What is Bitcoin and Why it Matters | by Shubh Patni | The Capital | Jan, 2021

Many have associated Bitcoin with gold, and now it is popularly known as digital gold. Why Gold?

Gold has been used as money or a store of value for more than hundreds of years, and it still maintains a special position among all the assets. It has retained its value throughout this time because of scalability across space and time.

Chemical properties of gold allow it to be almost indestructible, making it salable across time, and its rarity allows it to store a large value in fewer quantities, making it salable across space. A limited supply of gold and the complexity involved in its mining gives it a high stock to flow ratio, making it a good store of value — A safe Haven.

Even today, after the world has rejected the gold standard, central banks have stockpiles of them reserved because of gold’s high purchasing power and it is only actual money, everything else is just credit.

When the world was under the gold standard, banks issued dollar bills that represented gold in their storage. But as the demand for money kept increasing to fund wars and to make weapons, more and more money was printed, more than the available gold. This led to a decrease in the purchasing power of the money and gold became more and more expensive. While gold retained its value, money was depreciating in value.

This is the problem with the current system of money. The government can print as much money as they like for negligible cost and it is the citizens who face the harshest consequences.

With the advent of the internet, anyone can be connected to anyone in the world. This technology made the blockchain, decentralized network, and Bitcoin possible.

Bitcoin is a cryptocurrency in a peer-to-peer decentralized network that stores the record of all the transactions ever made using blockchain.

Bitcoin, amongst many other problems, aims to solve this problem of an ever-increasing supply of money. Central banks can print as much money as they want because money is not backed by anything. They can create credit out of thin air thus devaluing the currency and leading to inflation.

Bitcoin is made and runs through algorithms, and the maximum supply is fixed at 21 Million coins. No matter what, this number cannot be increased unless there is a 51% attack, which is almost impossible.

The mathematical cryptographic puzzle required to create a block and then mint bitcoin is a proof of work algorithm which gets harder after each halving. The halving takes place every 210,000 blocks (almost every 4 years) reducing the supply of bitcoin with time, giving it a high stock to flow ratio.

I know there were a few technical terms there, but in simple terms, it means that you can use Bitcoin anywhere you want, free from the clutches of any government. You can make transactions anonymously. You can use Bitcoin as a store of value because of its high stock to flow ratio, and no one can increase the supply of bitcoin, making it an ever-increasing value asset.

This is important because bitcoin empowers people with control over their own money, and no sole party can influence the value you hold.

With the traditional money, it is the government that has all the control over it and the ability to create it in unlimited quantities whenever they see fit to fund whatever they think is right. In the short term, it might work and may not have serious consequences, but in the long term, hyperinflation is inevitable.

We have seen the same with various governments around the world, and a prime example is Venezuela. A country which was once the richest in the whole of Latin America in 2000, now has the minimum wage fixed at 0.9 € per month because of 53,798,500% hyperinflation between 2016–2019.

It is hard to even imagine the hardships of people in Venezuela. This is the reason they have shifted to cryptocurrencies to store their value and a medium of exchange.

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