The Number One Question I get asked about Cryptocurrency
People have heard of Bitcoin and crypto, but they don’t know who to ask about it, and more often than not, they seem almost embarrassed to ask about it.
The number one question I get about cryptocurrency is – What is cryptocurrency?
People have heard about cryptocurrency in the media, but they don’t understand what it is or what it does or how to get it and they just want a plain language description.
If that sounds like you, then that’s really not your fault. We are bombarded by information from our phones, the media, advertisers and even our peers. So if you have these basic questions too, I hope you’ll find enlightenment in this article!
In the beginning
In the beginning there was Bitcoin. It was the first cryptocurrency, although today, there are thousands of these “coins”. In this article, I’ll use the term Bitcoin and cryptocurrency interchangably.
The author of Bitcoin remained anonymous and disappeared only a couple of years after creating it. He said of Bitcoin:
“SORRY TO BE A WET BLANKET. BUT, WRITING A DESCRIPTION OF BITCOIN FOR GENERAL AUDIENCES IS BLOODY HARD. THERE’S NOTHING TO RELATE IT TO.”
The traditional press and media isn’t any help, they tend to sensationalise Bitcoin market dips say little about its peaks, all the while ignoring the underlying technology. They give their readers the takeaway that there’s nothing to see here, so don’t bother trying to understand it. But they’re wrong.
On the other side of the media isle, online media is just so far into coverage of the topic of cryptocurrency that they tend to neglect their duty of properly informing the public on the basics of this revolutionary topic. Also desperate for attention, they too are just as guilty of sensationalism.
Like Bitcoin’s author said, it is (bloody) hard to describe, since there’s nothing like it in the history of Money. It’s a replacement for the money that we’re used to. But if we already have money, why do we need a replacement? Cash and plastic work fairly well, right?
There are many problems with traditional money, and Bitcoin solves them all. So let’s start there.
Three Main Problems with Money
There are three main problems with money, or the three biggest elephants in the room. They are inflation, confiscation and censorship.
There are other minor problems with money, like theft, secure storage, replenishment of dirty and worn out Bank notes etc., but we’ll just focus on the three largest elephants.
Inflation
Let’s tackle the biggest elephant first – inflation. Unless you’ve been on a desert island, you’ll have felt the effects of inflation in 2022. Inflation is the direct result of money printing.
But printing money comes at a cost – it causes the value of your money to evaporate – as more money is available in the economy to exchange for the same amount of goods and services. Thus prices rise.
Money Creation
I tend to avoid explaining money creation since it just serves to confuse, but it looks like we’re going down this rabbit hole, so hang in there..
Money creation is often called Money printing and is a convoluted process. This process is computerised and there is no production of physical notes.
Money creation may often be thought of or referred to as an action of the government, but in reality its an action of a country’s treasury or the the case of the US, the federal reserve, who buy financial assets (bonds) from commercial banks.
The treasury or fed just invents the money for these assets out of thin air. This process enables the commercial banks to lend money to their customers.
The catch is that the government or banking body responsible for money creation doesn’t have to deal with the problem they’ve created (inflation). That’s up to the general public, who suffer the price rises.
For this reason, inflation is often called a hidden tax, inflicted on the “squeezed middle classes” of society.
So inventing money out of thin air allows a treasury to control the money supply. A government normally finances expenditure through taxation, but when a government has been financially irresponsible, like for example blowing £400 Billion on non-pandemic, it can resort to tactics like printing money to cover their financial ineptitude.
Confiscation
The next elephant in the room is confiscation of money. This might be through taxation, or the surrender of your assets through physical confiscation.
Governments do this at their will, if they suspect you of a crime, or if they’re feeling all dictatorial that day.
You might have your assets frozen as part of grizzly divorce, or you may find your assets or the content of your bank account confiscated to help with a war effort for example.
Censorship
Censorship is the last major elephant in the room.
As a result of leaking Iraq war footage that embarrassed the US government, the journalist Julian Assange and his organisation Wikileaks faced a financial blockade.
Banks and payment processors would not transact with Assange or Wikileaks.
Setting aside your feelings on whether or not these financial sanctions were justified in this case, governments and banks can and do block financial transactions, and those who attempt to make them, in order to enforce their will.
Three Main Problems of Money Solved by Bitcoin
We’ve examined above the three problems of money, now lets look at how Bitcoin solves each of them.
Fixed Supply
Bitcoin is a fixed supply cryptocurrency. There are only 21 million and no more can ever be created. No one person, body, government or organisation controls Bitcoin. No one can ever “print” more Bitcoin into existance. Inflation solved.
This is because Bitcoin is decentralised. Each node that participates in the Bitcoin network runs identical software to all of its peers and has no more authority than any of the others. These nodes are spread out geographically across the world. The Bitcoin network is tamperproof.
Soverign Money
Your Bitcoin assets are secured through cryptography. No one can confiscate them, so long as you hold your wallet “seed phrase” – a collection of 12 or 24 words that allows you to access your assets on the Bitcoin network. You can commit these to memory, so that not even a court can compel you to give up your cryptocurrency. That’s confiscation solved too. Em, unless they resort to physical torture. And your government is much too virtuous to resort to that, right?
Censorship Resistance
Bitcoin is censorship resistant because no “middlemen” are required to transact. Transactions occur directly between the two exchanging parties. They’re confirmed and recorded by Bitcoin nodes on the public, tamperproof Bitcoin ledger called the blockchain.
So middlemen like banks, or payment processors like Visa, Mastercard and PayPal are no longer required and therefore can no longer profit from, or meddle in the financial affairs of countries, companies, organisations or individuals.
The More Trivial problems of Traditional Currency
Theft
Theft is often the first problem that springs to mind when we think about money. Our ancestors would resort to clipping the edges off gold coins to make ends meet, while bank robberies are almost as old as banks themselves.
Bitcoin has no physical form, and so can only be given up voluntarily, under threat of physical harm or through careless security precautions. I advise those learning cryptocurrency that in using cryptocurrency, you become your own bank – but also your own security guard. So you must not lose, write down your crypto security data, or forget it, or will be forever gone.
The Cost of Security
Traditional money, like paper notes, precious metals have physical form that must be secured. Bank vaults, CCTV, guards, armoured trucks, secure counting facilities, closely guarded manufacture of notes, GPS tracking, exploding dye packs. A whole industry (that comes at huge cost in terms of energy and money) is built around securing the physical form of money.
None of this is necessary with Bitcoin, since it exists on the blockchain, that tamperproof ledger that exists on every node on the Bitcoin network, which is spread out geographically across the globe.
Other Questions about Bitcoin
In this article, we’ve visited some interesting terms that are attributes of Bitcoin. We’ve referred to it as decentralised, fixed-supply, soverign, digital money. We’ve learned that it’s inflation proof, uncensorable and unconfiscatible too. What other things are worth knowing about Bitcoin? Below are my responses to common questions I get.
What if the Internet went Down?
Another common question I get about Bitcoin is wouldn’t it would be rendered useless if the Internet went down? Well, perhaps during the Internet outage, but the chances of that happening (even for a short period of time) are remote, and such a situation would render banks and payment processors useless too. With Elon Musk’s Starlink, now even warzones can access high speed Internet.
There are too many large companies who have a keen interest in ensuring that their revenue stream remains uninterrupted for this to occur. Do you remember for example, the last time Visa, Mastercard or PayPal were unable to process transactions?
Where does Bitcoin get its Value?
The value of anything is what we’re prepared to exchange it for. The first Bitcoin transaction was 10,000 Bitcoin for a couple of large pizzas. Just a month after that, Bitcoin was worth about $100 USD.
Bitcoin became a trillion dollar asset more quickly than anything else in the history of the world. The Bitcoin cryptocurrency at its peak (to date) was worth $1.15 trillion US dollars. That value is called its market capitalisation, and its the value of all Bitcoin in circulation multiplied by the price of one Bitcoin.
It took Google twenty years to reach that evaluation. It took Microsoft about forty years to achive the same feat. Bitcoin did it in just over ten years.
Bitcoin’s Mysterious Origin Story
As I briefly mentioned in this article, there’s a fascinating and mysterious story behind the origin of Bitcoin. It was created in 2009 by anonymous author who called himself “Satoshi Nakamoto”. The list of candidates for Satoshi is short and includes cypherpunks, academics and even an international criminal mastermind! To this day, Satoshi has never returned, and he left approximately 800,000 Bitcoin untouched, which would make him a multi-billionaire in US dollar terms; if he ever returns to spend it…
You can read about the Bitcoin origin story in a chapter I’ve devoted to it in my new book, Bitcoin Mass Adoption. If you’re not a reader, please check back regularly, as I’m working on recording the audiobook version!
