In a previous post, I briefly answered the question “What Is Bitcoin?” and explained some of its main features to those who are completely new to the topic. The next natural question is “Why should I care?”
In this follow up, I want to introduce some Bitcoin truths that answer this question. As always, please let me know if anything resonates with you or if you have any questions I can answer in a future post.
1. Bitcoin is self-sovereign money that can’t be stopped
Bitcoin is self-sovereign money because you control it. This differs from the money you hold in a bank account, which is controlled by the bank and ultimately the government. The bank could take away your access by freezing your account, especially if the government told it to. Bitcoin is different because only you have access to your bitcoin via your own private keys.
This may not seem important if you live in a First World country, have a regular job and have never been in trouble with the law. Unfortunately, for many brave female activists around the world, this is not the case and the self-sovereign nature of Bitcoin has helped them to retain their assets or pay for their struggle, even when their government opposes what they do.
2. Bitcoin is a scarce asset in a world of free money
The fact that there will only ever be 21 million bitcoins really matters because scarce assets look increasingly attractive right now.
You will know that, ever since the financial crisis of 2008 and particularly in response to the COVID pandemic, governments around the world have printed huge amounts of new money. Whether you agree with this policy or not, it is hard to disagree with the view that massive amounts of extra money in the system leads to asset price inflation.
The fact that there will only ever be 21 million bitcoins is important because, as more money is created, more investors will see the value of all fiat currency decreasing and choose scarce assets that they believe will retain value.
3. Bitcoin is a store-of-value over the long term
Bitcoin is compared to gold by some investors because both are scarce assets. Gold is widely considered to be a good store of value but many gold investors would reject the idea that Bitcoin should also be thought of in this way.
It is certainly true that Bitcoin’s price can fluctuate dramatically, as it did earlier this year when it dropped over 50%. However, this doesn’t mean it hasn’t been a good store of value over the long-term.
In fact, everyone who bought it at the peak of the 2017 rally is now sitting on an amount worth more than double what they paid, even though the price fell sharply in the intervening period.
4. Bitcoin is the most battle-tested cryptocurrency
The first bitcoin was mined at the start of 2009, making this monetary network over 12 years old now. In that time, the network has never been hacked. However, many people believe that Bitcoin has been hacked, either because of misreporting in the press or because they confuse the Bitcoin network with applications that sit on top of, and interface with the network (e.g., Cryptocurrency exchanges) that have been hacked.
The fact that the Bitcoin network has never been hacked matters because it seems almost certain that criminals and hostile government agencies will have tried. There’s no guarantee Bitcoin won’t be hacked in the future but this track record should reassure anyone concerned about how secure an investment it is.
5. Bitcoin does use energy (and that’s a good thing)
There has been a lot of coverage about the energy the Bitcoin network uses and it is certainly true that electricity is used to keep the network secure.
Without going into too much detail, energy is used by miners in the Proof of Work consensus mechanism. This involves them racing to solve a complex mathematical problem and using large amounts of computing power to do so. The miner that solves the problem first gets the opportunity to add transactions in a new block and receives bitcoin as a reward for doing so.
The fact that this process requires a lot of energy plays an important role in making the Bitcoin network secure. So, if you believe having a secure, digitally native currency that cannot be devalued at the press of a button by a central bank is important, you will also agree that Bitcoin’s energy footprint is worthwhile. The Bitcoin network also uses electricity at the margin, i.e., where it’s cost is lowest, and at times it is not used by “typical” power users. Because it is difficult to “store” energy using off peak energy that is otherwise wasted, the Bitcoin network serves to provide an economic return for electricity providers — while helping to drive the clean energy revolution (as that is ultimately a cheaper form of energy).
If you are interested in diving deeper into this topic I would encourage you to read this excellent article by Lyn Alden Bitcoin’s Energy Usage Isn’t a Problem. Here’s Why.
I love the way you outlined these key features….. would love to know how other popular crypto currencies stack up to this one. ie . my newly purchased Etherium …