To understand why Bitcoin is so significant, it’s important to not only understand how Bitcoin works, but also why our current monetary system is unsustainable.
The value of modern currency (called ‘fiat’) originates from the gold standard, whereby each dollar was backed by gold stored in a vault. Problem is, Nixon abolished that standard in 1971. As such fiat quit having any intrinsic value decades ago.
There’s also something called “fractional reserve banking”, which is used by governments and banks all over the world. What this means, is that for every $1 a bank holds in its vaults, its allowed to loan out $9 (the ratio depends on the country). That means that by default, that 90% of all money doesn’t exist, and thus 90% of all money is debt. To make matters worse, the banks charge interest on that debt, thus creating a compounding debt cycle that grows at an exponential rate.
Next comes the Federal Reserve. When the economy collapsed due to the housing market back in 2007, the US government bailed out the banks for $9.1 trillion. People assume that this money originated from a government cash savings account, yet nearly every government on the planet is in debt and unable to hold significant cash savings. Instead, the money came from the Federal Reserve, a privatized banking institution who prints new money, from which the governments borrow at interest.
Let that sink in. Money is freely printed, but not by governments. It’s done by a private institution who then lends that money to the government at interest, which is then used to bail out the private sector. As a tax payer, it’s you who pays that interest. Your income tax doesn’t all go to education, transportation, etc. A large portion of it goes towards paying the interest on money borrowed from the Federal Reserve.
The combination of these three items (abolished gold standard, fractional reserve banking, and the Federal Reserve) all work together to generate inflation. Since it’s inception in 1913, the US dollar has lost over 96% of its value due to inflation. Each year the rate at which it loses value grows, now at 2% per year. Inflation is an endless cycle, and every time it repeats, the problem compounds itself, eventually leading to hyperinflation.
A few current examples. Recently the country of Cypress hit hyperinflation and was bailed out by Europe on the condition that every single citizen’s personal bank account be confiscated. Everyone lost everything. Then this year Venezuela hit hyperinflation, with an inflation rate of 57% per year. Angola, Egypt, Argentina, Nigeria, Yemen, Congo, etc, are also on the verge of facing hyperinflation, with inflation rates as high as 40%. When hyperinflation hits, it takes only a few years, not decades. And when it does, there’s no stopping it. Inflation and currency manipulation has been the downfall of every civilization who’s monetary system was governed by a central party, and will continue to do so unless the very fundamentals of money are changed.
The solution? Transparent, decentralized, deflationary digital currency. Enter Bitcoin (and other crypto assets).
Bitcoin is a transparent public ledger indicating who owns what, and a history of every transaction ever completed. The wallet addresses are all publicly visible, indicating how many coins are in each. This makes it easy to account for all 21 million coins, thus preventing inflation. Yet while the coins are visible, the ownership remains anonymous, protecting the users privacy. All aspects of the data are backed by a form of cryptography that is only hackable through a combined attack of 51% of the worlds computing power. The code is also open source, available to be scrutinized online by anyone, verifiable to ensure that it’s secure.
If you think you’re too late, Bitcoin is still in its infancy. There’s only 2 million wallets right now, and the average one only holds ~0.1 Bitcoin. The infrastructure is still primitive, a pain to buy and trade, the transfer times are slow, etc. The system is being improved every week, as some of the world’s most brilliant developers are contributing. Right now, it’s more like digital gold than digital money, and it’s increasing in price exponentially as people begin to see the value. As the tech improves and more people buy in and the total market cap increases, the market will eventually stabilize, mass adoption will commence, and ultimately Bitcoin (or other cryptocurrencies) will become more practical to use as common currency.
Bitcoin isn’t a fad. It’s a new monetary system that can change the world by undermining the mass manipulation of the world economy.