Education 1 – What Is Bitcoin?

What Is Bitcoin?

This question has been answered more times than I can count in more ways than I know about. Most of the explanations I’ve heard used involve a lot of technical words that frighten many people away or descriptions that don’t bring anything new to the ears of the potential users. In my experience, when I try telling someone it’s “the first decentralized digital currency” or a “consensus network using triple ledger accounting” they tend to go blank and I know I’ve lost them. When I tell someone “it’s digital money you can use on the Internet” they don’t hear anything new, as their debit card and online bill pay systems are digital money. When I say that it’s “an open source peer-to-peer money system that has no central authority” people hear “scam” and tend to ask “well then why is it worth anything?” The most effective explanation I’ve found is to describe why our current money system is broken and how Bitcoin can fix it.

Inflation And Hyperinflation

Purchasing Power of the U.S. Dollar 1913 to 2013

 

 

 

 

 

 

 

 

 

 

This is a graph showing the purchasing power of the US Dollar from 1913 to 2013. This is what has happened to our money since the government gave control of the currency to a private bank with no oversight. The people in charge of the money were given the ok to print more whenever they felt like it. This is, in effect, printing more money to solve the problem introduced by printing too much money. And this is just an example of inflation. Hyperinflation is dramatically worse. Take Zimbabwe for example. Starting in the 1990s inflation got out of hand, to put it mildly, and they started printing money at ever faster rates. At one point in 2008 $1 US was equivalent to $2,621,984,228,675,650,147,435,579,309,984,228 Z. Currently Zimbabwe has completely abandoned their currency and is working on converting their entire system over to using US Dollars.

Bitcoin is a deflationary currency. It has a hard limit on how much will ever be in the system. Nobody can press a few keys and just create more Bitcoin without the rest of the network agreeing that the Bitcoin exists. Nobody would agree to this because it makes the rest of their Bitcoin worth less. Since its creation some Bitcoin has already been removed from the system in various ways. And, as time goes on, more will be lost, locked, or otherwise become inaccessible. This makes the rest of the Bitcoin in circulation worth more, assuming market cap remains roughly the same. So consider your retirement fund for a moment. Instead of putting your money into US Dollars and watching it follow the chart above, wouldn’t you rather put it in a monetary system, by whose very nature, will increase in value just by holding it?

Pull Transactions

Our current system of checks, debit cards, and credit cards have a similar flaw: pull transactions. I’m not certain this is the proper term for it, but it’s the term I use to describe the process as compared to the process in Bitcoin. In a pull transaction you give the credentials of yourself and your account to someone and they use that information to pull funds from your account. This exposes your information, both personal and account, to the person with whom you’re doing business. Not only is this information collectible it rarely, if ever, changes. And what’s worse is that, if they are collecting this information and storing it, this data could leak out via data breaches and hacks and your information could be used to make transactions in your name. Granted there are fraud protections in place, chargebacks which I will discuss below, and guarantees by the banks and card issuance companies. With Bitcoin the system could be improved greatly.

Bitcoin uses push transactions. The person with whom you’re doing business gives you account information that they generate themselves specifically for this one single transaction. You then use your Bitcoin wallet, which has always used varying account information, to push Bitcoin to that account. The details of this transaction could be known to the world and the rest of your Bitcoin is still secure. Nobody can use that information to pull more of it out of your wallet. So, consider your security for a moment. Would you rather put transaction power in the hands of a corporation with whom you’re doing business, exposing yourself and your accounts to fraud, or would you rather take the responsibility to send them money when you wish?

Counterfeit, Fraud, and Chargebacks

If someone gives you a counterfeit $100 US bill you’re stuck with it. Neither your local bank nor the central bank are responsible for replacing it with a valid $100 US bill or even a percentage of it. To protect yourself from this you would have to have a Secret Service agent checking every bill or coin you accept to ensure its validity. If someone gives you a check drafted on an account which is overdrawn you’re stuck with it. Neither your bank nor the other author’s bank are responsible for returning your money. Many banks will do so, granted, but they don’t have to. In many such cases you’re responsible for tracking the person down yourself to collect or simply refusing to do business with them in the future. To protect yourself from this you would have to have a bank system checking every account for available funds. While more plausible than having your very own Secret Service agent, the current networks are too slow and cumbersome to verify checks at this speed. Someone could draft a multitude of checks before the first one was reported back to their bank to be cashed. If someone transacts with you using a debit or credit card and then claims fraud the card issuer can pull that money out of your account, even weeks or months later, and return it to the card holder. And, again, you’re stuck with it. Neither your bank nor the card issuer are responsible for giving you that money. And what makes this worse is that there is no protection from this. Chargebacks are considered a feature of consumer protection. Instead of accepting money that may or may not be genuine, may or may not be available, or may be taken back from you without notice or recourse, wouldn’t you rather put your money in a monetary system with irreversible transactions verified by every member of the system?

Remittances And The Unbanked

The remittances industry has been a very lucrative business for a long time. To send money from place to place, especially across vast distances, across borders, and overseas. Take into account currency exchange and it’s been downright booming. Why is that? Because moving money worldwide isn’t easy. Or, at least, it wasn’t. It took a vast network. It took operating locations. It took currency exchange. Of course, once this was in place, it didn’t take much more than a phone call, a calculator, and a bank transfer. But that didn’t stop businesses from charging outrageous fees for it.

For example, while writing this, I went to Western Union’s website. I asked for a fee estimate on sending $100 to London. If I was using my bank account and depositing into a bank account in London it would take 7 days to transfer and cost $2.99. If I was using credit/debit and depositing into a bank account in London it would take 3 days to transfer and cost $5.00. If I was using credit/debit and someone went to pick it up in London it would be there in minutes, but it would cost $12.00. If I was using my bank account and someone went to pick it up in London it would take 4 days to transfer and cost $10. If I went to a Western Union and did these same transactions in person nearly the same fees and times apply. Their mobile app reduces fees, but nothing less than $2.99 and it’s $12 unless you want to wait days. This same transaction in Bitcoin can be done from mobile phone to mobile phone across the Internet in seconds for $0.01. The funds will be completely available even by the strictest Bitcoin standards in about an hour. And furthermore a Bitcoin here is a Bitcoin there. There are no charges for currency exchange.

In 2013, 9.6 million households, that’s 1 in 13 households, were unbanked. For these households it’s a way of life paying fees to have a paycheck cashed, purchasing money orders or cashier’s checks to pay bills, paying fees to load cash onto prepaid debit cards, and finding a place to store savings that isn’t easily stolen. Households like this are also the biggest borrowers using high interest advance payday loans. These are additional financial drains on already low income households. Sending and receiving Bitcoin takes a smartphone with an Internet connection and there are little to no fees involved. Instead of consistently giving up part of your income to fees simply to receive your income, wouldn’t you rather be able to move money around, for all intents and purposes, free?

Capital Controls

Banks were originally places to safely store your money to ensure that it wouldn’t be stolen. There’s a saying I once heard that says, “If you don’t hold the gold you don’t really own the gold.” When the financial crisis happened in the US in 2008 the US government took taxpayer money to prop up failing businesses called banks. When the same thing happened in Cyprus in 2013 the Cypriot government seized portions of citizens’ bank accounts. When the same thing happened in Greece in 2015 the Greek government put controls in place limiting withdrawals and transfers. It has now become legal for banks to do exactly what they were intended to prevent. Instead of putting your money into an account that can be frozen, confiscated, or controlled, wouldn’t you rather put it in a monetary system that puts you in complete control?

Negative Interest Rates

Other than safe storage, banks were businesses that gave customers interest on stored money. With the rise of free checking this practice seems to have gone by the wayside. But back in the day this was added incentive to store money in a bank. In Sweden the banks are about to impose negative interest rates and they’re not the only country considering it. This means that customers will be charged taxes for keeping their money in a bank account. Every month a person’s savings will be charged just for being saved. Again, think about your retirement fund. Imagine that every month you are charged money because you don’t spend it and the more you save the more you’re charged. Instead of putting your savings in an account that gets charged simply for existing, wouldn’t you rather put it in a monetary system that rewards you for saving?

Civil Forfeiture

You may wonder what you can do if the bank accounts are being frozen and your savings is being removed. Couldn’t you just use cash and hide it, hoping that purchasing power doesn’t drop too far and we cross the border into hyperinflation? Well, you could do that until you get caught. Again, in Sweden, if you spend too much cash, the authorities get involved and your cash gets seized. And if you think that’s odd, look up Civil Asset Forfeiture. In the US your property can be seized without warrant, arrest, charges, trial, or conviction. This is done simply on the suspicion that you may do something illegal with it. If you travel with a bag of cash the authorities can simply assume you’re going to spend it on something illegal and confiscate it. In 2015 in the US, law enforcement seized more in civil asset forfeiture than criminals stole in burglaries. You could try gold and silver, but their market value is just as volatile as Bitcoin, privately holding bullion has been made illegal before, and it’s just as susceptible to Civil Asset Forfeiture or burglary as cash. Instead of putting your money into your mattress or lock box where it can be seized, aka. stolen, wouldn’t you rather put it into a monetary system that can’t be seized except under duress?

Freedom

Bitcoin is monetary freedom. It puts all the control in your hands again. Bitcoin is a system that allows you to store money in a system that increases in value by its very nature, cannot be counterfeited or reversed, cannot be seized or controlled, rewards you for saving, and allows you to transact relatively anonymously and nearly free in the manner in which you choose.

Caveats

But it also puts all the responsibility on you as well. If you send your Bitcoin that transaction is irreversible. If you lose your passwords or keys it’s locked forever. If you don’t have backups it’s gone forever. So, before you get started, go through my Tutorials and learn by getting some hands-on time with Bitcoin.

Also please make note that I’m not suggesting you stop paying your taxes or that you start to launder money. I am a happy US citizen and taxpayer. I simply do not condone a system that limits freedom and is designed to separate us from our money and our current banking system does both. So remember, come tax season, to do your due diligence and render unto Caesar what is Caesar’s.

Do I have your interest? If so, look for my next Education post and I’ll go into a more technical response to what Bitcoin really is.

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  1. […] my first Educational post I mentioned that I’m not in the Bitcoin space to launder money, hide income, or avoid taxes. […]

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