What is the Point of Bitcoin?

by Jun 7, 2022Articles

Articles

What is the point?

We already have banks that store our money…

And apps on our phones that let us zap it between accounts.

It all feels pretty seamless, so why do we need Bitcoin?

All the arguments about convenience and “sticking with what we know” make sense.

It’s the reason that we’ve kept the systems we’ve had in place for so long.

We trust that money works and inertia stops us questioning the status quo.

But there’s a problem…

Two thirds of us don’t trust banks or governments

For centuries we didn’t need trust because currency was backed by gold.

Miners can’t magic up an infinite supply of gold mines and governments can’t print it.

Gold was scarce and therefore valuable.

Up until 1931 our money was pegged to gold under the ‘Gold Standard’ meaning any paper money you carried entitled you to that weight, in pounds, of the gold it denominated.

Safer than carrying around a gold nugget in your wallet and more convenient if you want to buy a small ticket items like a loaf of bread.

Money, in this sense, was real.

But without the Gold Standard, where does the trust come from?

It has to come from…

a) Governments who tell us it’s worth something
b) Our shared belief that it IS worth something
c) The banks we rely on to look after it for us

This is a terrifying state of affairs given that…

66% of adults in Britain don’t believe our banks work in the best interests of society (YouGov Poll, 2018)

Or that…

“76% of the public in England don’t trust MPs to take decisions that will improve their lives” (Carnegie UK Poll, 2022)

Let’s be frank…

Gold is volatile, it constrains governments (sometimes a good thing) and it’s also incredibly inefficient in many ways.

But it’s also very difficult to cheat…

… and so once again we circle back to trust.

Because the more conceptual money becomes, the easier it is for self-interested third parties to manipulate and exploit.

Until you arrive at the situation we find ourselves in today:

A precarious financial system held up by an almost supernatural belief and run by institutions that two thirds of us don’t trust.

And it gets worse…

Up to 87.25% of your money doesn’t exist

If you want to take all of your money out of the bank tomorrow you can.

(Although prepare yourself for a grilling by an overzealous clerk).

If everybody from your bank tries to do the same thing the whole system collapses.

That’s because they don’t actually have it.

Legally banks only have to hold a fraction of their customers’ money in reserve.

That figure is just 12.5% in the UK and 10% in the US.

This ‘minimum reserve’ is based on the assumption that it’s highly unlikely all of a bank’s customers would try to withdraw their money at the same time.

So they can invest the rest wherever they please.

Allowing banks to invest our money is great when it helps nurture growth.

It can mean a mortgage on a house or a loan to start a businesses. It can help create more opportunities, security and jobs.

The problem is banks can make more gambling our money on high risk loans, futures, derivatives and other exotic financial instruments.

They have a mission and a mandate to make as much money as possible.

So that’s exactly what they do…

The psychopaths gambling with your money

Christopher Bayer, a Wall Street psychotherapist, estimates that there are 10X as many psychopaths operating in the financial sector as there are in the general population.

The ability to make reckless, guilt-free decisions with billions of pounds of other people’s money in the pursuit of bonuses and share holders’ demands is alarming to say the least…

Especially as these are already risky investments…

Add to that a lack of transparency… cheap debt from the government… an endless supply of other people’s money to gamble with and you have a toxic cocktail.

So when things go wrong, like they did in 2008, with rising inflation, sub-prime lending and the subsequent global economic crash it can be catastrophic.

There’s panic as people realise with sobering clarity for the first time that the bank doesn’t actually have their money… and that it was all just a shared delusion.

You get a run on the banks…

Emergency government bailout packages (£500 billion in the UK) are put together for an industry who gambled our money with impunity.

It’s an extraordinary situation where we’re now giving money to the banks who lost our money in order to prop up its existence.

Bitcoin was created in response to the 2008 crash

Trust in banks and the financial system was at an all time low…

In 2008 Satoshi Nakamoto, Bitcoin’s creator, wrote the whitepaper which set out Bitcoin’s goal to create “a purely peer-to-peer version of electronic cash…”

One which “would allow online payments to be sent directly from one party to another without going through a financial institution.”

It “proposed a system for electronic transactions without relying on trust.”

In other words:

1) Remove the self-interested third party (the bank gambling your money, the government printing it)

2) Create a system of transaction that’s fast, bullet proof secure (and removes the need for trust in the first place)

That’s what Bitcoin does, it automates trust.

It can’t be created out of thin air.

It can’t be manipulated or exploited by banks or governments.

Bitcoin is a form of ‘digital gold’

Like gold, Bitcoin is scarce.

The maximum supply is capped at 21 million Bitcoins and this supply is ‘mined’ slowly, over time by crypto miners.

It’s a painstaking and costly process which tries, cryptographically, to be analogous to gold mining.

You can’t just make more of it at a whim and there’s no-one entity (no government or financial institution) who runs the show.

No shortcuts, no monopolies. You can’t print it or fudge the numbers.

If you have a Bitcoin in your wallet it’s tangible and real, just as sure as if you had a gold bar in your hand.

This is a hard thing to get your head around at first.

I’ll cover this in more detail in a future article but every Bitcoin transaction that takes place is indelibly inked on an open ledger.

Transactions are confirmed cryptographically by a network that contains tens of thousands of computers – independent from one another – solving complex mathematical problems. It’s observable by billions more.

Imagine a bank vault secured by tens of thousands of other bank vaults… each with different moving combinations… all distributed randomly across the world.

And the real world benefits are impressive…

No-one can manipulate your money – you own and have access to all of it. No bank investing 87.25% of your holdings elsewhere, no government printing more

You can move it cheaply and quickly – no need for a middleman, no clearing house taking a cut, no bureaucracy delaying the process

It’s open to everyone, even the ‘bankless’ – People in developing countries without access to a bank account or the traditional financial system can setup a wallet in minutes

Do we think Bitcoin will become a world currency and the solution to all our problems?

Not necessarily.

Does it have its challenges? Absolutely.

These include high levels of volatility (which you will have no doubt seen plastered across headlines).

Right now it’s positioned as an asset, like ‘digital gold’.

And that’s how I treat it.

I have a decent sized position in Bitcoin but in the sliding scale of crypto developments it’s one the projects I’m least interested in which is saying something.

The technology behind it is truly thrilling.

It’s spawning other projects in the crypto space using the same tenets – systems of automated trust – which I believe could be truly world changing.

If you want to see what myself, Frank and our head trader Michael are invested in right now you can take a look at our academy offering here. This is a discounted price for Vanguard readers and you can try it out risk-free.

The key takeaway

Bitcoin was setup as a response to the 2008 crash. To banks gambling with our money and governments printing it at will…

It was setup as a way to automate trust in the finance.

I keep repeating that word trust because it’s central to crypto.

You place trust in ultra secure technology to make transactions, rather than players motivated by greed or self-interest.

I truly believe the technology behind Bitcoin (Blockchain) is a gamechanger and the projects which are spawning as a result have the potential to be world changing.

I can wait to deep dive into this in more detail over the coming weeks.

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