Why Bitcoin Matters The Complete Guide

A mysterious new technology emerges, apparently out of nowhere, but really the consequence of twenty years of extraordinary innovative work by almost anonymous researchers.

Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it.

Then again, technologists nerds are transfixed by it. They see within it colossal potential and spend their evenings and ends of the week fiddling with it.

In the mainstream products, companies and industries emerge to commercialize it; its effects become significant; and later, many people wonder for what reason its powerful promise wasn’t more obvious from the start.

What technology am I discussing? PCs in 1975, the Internet in 1993, and I believe Bitcoin in 2014.

One can barely accuse Bitcoin of being a uncovered topic, yet the gulf between what the press and numerous peple accept Bitcoin, and what a becoming critical mass of technologists accept Bitcoin is, remains enormous. Here, I will make sense of why Bitcoin has so many Silicon Valley programmers and entrepreneurs generally washed up, and what I believe Bitcoin’s future potential is.

First, Bitcoin at its most fundamental level is a breakthrough in computer science one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.

Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the B.G.P.: [Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.”

More for the most part, the B.G.P. poses the subject of how to lay out trust between otherwise unrelated parties over an untrusted network like the Internet.

The practical consequence of solving this issue is that Bitcoin gives us, interestingly, a way for one Internet user to move a unique piece of digital property to another Internet user, to such an extent that the exchange is destined to be completely safe, everyone realizes that the transfer has taken and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transfer in this way? Think about digital signatures, digital contracts, digital keys (to actual locks, or to online storage spaces) digital ownership for assets like vehicles and houses, digital stocks and securities and digital money.

Every one of these are exchanged through a distributed network of trust that doesn’t need or rely upon a focal middle person like a bank or dealer. And all in a manner where just the proprietor of an asset can send it, just the planned beneficiary can get it, the asset can exist in each spot in turn, and everyone can validate transactions and responsibility for assets whenever they need.

How does this work?

Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to another person who wants to buy into the ledger. Anybody in the world can buy into or sell out of the ledger any time they want – with no approval needed, and with no or exceptionally low charges. The Bitcoin “coins” themselves are essentially slots in the ledger, closely resembling somehow or another to seats on a stock exchange, except substantially more broadly relevant to real world transactions.

TThe Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees.

That last part is enormously important. Bitcoin is the main Internetwide payment system where transactions either happen with no fees or extremely low fees “down to fractions of pennies”. Existing payment systems charge fees of about 2 to 3 percent – and that’s in the developed world. In bunches of different spots, there either are no advanced payment systems or the rates are significantly higher. We’ll come back to that.

Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no prior trust: A sting of numbers is sent over email or text message in the most straightforward case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks – this is the part that is literally similar to cash – if you have the money or the asset, you can pay with it; on the off chance that you don’t, you can’t. This is brand new. This has never existed in digital form before.

Bitcoin is a digital currency, whose value depends directly on two things: use of the payment framework today volume and velocity of payments running through the ledger and speculation on future use of the payment system. This is onepart that is confounding people. It’s not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anyplace, everywhere, with no misrepresentation and negative or exceptionally low expenses) and as a result it has value.

It is maybe obvious right as of now that the value of Bitcoin currency depends more on speculation than actual payment volume, but it is equally true that that speculation is establishing a sufficiently high price for the currency that payments have become practically possible. The Bitcoin currency must merit something before it could bear any amount of real-world payment volume. This is the work of art (chicken and egg) issue with new technology’ new technology isn’t worth a lot until it’s worth very much. Thus the way that Bitcoin has risen in value in part because of speculation is making the reality of its usefulness arrive much faster than it would have otherwise.

Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are purchasing, using and selling Bitcoin, from one side of the planet to the other. The overall numbers are still small but they are growing quickly. Furthermore, convenience for all participants is quickly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to try and get on the Internet. Presently it’s not.

The criticism that merchants won’t accept Bitcoin because of its volatility is also inaccurate. Bitcoin can be used entirely as a payment system’ merchants don’t have to hold any Bitcoin currency or be exposed to Bitcoin volatility whenever. Any consumer or merchant can trade all through Bitcoin and different currencies any time they need.

Why would any merchant online or in real world need to accept Bitcoin as payment, given the currently small number of consumers who need to pay with it?

Let’s say you sell electronics online. Profit margins in those businesses are usually under 5 percent, which means conventional 2.5 percent payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers or taxed by the government. Of all of those choices, handing 2.5 percent to banks to move bits around the Internet is the worst possible choice. Another challenge merchants have with payments is accepting international payments. If you are wondering why your favorite product or service isn’t available in your country, the answer is often payments.

In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers.

Since Bitcoin is a digital bearer instrument, the recipient of a payment gets no data from the source that can be used to take money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.

Credit card fraud is a big ordeal for merchants, credit card processors and banks that online misrepresentation identification systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraudulent. Thus, numerous online merchants are forced to dismiss 5 to 10 percent of incoming orders that they could take without fear the customers were paying with Bitcoin, where such misrepresentation wouldn’t be possible. Since these are orders that were coming in as of now, they are inherently the highest margin orders a merchant can get, and so being able to take them will drastically increase many merchants, profit margins.

Bitcoin’s antifraud properties even extend into the actual world of retail locations and shoppers.

For example, with Bitcoin, the huge hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have been possible. Here’s how that would work:

You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. You click “Confirm” on your phone and the transaction is done (including converting dollars from your account into Bitcoin, if you did not own any Bitcoin).

Target is happy because it has the money as the form of Bitcoin, which it can promptly transform into dollars in the event that it needs, and it paid no or extremely low payment processing fees; you are happy because it is basically impossible for hackers to take any of your own data; and organized crime is miserable. “Indeed, maybe hoodlums are as yet cheerful: They can try to steal money directly from poorly-secured merchant computer systems. But even if they succeed, consumers bear no risk of loss, fraud or identity theft”

Finally, I’d like to address the case made by certain critics that Bitcoin is a sanctuary for terrible way of behaving, for criminals and terrorists to move money anonymously with impunity. This is a myth, fostered mostly by sentiment press coverage and an incomplete understanding of the technology. Similar as email, which is quite traceable, Bitcoin is pseudonymous, not anonymous. Further, every transaction in the Bitcoin network is tracked and logged forever in the Bitcoin blockchain, or permanent record, accessible so anyone might be able to see. Therefore, Bitcoin is considerably easier for law enforcement to trace than cash, gold or diamonds.

The future of Bitcoin?

Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook.

In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. Those constituencies are 1 consumers who pay with Bitcoin, 2 merchants who accept Bitcoin, 3 “miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and 4 developers and entrepreneurs who are building new products and services with and on top of Bitcoin.

All four sides of the network effect are having a valuable impact in extending the value of the overall system, however the fourth is especially significant.

All over Silicon Valley and all over the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. we are seeing a rapidly increasing number of outstanding entrepreneurs – not a few with highly respected track records in the financial industry – building companies on top of Bitcoin.

Consequently alone, new challengers to Bitcoin face a hard uphill battle. Something is to displace Bitcoin now, it should have sizable improvements and it should happen rapidly. Otherwise, this network effect will carry Bitcoin to dominance.

One quickly self_evident and enormous area for Bitcoin based innovation is international remittance. Every day, a huge number of low-income people go to work in hard jobs in foreign countries to make money to send back to their families in their home countries more than $400 billion altogether yearly, according to the World Bank. Every day, banks and payment companies extract mind boggling fees, up to 10 percent and sometimes even higher, to send this money.

Switching to Bitcoin, which charges no or extremely low fees, for these remittance payments will in this way raise the quality of life of traveler laborers and their families significantly. As a matter of fact, it is difficult to consider any one thing that would have a faster and more positive effect on such countless people in the world’s poorest countries.

Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. Only about 20 countries around the world have what we would consider to be fully modern banking and payment systems; the other roughly 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Even Netflix, a completely virtual service, is only available in about 40 countries. Bitcoin, as a global payment system anyone can use from anywhere at any time’ can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.

And even here in the United States, a long-recognized problem is the extremely high fees that the “unbanked” people without conventional bank accounts pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system.

A third intriguing use case for Bitcoin is micropayments, or ultrasmall payments. Micropayments have never been possible, despite 20 years of attempts, because it isn’t cost powerful to run little payments (think $1 and beneath, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The fees structure of those systems makes that nonviable.

All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility currently down to eight decimal spots after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anybody in the world for nothing or close free.

Think about content monetization, for example. One reason media businesses, newspapers battle to charge for content is because they need to charge either all (pay the entire subscription fee for all the content) or nothing (which then, results in all those terrible banner ads everywhere on the web).All of a sudden with Bitcoin, there is an economically viable way to charging arbitrarily modest quantities of money per article, or per section, or each hour, or per video play, or per archive access, or per news alert.

One more expected use of Bitcoin micropayments is to battle spam. Future email systems and social networks could refuse to accept incoming messages except if they were went with tiny amounts of Bitcoin tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages free of charge with impunity.

Finally, a fourth interesting use case is public payments. This idea first came to my attention in a news article a few months ago. A random spectator at a televised sports event held up a placard with a QR code and the text “Send me Bitcoin!” He received $25,000 in Bitcoin in the first 24 hours, all from people he had never met. This was the first time in history that you could see someone holding up a sign, in person or on TV or in a photo, and then send them money with two clicks on your smartphone: take the photo of the QR code on the sign, and click to send the money.

Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere in the world who sympathize with them send them money on the spot. Bitcoin is a financial technology dream come true for even the most hardened anticapitalist political organizer.

The next few years will be a time of incredible show and excitement revolving around this new technology.

For example, a few prominent economists are profoundly doubtful of Bitcoin, despite the fact that Ben S. Bernanke, formerly Federal Reserve chairman, as of late composed that digital currencies like Bitcoin may hold long-term promise, especially in the event that they promote a faster, more secure and more efficient payment system.” And in 1999, the unbelievable financial specialist Milton Friedman said: “One thing that’s missing yet will before long be created is a reliable e-cash, a method by which on the Internet you can move assets from A to B without A knowing B or B knowing A_ the way in which I can take a $20 bill and hand it over to you, and you may get that without knowing who I’m.”

Further, there is no shortage of regulatory topics and issues that should be addressed, since practically no country’s regulatory framework for banking and payments expected a technology like Bitcoin.

However, I hope that I have provided you with a sense of the tremendous promise of Bitcoin. A long way from a simple freedom supporter fantasy or a basic Silicon Valley practice in publicity, Bitcoin offers a sweeping vista of opportunity to reimagine how the monetary framework can and ought to work in the Internet era, and an catalyst to reshape thatsystem in manners that are more powerful for people and organizations the same.

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