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What's up with cryptocurrencies and with Bitcoin in particular? Are these virtual currencies really the "Next Big Thing"? Or is it merely a hype, the result of too much money sloshing around the world looking for what to be spent on? This article will give you straight-up facts, worded as objectively as possible. We'll leave it to you to subsequently make up your own mind.
Bitcoin came into being during the most recent recession, the Lehman Brothers crisis. Satoshi Nakamoto was the one responsible for creating and releasing Bitcoin, possibly inspired by the cause of that very recession, fractional banking and all of fiat money's failings.
With this in mind, Nakamoto-san devised Bitcoin to be immune to fraud and manipulation. He did this by ensuring Bitcoin is 100% decentralized. It appears Nakamoto's aim was to give the world a new kind of money that's both sound money as well as a people's money.
The fact that Bitcoin is decentralized renders it a peer-to-peer currency for one thing. This has important consequences, since avoiding the need for a third party authority intermediating value transfer ensures considerable cost savings. In addition, when money flows in a straight line, from sender to recipient direct, it arrives at its destination much quicker.
This is one of Bitcoin's trifecta of critical added values: low-cost, blazing fast money transfers, even when cross-border.
But how does Bitcoin manage to retain top-notch security even in the absence of a VISA, PayPal, Wells Fargo, or Western Union etc? Bitcoin is powered by the Blockchain.
The Blockchain's ingenious algorithm governs each and every one of Bitcoin's transactions and records these, once approved, into its distributed ledger. But this ledger is not an ordinary ledger. Where this ledger differs from your everyday database ledger is that it is copied regularly to thousands of computers that collectively make the Bitcoin network.
In so doing, Blockchain guarantees security so iron-clad, yet fully transparent, that other security-based industries are inspired by Blockchain and have begun researching their own kind of Blockchain. In fact, Blockchain can be applied in a variety of industries and it will, as a consequence of its superiority, change the world in the same way that internet did.
But Bitcoin can do more. Being decentralized also means that nobody can manipulate it to suit their agenda. And since the Bitcoin protocol has been hard-coded to cap the number of Bitcoin in circulation to 21 million, inflation is a thing of the past.
Inflation vs Disinflation
This is huge. Why? Because given that inflation is actually a requirement in the fiat money system, all fiat currencies will for ever continue to degrade by at least 1% or 2% per year. This is fiat money's ideal scenario, because any less would be considered too close to deflation, central banks' nightmare scenario.
By extension, this means that Bitcoin, once all coins have been mined, will always continue to appreciate versus all fiat currencies, including USD, EUR, AUD, JPY etc. In fact, this is already evident now, even as new Bitcoins are continuously being mined into circulation.
In the face of fiat's extremely low interest rates and resultant loss of purchasing power, this makes Bitcoin the preferred currency to hold for everyone with savings, a pension, or other kind of nest egg or cash-in-waiting.
Bitcoin's stability has recently caught the eye of investors looking for a safe haven long-term store of value. Traditionally this role has been played by gold, but of late more and more gold bugs have seen the light and are swapping at least some of their gold for Bitcoin.
After all, Bitcoin has all the powerful safe haven store of value features of gold, and a few extra desirables, such as portability and potential upside, added in for good measure. By going to Bitcoin, the ownership of disciplined money is taking steps into the modern world.
Bitcoin's disinflationary tendency also appeals to populations suffering through demonetization campaigns, such as seen in India and Indonesia, as well as contrarians who prefer to invest in non-corollated assets.
All of the above being said, Bitcoin is still in its infancy and is constantly being tweaked and honed by its developers. Scaling, for instance, is one of Bitcoin's aspects that requires improvement. Of course, no new development with the disruption potential of Bitcoin comes onto the scene with abundant capacity.
Technological revolutions run into their own limitations with the invariably exponential rise in their usage. This applied to the internet and its initial bandwidth issues and also applies to Tesla, which is hamstrung by production bottlenecks.
Suffice to say that nothing is as powerful as an idea whose time has come. And Bitcoin has more than amply shown that its time has come.
By the way for those keen to know if Bitcoin will be playing a role in Singapore's Smart Nation future, click here or here.
I am not an investment advisor and above article is for purely informational purposes and is not to be taken as investment advice. Investors are advised to personally undertake adequate due diligence, or to consult a financial advisor in order to determine what assets - if any - are appropriate to invest in.