1972 the US (and later most countries including India) went off the gold standard and declared that the paper you're trading is now real money and the central bank has the powers to print them. And there you go, a century long currency was replaced with institutional money with no hard limit.
Fiat standard had its benefits. It was introduced post the great depression but it was always supposed to be a temp
Money printing goes brr
printing more money has become the go-to solution for any problem the government faces. People are too rich? print money. People are too poor? print money. We want to go to war? print money.
Whatever is the problem just turn on the money printer.
Printing more money has its consequences. By introducing more money into the economy you are devaluing the entire currency and making people poorer. It affects the middle class the most as they can't afford to be invested in appreciating assets.
They work so hard their entire lives to earn and save their money which gets devalued over a month or so. This is happening in India as I type this.
The current global reserve currency is the US dollar and the US truly has the ultimate money printing power. They are always at an advantage in global deals because their currency is in which global deals are made. That beats the neutrality of global trades. The USA is always at an advantage.
How bitcoin helps here
Bitcoin is fundamentally like gold. As I said before, you cannot print more than 21 million bitcoin (unless everyone agrees to change that). It has a hard limit and no one can print as they wish.
If printing more bitcoin is needed, then it can be done with consensus. I will later discuss how consensus in bitcoin works. But in the end it'll be a democratic decision.
Bitcoin is also a "de-institutionalized" currency, as in it doesn't belong to an institute like the US or China. Global trades are more fair and countries aren't at the mercy of USA.
Banks have become too big to fail
A bank capitalizes when it profits, and socializes when it loses. If the bank is profitable it keeps the money. If the bank messes up and goes bankrupt, nothing happens, they just get bail out from tax money and are back in business.
That is exactly what happened with YesBank in 2019 (in India) and a lot of big banks that caused the 2008 crisis. In capitalism, if you're unfit in the market, you die off and get replaced by someone better. That doesn't seem to happen to banks.
"Bitcoin has failed" because
Bitcoin miners control everything
That is the biggest misconception around Bitcoin. Miners don't control consensus.
To explain this section let me introduce few technical terms:
- Full node: Its a computer that owns the full copy of the Bitcoin blockchain and is connected to the rest of the Bitcoin network. A full node runs on as low as a raspberry pi 4.
- Mining node: Its a computer that is listening to full nodes for transactions and is construction and calculating proof of work for new blocks for the blockchain.
- Consensus: Its the agreeing up between full nodes about the rules of Bitcoin and the state of the blockchain (things like has this transaction happened)
"The Bitcoin Network" isn't the miners. Its the full nodes + miners.
Whether a transaction is valid or invalid isn't a judgement call by miners, but by full nodes. Even if there's a miner with 90% hash power, if full nodes invalidate a block from that miner then its, invalid.
Full nodes are the enforcers of consensus. They enforce the rules, not the miners.
How does that all work? That will require another blog post but you can look up "how does consensus work in Bitcoin" to learn more.
Bitcoin is too slow
This statement was true 4 years ago, but is no longer true. Ever since new advancements have come up bitcoin has improved a lot. The biggest contributor being The Lightning Network, which I realized surprisingly little people know about.
Before even beginning to explain I will put-forth screenshots of transactions I've done. Notice the timestamps between creation and completion. The transaction completes within 4 seconds.
There seems to be a massive disconnect. Most people talking about these topics don't seem to have used Bitcoin in its current form.
The Lightning Network is a layer 2 solution to Bitcoin that (with some tradeoffs) makes bitcoin "lightning fast". Unlike the layer 1 blockchain layer, the bigger and more popular the network gets, the faster and cheaper it becomes. As of writing this article the lightning network is only 4 years old. That's the beauty of open-source.
The statement of bitcoin does only 7 transactions per second is no longer true. Every statistic that pulls this data doesn't include lightning transaction. This would've been fare 3 years ago but lightning network is growing and cannot be ignored.
The amount of transactions that happen on LN are hard to calculate, but they are by no means 7 transactions per second. The theoretical limit for the lightning network is infinite but the real value is yet to be calculated.
Bitcoin is too volatile
I agree with this. Bitcoin markets are really volatile. Almost everything I discussed on this article has been about Bitcoin's fundamentals, not the actual market. The current market involves a lot of speculation and resembles the stock market more.
I think we should have the right regulations in Bitcoin trading to make markets safer, and less volatile.
Bitcoin uses a lot of energy
I agree on this too. Bitcoin uses a lot of energy. It uses that energy as its security mechanism to prevent spam.
However Banks use a lot of energy too, so does Netflix and Reddit. But you would say that those companies have value and Bitcoin doesn't.
As stated earlier, the 7 transactions / second metric isn't true anymore. Bitcoin does much more for that same amount of energy. Bitcoin is open source protocol and those things improve.
The 707 kilowatt-hours per transaction metric isn't true anymore.
However don't get me wrong. I strongly care about the environment and believe we should use clean energy whenever possible. But its important to get the picture right. The energy per transaction metrics you hear doesn't include lightning transactions.
Direct benefits from Bitcoin
Open source money
The beauty of open source is in the freedom it provides. Anyone is free to innovate on top of bitcoin. That is how we got The Lightning Network.
This also makes Bitcoin permission-less. Anyone is free to join and innovate. There is no barrier to entry. This is something that is completely missing from the current financial system.
Bitcoin has no barrier to entry. All you need is an internet connection and a cheap smartphone. Just with that you become part of the global economy.
The majority of humanity doesn't have that ability. Most cannot do global transaction and a big chunk of humanity doesn't have bank accounts.
Bitcoin also doesn't discriminate based on race and nationality.
Everything in Bitcoin is open. The policies are enforced by battle-tested open source algorithms, instead of a promise by an authority.
Its a misconception that things cannot change in Bitcoin. The enforced rules such as bitcoin supply, inflation rate, black listing, can all be changed. But that decision is not taken by a centralized authority. its taken by all of us.
Consensus can be changed if there's consensus for it. Rules can be changed only if everyone agrees to it. And this happens on Bitcoin more often than you'd imagine.
No system is perfect. I think over long term both, the fiat system and the bitcoin system will coexist. Our financial needs change overtime and so does our financial systems.
My goal is to educate everyone so we all understand Bitcoin as well as the current financial system better. We cannot have discussions if we only listen to one extreme view. That just polarizes us more.
I hope you learned more about the existing financial system and Bitcoin.