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Bitcoin explained | Part 1. Digital VS Paper Money


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Bitcoin, Cryptocurrency, Wallets, Blockchain, Decentralization…
What the hell does this mean?

What is Bitcoin? How does Bitcoin work? Should I invest in Bitcoin? Is it too late to invest in Bitcoin? Average Joe doesn’t need to know the definition of all these geeky words, but if you aren’t an average Joe – feel free to explore it at the bottom of the post.

I will be releasing a series of posts divided by parts, explaining main aspects of cryptocurrency and comparing it to the things we all are aware of.
We will compare these weird and uncommon words to the common things you’ve met before, dealing with bank accounts and finances in general.

So, the very rough comparison would be as follows:

  • Cryptocurrency = Cash
  • Crypto Wallet = Bank Account
  • Blockchain = Bank or Banking System
  • Mining = Verification/Validation
  • Decentralization = Crowd (no central/major authority)

* Please note, these comparisons do not match completely. They are here to make it easier for you to understand the principles.

In Part 1 we will compare cryptocurrency and fiat money (regular money like a dollar or euro) in general. Let’s begin.

 

Cryptocurrency VS Fiat Money

image with cash and coinsicon with bitcoin symbol in orange color

 

The initial idea of cryptocurrency is to use cryptography to control its creation and management, rather than relying on central authorities.

 

1. Emission (supply)

Speaking in a simple language, emission is a process of printing or releasing the new money.
Bitcoin, for example, has a limited supply (emission) of 21,000,000 bitcoins (BTC). January 13 marked an important milestone for Bitcoin when 16.8 million bitcoins (BTC), or 80 percent of the entire Bitcoin supply, were mined (emissioned). This means only 4.2 million bitcoins, or 20 percent, are left to mine (emission) until Bitcoin’s 21 million supply cap is reached.
Fiat money supply is not limited. If government need more money it prints more money for their needs. This process causes inflation and increase in prices on everything.

2. Store of value

Even Fiat money is not the best store of value due to the lifetime depreciation (value reduction), its a great store of value due to its liquidity. Liquidity means that you can easily exchange dollars or euro on anything else. Other great stores of value are gold, jewelry, works of art, however, they are not as liquid as money.

At this point of time, cryptocurrency stands in the middle between illiquid stores of value like gold and money. The reason is very simple, check if Amazon or your local biggest grocery store accepts Bitcoin, you will find out that very little of them do, like small online shops or niche stores who want to attract crypto community attention. While the price is very volatile and rapidly increasing in the long term, companies are not taking the risk yet. However, if you need to send an unlimited amount of money to someone quickly and with low or without fees, there is nothing better than cryptocurrency.

This fact makes cryptocurrency a different thing than precious metal or work of art. Today, we can’t definitely say that cryptocurrency is a money (very small number of merchants accept it), but in my strong opinion, this is a matter of time, once the false fear and uncertainty, created by governments and social media disappear, cryptocurrency will take a huge piece of fiat money share.

3. Privacy

Privacy is one of the major cryptocurrency principles. While all transactions are publicly available and transparent, there are no names, social security numbers, phones or anything personal about the sender or recipient.

Example of Bitcoin transaction details

Bitcoin transaction example showing sender and recipient bitcoin wallet details
As you can see, transactions are completely anonymous and free from any sort of sensitive information.

Summary

See the table of Bitcoin / Fiat money comparison below. Not all “Yes” are positive nor all “No” are negative. Every row represents its positive or negative side. At the end of the table, I summarized points to demonstrate, which one has more positive features.

 Fiat MoneyCryptocurrency
Medium of exchangeYesYes
Store of valueYesYes
Unit of accountYesYes
Privacy/anonymityNoYes
Transactions limitYesNo
Limited supplyNoYes
TransparencyNoYes
Controlled?YesNo

Fiat money: 3 points
Cryptocurrency: 
8 points

 

And these are just fundamentals of cryptocurrency and blockchain, there are tons of use cases in healthcareautomotive industryreal estatefinancial industryretail and many more.

Definitions

Source: Wikipedia

Cryptocurrency – a digital currency (Bitcoin is one of them) in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

Cryptocurrency Wallet – a secure digital wallet used to store, send and receive digital currency like Bitcoin. Most coins have an official wallet or a few officially recommended third-party wallets.

Blockchain – a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a timestamp and transaction data. By design, a blockchain is inherently resistant to modification of the data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”.

Mining – In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network.

Decentralization – the process of distributing or dispersing functions, powers, people or things away from a central location or authority. Within cryptocurrency, decentralization means there is no central system, server or authority which processes transactions on the network. The blockchain is distributed among all participants of the network in the even share, meaning everyone has the same copy of the information, which makes it nearly impossible to manipulate the data for one person or group of people.


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