For the first-quarter of 2021, results from Tesla, Inc. showed that they made more profits in the first three months of the year with Bitcoin than they did with their car business.
How profitable has Bitcoin been? Here is what “The Motley Fool” had to say about it:
“As of late evening on Nov. 12 (2021), at the time of this writing, Bitcoin was going for $63,712.34 per token. An initial $100 investment held for a tad over 11 years and four months has gained almost 8,000,000,000% and would now be worth $7,964,042,400. In other words, Forbes would be including you in their annual list of the world's richest people.” Sean Williams “If you invested $100 in Bitcoin…” (2021)
To be fair, anyone buying Bitcoin anywhere near 2010 was either an absolute visionary, or a complete idiot. It might also be true that I call them idiots because I am jealous. Regardless of that, being a major influence on a new generation of coders, the pioneer of a revolutionary industry, and the mother of all Cryptocurrencies, it is only fair that we dedicate some time to understand and appreciate the one-and-only: Bitcoin.
If you don’t know what Blockchain is, I would advise reading “Blockchain in under 5 minutes” before continuing.
Blockchain technology was born 20 years before Bitcoin, when the renowned physicist and scientific researcher, Scott Stornetta, started gaining interest into the future of record keeping. Stornetta witnessed the manipulation of an influential biology publication. This publication was altered in paper, manually, but Stornetta’s work experience in the technology sector gave him some insight into the future of record keeping, which was completely digital. The immutability (safety) of digital records became his mission. He later partnered with Stuart Haber, a computer scientist and cryptographer, which would compensate for Stornetta’s shortcomings in the development of what would come to be the first version of blockchain. Their mission was simple, to implement a system where document time stamps could not be tampered with. In other words, a system which protects the creation, modification, and ownership of documents.
What if we were to use the blockchain technology for digital currency? If Stornetta and Haber were able to use blockchain to safeguard the creation, modification, and ownership of documents, maybe the same technology could be used for currency. After all, these are some of the main difficulties for the effective development of virtual cash. By the early 90’s there were already a substantial amount of companies trying to create the first version of electronic cash. Some of the Bitocin predecessors include B-Money, Bit Gold, Hashcash, and PayPal. Most of these companies had a similar objective, creating safe, easy, and private electronic transactions. Some of them were even including early-day cryptography, proof of work, and decentralization (concepts still relevant in today’s cryptocurrencies).
The Rise of Bitcoin
Published in 2008 by a genius, or perhaps a team of geniuses, under the alias Satoshi Nakamoto (identity still unknown), Bitcoin’s whitepaper became public. The paper was majorly influenced by the growing relevance of the internet commerce and how transactions required the assistance of third parties, specifically, financial institutions. They focused on the drawbacks of having to deal with these third parties which include high costs, limits on the minimum transaction sizes, the requirement of private information before any money transaction, and the unavoidability of fraud. Then, they proposed a solution:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.” Satoshi Nakamoto, “A Peer-to-Peer Electronic Cash System” (2008)
Bitcoin’s whitepaper proposed a decentralized digital currency. In more comprehensible terms, Bitcoin proposed an electronic currency that operates in a system where there is no single owner. Through a virtual ledger, the general public has access to all transactions made and everyone can supervise the proper creation, modification, and ownership of the currency (sounds familiar?). Users who supervise the transactions must follow a specific process (Proof-of-Work) for the validation of every transaction, and they get rewarded for their work in form of the virtual currency (Bitcoin). Of course, the technical details are more complex.
Through blockchain, Satoshi Nakamoto, was able to provide an alternative way for people to buy, sell, and own money without the need of financial institutions. All while claiming to improve security, transparency, costs, and overall user experience. Here are the references that Satoshi Nakamoto included in Bitcoin’s whitepaper:
Bitcoin's promises were huge, it could singlehandedly disrupt the whole world’s banking industry and change the way people think and interact with money. Almost 14 years after the publication of Bitcoin’s white paper, was the digital currency able to keep its promises? Absolutely not. First, it’s not even considered real money. Economists agree that money performs three functions:
1. Unit of account: Helps people understand how much wealth they have
The volatility of Bitcoin’s price is such that to comprehend someone’s wealth, Bitcoins are usually expressed in Fiat Currency – Think of USD or EUR. It does not really help people understand their wealth
2. Medium of exchange: Facilitates trade, to carry out transactions
Although it might be used as a means of trade, it is not widely accepted. Also, most establishments accepting Bitcoin price the items in Fiat Currency and whenever they receive a payment in Bitcoin, they automatically convert it to Fiat
3. Store of value: Something that keeps its value if it is stored rather than used
Once again, the volatility of Bitcoin is such that it’s difficult to imagine it being described as an asset that “keeps its value if stored”
Very easily put, Bitcoin’s volatility is simply too much for it to be considered real money. I will not mention all of Bitcoin’s drawbacks, but here is another one that has caused some serious controversy, and I believe is worthy of mentioning: It’s not green. Remember the “supervision” process mentioned above (Proof-of-Work)? To approve any transaction, supervisors are required to solve mathematical “puzzles”. Solving these puzzles requires energy, and because supervisors are paid in Bitcoin, a rise in the price of the digital currency draws ever more supervisors. More supervisors = more energy. Here is what Columbia Climate School had to say:
“Globally, Bitcoin’s power consumption has dire implications for climate change and achieving the goals of the Paris Accord because it translates into an estimated 22 to 22.9 million metric tons of CO2 emissions each year—equivalent to the CO2 emissions from the energy use of 2.6 to 2.7 billion homes for one year.” Renee Cho, “Bitcoin’s impact on climate and the environment” (2021)
The Real Value
Does this mean that Bitcoin was a complete failure? Not really, I would argue the opposite. Thanks to Bitcoin, we were able to see the willingness of people to try and adopt a completely digital currency, one that defies the current banking system. More importantly, Bitcoin opened the doors for the development of a new class of asset that is revolutionizing the world. It also put the spotlight on Blockchain technology which is now being used to enhance plenty of different industries around the world, from retail to government. Bitcoin was the Minimum Viable Product of Cryptocurrencies; it has paved the way and revealed its shortcomings along the way for others to build on. Bitcoin is a brilliant and bold proposition, and it would be absolutely insane to ask for more from technology that was developed in the earliest of days.
Thanks to Bitcoin’s public drawbacks, current creators can develop solutions to prevent these and have a real opportunity at building the future of digital currency. Take volatility and ecologically unsustainability for example, other computer scientists and experts of sort have already provided solutions:
For volatility, “stable coins” were proposed. These are Cryptocurrencies pegged to Fiat Currency (1 Crypto Coin = 1 USD). This technology is making way for further development in the financial sector. For example, think of how this could facilitate and massively increase the access to loans while reducing costs. All under a stable digital currency
For sustainability, other transaction supervision methods like “proof-of-stake” have been proposed. These methods, which require considerably less levels of energy, are making way for scalable Cryptocurrencies while being ecologically friendly
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