Bitcoin, the centralized & deflationary asset.

Where it all began

In 2007–2008, the global financial system has experienced some unprecedented downfalls among its biggest financial veterans. With the biggest US investment banks and other financial institutions falling like dominos, US, along with the rest of the world needed a solution for the unstable, volatile financial system which was created. While the ‘Too big to fail’ institutions were looking for a lifeboat to jump on and begging for a bailout, a technological advancement was underway that arguably provided an alternative financial system and the solution to this mess. On October 31st, 2008 a technology called bitcoin has been created which fixated on providing an alternative financial system, if not a replacement all-together. October 31st, 2008 was indeed a revolutionary date because not only did bitcoin get created, but along with it came many more incredible technological advancements, including the blockchain, ethereum which enabled the creation of decentralized autonomous organizations (DAO), and countless other cryptocurrencies and tokens. But for the sake of this writing, we will focus only on bitcoin.

The Basics

As previously mentioned, Bitcoin emerged out of the ashes of the financial crisis in 2008. On October 31st, an anonymous individual (or group of individuals) named Satoshi Nakamoto released a white paper which would detail the technical details of bitcoin and explain how it functions. You can view it here: https://bitcoin.org/bitcoin.pdf. To start off with basic facts, Bitcoin is a digital currency. Which means it exists in the networks of computers and does not possess any physical form. Bitcoin’s network is open source, which means that any developer can add to the development of the infrastructure and code of bitcoin if they wish to contribute to it. A key feature which bitcoin enables is peer-to-peer transactions, which mean that no third-party has to be involved, enabling individuals to make financial transactions between each other only. Bitcoin also utilizes cryptography, meaning that it uses complex tools (such as the SHA-256 algorithm) in order to protect itself from being vulnerable to hackers. Bitcoin is very much privacy oriented, nobody knows that you are making that particular transaction, even the person receiving the payment. However it is not anonymous, there are other cryptos like Monero which has that anonymous perk to it, but Bitcoin is pseudonymous, meaning that the transactions that are being made are available for everybody to see, but nobody knows who makes those transactions because the account names of the senders and receivers are encoded with a combination of different numbers and letters.

Digital Gold?

In order to see if bitcoin has the same characteristics as money, we need to examine currency and more importantly gold. Currency, such as the Canadian Dollar, has a few key characteristics; it functions as a medium of exchange, a unit of account, it is portable, durable, and divisible, and fungible or interchangeable. When taking a look at gold, gold has all of those characteristics, plus one crucial one, and that is it has a store of value over a long period of time. Gold, unlike fiat currency does not devalue over time. Just like any asset, it has its ups and downs in the market, and is sometimes volatile, but never since 4,500 years ago in Lydia, when it was first used as currency, has gold been worth zero, (Maloney, 37) it has always prevailed in monetary history and came out on top, while all the previous fiat currencies that have existed are now worth zero. At the current moment, the existing supply of gold is at about 187 kilotons split evenly between financial and decorative uses (Gilder, 248).

Economic Flaws in Distribution

The BMI research forecasts for the “global gold production to increase from 105moz in 2018 to 125moz by 2026, averaging 2.3% annual growth.” (Mining.com, Gold Production will grow in the coming year.) If bitcoin mimicked that 2.5% rate of growth of gold production”, according to Mike Kendall, “the current number of bitcoins -16,651,130-… would reach 347,119,614 million units” by Satoshis closing date of 2140. (Gilder, 255). Therefore the two distribution models are very different.

Bitcoin, World’s Biggest Centralized Asset

The Future

Bitcoin has the potential of being a great store of value, and enabling countless amounts of individuals that previously did not have access to the banking system, to finally participate in it. Even more than that, bitcoin can allow people, which live in countries with very unstable environments that have very high inflation rate on average, to have a better alternative to storing their wealth, and not have government steal it from them. Not to mention that there is no need for banks and similar institutions, making the processes of transferring money faster and cheaper.

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Volodymyr Gryga

Volodymyr Gryga

I’m interested in Money. How humans make it, spend it, invest it, and think about it.