Bitcoin (freepik photo)
Bitcoin is a new type of money. Just like a shekel, dollar, or euro, it has one purpose – to receive it as payment for work, services or products we offer, and then to pay with it for services and products we consume. But, Bitcoin has come to do it better than traditional money.
First of all, Bitcoin is digital. In this sense it is different from the currencies of the past such as gold, but not much different from the fiat money we use today, which is nothing more than a series of digital data in the banks’ database.
What makes Bitcoin unique is that it is also decentralized, and not subject to any central control. He does not need a country to issue it, or a bank to guard it and mediate transactions. Instead, Bitcoin is powered by a collaborative computer network based on open source software, and a known set of rules, known as a protocol, that all users of the currency agree upon. The common man is able to keep bitcoins with him, and transfer them via the Internet at the click of a button – in any amount, any distance and independent of any other factor.
Even the initial printing of the money, a role usually reserved for central banks, of Bitcoin is carried out in a decentralized manner – by computers all over the world that perform calculations that help to secure the system and keep it in order, and as a return for their work they receive a reward in the form of Bitcoins. Anyone may join the network, contribute their share and receive a reward, a process called “Bitcoin mining”, but it is not necessary to participate in this process, in order to use Bitcoin (in fact, for most people it is not recommended nor financially viable, due to the costs of operating the equipment).
So why do you need it?
Bitcoin can be used without the need for a bank, the barriers to entry are low and there are no problems of difficulty in moving funds. That’s why the system is competitive, there are no salaries for officials and there are no middlemen who cut coupons. Since the system’s infrastructure is based on innovative digital technology, operating costs are low and therefore Bitcoin can be used easily and efficiently.
There is no need to fully trust one party to perform its work faithfully, and there is no danger that negligence or malice on its part will cause harm to users of the currency. There is also no fear that a technical fault will cause a temporary shutdown of the activity. There is a predetermined schedule for the issuance of coins – the entry of new bitcoins into circulation, and the total number of existing coins is limited by the protocol – which prevents erosion of the value of the coin.
From an ideological point of view, the ability to manage money independently, without being dependent on banks or other intermediaries, has the potential for personal and social empowerment of people. When not only governments control money, the distribution of power in society changes, and for the better.
These advantages, and in particular the fact that there is no need to deal with the question “who will be the one to control the leading currency in the world”, gives Bitcoin the ability to be an international currency that is widely used all over the world, and then there is no need to make conversions for international transactions. Even if there are several different digital currencies, the conversion between them will be simpler than with the currencies that are common today.
And does it really work?
When something sounds too good to be true, it usually is. It’s no wonder, then, that an enthusiastic explanation of the revolution that Bitcoin might bring is often met with suspicion. How does it even work? Can it really live up to all the promises? Is this a scam? Is this a passing fad? Is it really different from everything that has been until now? Why only now does it exist? Why would something virtual without official backing have any value?
Each such question requires an article in itself, but it should be noted that the reason there was no such thing as Bitcoin until now, is that there was no technical way to solve the problem of “double exploitation” in digital currencies in a decentralized manner (trying to pay twice with the same currency). The first solution to this was driven in 2008 by Satoshi Nakamoto (pen name), who also wrote the initial article introducing the system and the first version of the Bitcoin software.
Bitcoin has been around for over a decade. It works, and you can install Shonin bitcoin wallets to receive and transfer coins. The total value of all the bitcoins that exist, as of the time of writing, is about 490 billion dollars, and there are hundreds of thousands of businesses in all fields in the world that accept payment in bitcoins. Recently, companies such as Square and PayPal have also joined, enabling purchases using Bitcoin in millions of businesses and various institutional investors who see Bitcoin as a hedge against inflation that threatens to develop in the markets.
Bitcoin is far from a finished project. It is a very flexible system that has the potential to meet many needs, but a lot of work is still needed to build the infrastructures that enable the realization of this potential. The technology underlying Bitcoin is constantly being upgraded, so that it can respond to the ever-increasing demand. In recent years we have seen significant progress in the regulatory monitor and the ability of authorities around the world to understand Bitcoin, bring it into the framework of existing state rules and create new rules for it where required.
However, the challenges facing the currency today are challenges of usability and the ability to upgrade the system so that it can effectively and easily support the use of hundreds of millions of people around the world.
Author: Manny Rosenfeld, chairman of the Israeli Bitcoin Association and a venture capital investor in the field