(Image credit: Unsplash)
As the Internet revolutionised the dissemination of information, creating free and decentralised channels of expression, so did Bitcoin forever revolutionise the way we perceive money.
Bitcoin Rises as A Counter to Central Finance and Abuse
In the post-corona world, it is difficult to be bothered by the previous financial crisis. After all, at the height of the COVID-19 pandemic, the U.S. Federal Reserve injected the economy with $2.3 trillion, saving the stock market from total collapse in March. At this point, trillions of newly-conjured dollars are to be expected to keep the system going, which is why the Federal Reserve’s balance sheet looks like this:
(Image credit: TradingView)
However, massive interventions by the Federal Reserve have been viewed as highly problematic for many decades before the turn of the millennia. The unseen consequences and costs of the Modern Monetary Theory (MMT) economy are yet to unfold. The resistance to such a centrally planned economy is the ideological milieu that birthed decentralised cryptocurrency — Bitcoin (BTC).
As you can see from the Fed’s total asset graph above, between 2008 and 2009, there was also a huge spike. Although minuscule compared to 2020, this spike represents the 2008–2009 financial crisis. As a consequence of banks mishandling their business, Congress enacted the Troubled Asset Relief Program (TARP), representing a $700 billion government bailout for banks. To say that this was unpopular would be an understatement. Soon after, the Occupy Wall Street movement emerged on the scene to express the unpopularity of the Fed bailing out big banks.
Bitcoin Emerges on the Scene
Amid the 2008 financial crisis, on October 31, 2008, a whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System forever changed how we perceive currency. Authored by Satoshi Nakamoto (a pseudonym for a person or a group of people - but certainly not this guy), the whitepaper proposed and detailed a digital currency that would have no central controllers. No governments, no central banks to increase the money supply, possibly creating hyper-inflation.
Powered by the Internet’s computer networks and cryptography, Bitcoin (BTC) resides on blockchain technology that makes it virtually ‘unhackable’. In essence, Bitcoin is a digital ledger distributed across nodes on a computer network. This means that each transaction conducted is immutable and transparent. Every time a new transaction is done, it has to be verified across the entire network, making it near impossible to push fraudulent transactions. Therefore, Bitcoin has unique features that have never before existed:
- Decentralized, as a peer-to-peer currency.
- Secure, as data blocks are cryptographically chained across the network.
- Bitcoin’s supply is finite, making the currency inherently deflationary. There will only ever be 21 million BTC, of which about 18.5 million have been mined thus far.
Bitcoin’s Legitimacy Journey
As a result of Bitcoin having finite, indisputable supply, the cryptocurrency has become a digital gold in addition to being a digital currency you can use as a payment method. Gold, as a precious metal, has always been a store of value to safeguard against currency devaluation, and so is Bitcoin. This was recently confirmed by JPMorgan Chase (one of the biggest bailed-out banks), forecasting that Bitcoin may supplant physical gold in the upcoming decade.
Just three years ago, JPMorgan’s CEO, Jamie Dimon, called Bitcoin a fraud, saying the following:
“I personally don’t understand the value of something that has no actual value.”
From Bitcoin’s launch in 2009 to 2020, its perception has shifted dramatically. For the longest time, mainstream headlines kept framing Bitcoin as underground internet money for criminals, drug dealers, money launderers, and terrorists. Websites like Silk Road boosted this perception, but it soon became obvious that Bitcoin provides a viable alternative to a centrally controlled financial system.
Keep in mind that such previous attempts have failed. In 1996, e-gold was the first instance of people using the term digital currency. However, e-gold was just an internet account that one could use to transfer money to another e-gold account in value equivalent to grams of gold. As such, it was not natively digital, which made it easy for the government to shut it down. Indeed, as e-gold grew in popularity, the US government terminated e-gold in 2008.
Unless one is willing to shut down the entire internet, no entity can shut down Bitcoin because it only exists as a digital code - a cryptocurrency. This makes it more valuable than gold, not less. There are no expenditures for storage and security like there are with physical gold. Bitcoin’s value emerging from its secure nature native to the Internet was recently demonstrated by Iran. It is the first country to accept cryptocurrency to fund imports, in lieu of the US’ crippling and relentless sanctions.
Likewise, Bitcoin drastically accelerated the acceptance of digital currency, setting new monetary standards. Cashless society was already on the way with contactless debit and credit cards, but Bitcoin spurred governments into developing CBDCs (Central Bank Digital Currency). China has already tested digital yuan in real-world commerce, and other nations are on their way.
Bitcoin’s Birthing Woes
For a digital currency that is only 11 years old, Bitcoin has grown immensely, currently sitting over $400 billion AUD market capitalisation. It now has a greater market cap than Disney, PayPal, Coca-Cola, and Netflix. As a system that is not controlled by anyone, and not serving as a tool in geopolitical games, Bitcoin keeps inspiring confidence.
(Image credit: CoinMarketCap.com)
Although Bitcoin’s major flaw remains its volatility, its price trajectory is upwards. Speculative Bitcoin whales and cryptocurrency exchange hacks represent two major drawbacks. The biggest crypto exchange hack happened in 2014 on Japanese Mt.Gox. Consequently, Bitcoin’s price slumped by 36%. Although blockchain is virtually unhackable, crypto exchanges are not. For the price of convenience, people give their private keys to exchanges, which then become a magnet for criminals. This is why we do what we do here at Coinstop, security is important and we’re here to help you best manage your hard earned digital assets.
New Era of Bitcoin Adoption and Innovation
The emergence of the term hodlers ushers in Bitcoin’s new level of enduring credibility and acceptance. Hodlers are individuals/entities holding BTC for long periods, not only not selling but also buying more. Therefore, hodlers are focused on a long-term Bitcoin investment, bypassing trading for the sake of saving.
(Image credit: glassnode)
Likewise, 2020 is the year of Bitcoin’s major penetration on mainstream platforms:
- Square’s Q3 2020 report reveals that over half of Square’s revenue is due to Bitcoin transactions, $1.63 billion out of $3 billion.
- PayPal, the world’s largest payment processing platform with nearly 350 million users, announced the integration of cryptocurrencies into their ecosystem. For the US PayPal users, this is already a reality. For others, both PayPal and Venmo will implement Bitcoin trading by the middle of 2021.
-
London-based FinTech company, Mode Global Holdings, included Bitcoin to serve as a cash reserve for its treasury, for up to 10% of reserve assets.
Lastly, decentralised finance (DeFi) marks the next stage of the decentralised financial revolution, with foundations laid down by Bitcoin and the #2 cryptocurrency - Ethereum. DeFi is largely powered by Ethereum’s blockchain, due to the fact that Ethereum (ETH) has a more flexible logic-scripting language. This allows Ethereum to create decentralised smart contracts that mimic traditional financial instruments of borrowing and lending, but without any governmental and banking mediators.
As a result, people could link their crypto wallets (including hardware wallets) to DeFi networks, transforming them into private virtual banks. Lending money at high-interest rates, called Yield Farming, exploded the DeFi ecosystem in 2020, going from $1 billion on July 1 to over $13.6 billion on November 13:
(Image credit: DeFiPulse.com)
Due to the difficulty of creating smart contracts on the native Bitcoin blockchain, the vast majority of Bitcoins on DeFi’s Ethereum networks are tokenised via Wrapped Bitcoins (WBTC). Some of the most popular DeFi platforms include:
However, there are efforts underway to add smart contracts on top of Bitcoin’s blockchain via sidechains, such as Liquid, Stacks, and RSK.
Takeaway
It is no understatement to say that Bitcoin marks a pivotal point in mankind’s monetary history. From precious metals to fiat currency, to deflationary digital currency, Bitcoin created a new space for opportunities. One that allows a separate financial system outside any central manipulation.
Not only does Bitcoin provide a way to safeguard from currency deflation, as Bitcoin’s skyrocketing adoption in nations like Argentina, Venezuela, and Lebanon attests, it also provides a viable defense against de-platforming, courtesy of the unscrupulous Big Tech. As we end this decade, national digital currencies will become the norm, but Bitcoin is likely to remain a parallel competitive currency with no rulers serving as one of Bitcoin’s biggest draw.