I recently had a chat with friends about Bitcoin and a few common questions popped up:
“What is it? Why does it increase in price? Who’s backing it?”
And a few reasons why my friends don’t think that Bitcoin is worth investing in:
“It’s just a bubble, there’s no one backing it, what will happen when Facebook or some other big players launch their own coin?”
In the most simple terms, I’d like to note down my understanding of Bitcoin. I am sure it’s naive and rudimental. However, it will also be in very simple language, “for dummies” I’d say, as I am a dummy and newbie myself.
Here are a few reasons why I think Bitcoin is an important store of value:
- Why is Bitcoin price increasing? What makes it valuable?
Just like a piece of paper on which money is printed on, it’s not the paper but the agreement among people that the money is worth something that creates the value of that money. The pros about money is that it is backed by the government, the cons is that the government can print more and more and more money and send it into circulation, this is the very basis of money losing value (inflation).
Due to coronavirus, this is exactly what’s been happening all over the world: Governments print money, trillions of dollars. Money loses value and asset prices are going up everywhere: the stock market, housing market, gold, Bitcoin.
Unlike money, and similar to gold, Bitcoin quantity is limited and is capped at 21 million coin. This means as long as the demand goes up, price will go up too.
2. Is Bitcoin like the numbers in your bank account?
Unlike a bank account or any centrally managed currency, a powerful politician can’t just say: “ I hate the look of her face, let’s freeze her bank account and put it under investigation”. Owning a Bitcoin means owning something that no middle man (banks, the government) can easily take from you.
3. Can Bitcoin be hacked?
Unlike centrally managed systems where one or a few powerful people can significantly influence the record, Bitcoin record is decentralised/ frequently checked by computers/miners all over the world. Let’s assume that 100,000 computers are doing this check globally, even if 10,000 computers are hacked, the record won’t be changed.
4. What if the government ban Bitcoin?
Yes, the government can ban Bitcoin, although this is looking to be increasingly unlikely. In the case that a few governments decide to ban it, it will take all the governments in the world and a shut down of the internet in order for it to stop working. As long as there are a few people in the world who think it has value, and they want to use it to exchange for other valuables, they could just use the internet and their number to complete the transaction, or go to a country where it is legal to finish the transaction.
5. What if Facebook or some other big players launch their own coin?
Many companies and organisation have indeed done so. You can launch one as well. It’s like you can copy a part of Facebook code and launch your own social network. However, just like your new social network versus Facebook, the value is in the players. It’s easy to copy Bitcoin but difficult to reach its value due to its huge network of computers all over the world mining, validating transactions, and the numbers of people who think it has value.
Last but not least, a “Facebook” coin would likely fall into the same trap as other centralised currencies: it is potentially controlled.
What if Mark decides that he doesn’t like the look of your face or the number of 000s in your bank account? I don’t think he will do anything unethical, but what if someone like Trump orders Mark to freeze your account because he doesn’t like your last night tweet? It’s the middle man & powerful people problems all over again.
All in all, I find Bitcoin to be a very interesting store of value in the future. Do I think we will make everyday purchases with it? No. I think there will be other digital currencies which we might be using that is faster and cheaper than Bitcoin, potentially regulated as well. However, when it comes to today’s digital gold of the internet, Bitcoin seems to be it.