Cryptocurrency, and among it, especially quite a well known one, called Bitcoin are two financial subjects that teens always hear about but rarely comprehend. We at Grow strive to change that. This article through the vernacular English language will help you understand the topics like decentralized money, Bitcoin, and the future of money transactions.

To understand Bitcoin, we need to take a step back, and ask ourselves what is money?

Money boils down to value. The face of value has changed multiple times in human history, to cater for practicality and convenience. In ancient times we used to exchange physical goods, such as salt and swords to trade. We then moved onto smaller goods such as processed gold and silver or coins, up until a century ago this mean was popular, with modernization came paper currency. The transition between smaller goods and paper currency was peculiar. What essentially happened is that value became trust. The trust we put into the central heads of state, printed out paper and gave it a certain value. This centralized value controlled and produced by the authority of a state is known as fiat money.

The drawbacks of Fiat money

Fiat money has two major drawbacks, the fact that is issued and valued by a central authority, and due to this the authority, such as an incumbent government or a central bank, has the right to issue unlimited amounts of ‘money’. The biggest issue with printed money is the fact that it is unlimited. So, in theory, if a centralized authority chooses to print more ‘money’ it does not necessarily result in economic inflation. In essence, what the authority is doing is that it is deducting the actual value of ‘printed money. Value always depends on availability.

The reason why a certain object is priced at a particular amount is related to its demand and value. Though a nation may have more ‘printed money it does not mean it is valuable, as the actual value is relative to the availability, if the availability is increased, so does the priced value. This is also the reason why nations cannot just print money to eradicate poverty. The evolution of the internet and the popularization of technology subsequently evolved money and popularized digital banking and transaction. Credit and Debit cards, with digital wallets, are household possessions now. Today, a fraction of the money in the world is in cold hard cash, and the fraction is reducing year-on-year (YoY). Though money changed for the good, centralization still prevailed, the value of money, in a digitalized bank account or wallet, is still dependent on centralized authority.

With centralized money, comes absolute power to the authority, power corrupts. India has had more thousand crore scams than Nobel Laurates. But India aside, corruption is perhaps the most common characteristic of power, globally. Central authorities responsible for fiat money control the flow of value in the world. Mismanagement is a possibility too, mistakes happen, but then at what cost? Due to centralization, if a single body mismanages, the entire economy of the authorized state gets bungled. An extreme example of this is the state of Venezuela. The most personal issue with centralized money is the control the authority has over a stakeholder. Modi’s infamous demonetization in 2016 is an example, of how absolute control gives seemingly unimaginable power. Due to demonetization 500 & 1000 bills worth crores of rupees became useless, overnight!

Up until 2009, there were no alternatives to centralized money. Enter Satoshi Nakamoto, the creator of Bitcoin. The financial crisis of 2008 was the last straw for the creation of a decentralized currency. So, now let us get on to the theoretical definition of Bitcoin. The intention of it’s founders during it’s inception was for it to be used as a peer-to-peer electronic cash system’.

Without a central authority controlling it, Bitcoin solves all the problems of the central authority regulated fiat money. Let us compare Bitcoin to a bank to better comprehend the workings of Bitcoin.

Bitcoin is a transparent ledger and decentralized, compared to a bank, which is a non-transparent ledger and centralized. Bitcoin is ‘pseudo-anonymous’, which means even though, everything is transparent and trackable, one still cannot tell who is sending what to whom.

Example:

Bitcoin cannot be hacked or shut down, due to fact that it is decentralized. In simple words, all the data of the general banks are stored in a single central database. Bitcoin, on the other hand, makes every participant of the system a storer of its data, this is known as Blockchain. The Blockchain is a recurring database, i.e., it keeps updating.  So hypothetically, if one wants to steal money from a Bitcoin address, the hacker needs to hack into the hundreds of thousands of devices keeping the Blockchain.

Bitcoin is fully digital. One cannot physically access a ‘Bitcoin’ or often abbreviated as ‘BTC’. There are just rows and columns of the transaction, as pictured above. If one ‘owns’ a certain amount of BTC, it means they own the right to access a specific Bitcoin address record in the ledger. To send BTC to a different person, a proprietor of the address needs to send the specific amount of desired BTC to their address.

So, what is the hype all about?

Bitcoin is the biggest alternative to the contemporary centralized system. Bitcoin is a form of money no authority like a bank or a government can control. Bitcoin is like the internet in essence. The internet decentralized information from the standard newspapers, Bitcoin decentralized money from the authorities. Bitcoin gives its shareholders full control of their money, only the proprietor has the access to the funds, no authority can demonetize the proprietor’s funds. Unlike centralized banks, there are no middlemen involved in the transactions, thus the transaction fee is negligible. The biggest advantage is its accessibility, one just needs an internet connection and a device to make an unlimited number of transactions with a click of a button.