Why Cryptocurrency?

One of the many questions I get when speaking to family and friends about cryptocurrency and blockchain is "Why? What's the point?"

Many questions like this come from those who haven't yet had the opportunity to go "down the rabbit hole" and find out exactly: what it is, what it does, and why it exists, but quick and easy answers tailored for the layman are hard to come by, and for good reason.

There is much to learn.

It is a new form of money, yes, but why bother? What's wrong with just using dollars? How does it hold value when I can't hold it in my hand?'

The answers are as numerous as there are questions, but I'll do my best here to distill it for someone who may just be starting their journey. To begin understanding the world of crypto, I would start by explaining Bitcoin, the world's first blockchain and cryptocurrency. Once someone has a firm understanding of Bitcoin, other projects and concepts can be understood much easier.

Why does Bitcoin exist?

Short story:

Some anonymous guy who went by the pseudonym Satoshi Nakamoto wasn't happy with the way the current system of money worked and set out to invent a better one.

Long story:

NASA-sponsored computer scientists, back in the 1970s, posited an interesting conundrum in the field of computer science, known commonly as the "Byzantine General's Problem". Quite simply, it sought to find a way for an undetermined number of networked computers to all agree on the same data, accounting for errors and bad actors. Sadly, none of the brightest minds in the world of computer science could propose a satisfactory solution that could be applied to the real world.

Until 2008. On Halloween of 2008, an anonymous internet stranger released a whitepaper on a cryptography forum entitled "Bitcoin: A Peer-to-Peer Electronic Cash System". While it had mixed reviews upon its release, along with a healthy dose of skepticism from the cryptography community, it nonetheless laid out not only a solution to the Byzantine General's Problem, but also proposed a real-world application for said solution.

The result was the invention of blockchain technology and the world's first cryptocurrency, Bitcoin.

So why did Satoshi Nakamoto feel the need to create Bitcoin? A clue lies hidden in the very first block upon Bitcoin's launch on January 3rd, 2009. Among all of the nerdy metadata, there was a snippet of plain English that read "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"

Whoever he was, Satoshi marked the 2008/2009 bailouts as a historic event worthy of noting in Bitcoin's first block. Now, I'm not here to get political, but many people were not happy with the banks causing the 2008 financial crisis, and then getting bailed out by the government when their system collapsed due to greed and poor planning.

So that's great and all, but how does Bitcoin actually help this situation?

Bitcoin and Cryptocurrency provide a number of benefits that traditional finance outlets don't.

1 - Self Sovereignty

2 - Provable Scarcity

3 - Network Reliability

4 - Transparency and Trustability

1 - Self Sovereignty

Bitcoin and cryptocurrency in general do something that no traditional financial system has done since the abolition of the gold standard, and that is allowing participants in the system sovereignty over their own wealth.

When you hand your hard-earned paycheck to a bank, that then becomes the bank's money. In exchange, they give you an IOU. As we've seen, in times of crisis and in bank runs, at the end of the day, the bank doesn't actually have all of the money that is owes to its depositors. This is called "Fractional Reserve", and it is one of the ways that dollars are created.

Conversely, when you own a Bitcoin wallet, you have control over your funds. No one else. That, however can be a double-edged sword, as now you are also responsible for safeguarding your private key, the string of numbers and letters that prove to the world you own Bitcoin.

You see, Bitcoins aren't stored in your cell phone or computer, but rather you can think of it as a very large ledger, kind of like an Excel spreadsheet that shows all of the addresses in the world, and how much Bitcoin they contain.

You can think of a Bitcoin wallet as a set of two things:

• A public address

• A private key

Regardless of the form it takes, a wallet is a combination of these two things. It can be in a computer program installed on your computer, an app on a phone, a physical device you carry around, or even a piece of paper with the information printed on it!

Your public address is what you want to give to everyone. Think of it as the giving the address to your house to anyone who would like to send you mail. As such, your public address is the string of digits that someone will need to send you cryptocurrency. Once it is in your wallet, only your private key can authorize moving funds out of it to some other location, so it is very important to protect your private key at all costs!

Due to the private and protected nature of private keys, that means that no banks, government, or institutions can seize, freeze, steal, or move your crypto from your wallet. It is yours and yours alone! This is true self-sovereignty.

2 - Provable Scarcity

While not all cryptocurrencies have set a hard limit on their supply of coins, the Bitcoin algorithm released on Jan 3, 2009 still to this day has not changed one thing about its rate of issuance. In fact, the algorithm guarantees that only 21,000,000 (21 million) Bitcoins will ever be mined, promising a mathematically built-in scarcity.

You can see here a graphical representation of Bitcoin's total money supply, and its corresponding annual inflation rate. At the time of this writing (Jan 2025), the inflation rate sits around 0.84%, now much smaller than the dollar's inflation goal of 2%.

As time goes on, and inflation happens in our traditional system, more dollars will be chasing fewer goods, and inflation will continue, whereas with Bitcoin, it acts more as a scarce commodity, which is why many since day 1 have coined it "Digital Gold".

3 - Network Reliability

The Bitcoin network is really just a large number of computers all running the same software. Since no one computer is the "boss" or tells other computers what to do, they are all similar to worker ants, concentrating on achieving the same goal. If one worker ant dies, or goes off course, it doesn't affect the group's ability to do their job, as there are still many capable ants working away.

In contrast, the entire internet since its inception has been based solely on the "client-server" model. This has been a necessary design scheme, as previously, there was no way to reliably get a large number of computers to reliably all agree on the same data. Thus, large corporations with robust server farms hold on to our data and process our financial transactions for us. For these instututions, internet security is a major concern and expense, and the end user ultimately pays for the costs associated in the forms of interest and fees.

For Blockchain technology, security is an inherent part of its programming, and implemented from the very start. As such, it boasts a better uptime than Google, having a total uptime since network inception of 99.989%. In fact, only two downtime events have ever happened in the history of Bitcoin. One in August of 2010 for a duration of about 8.5 hours, and a single block in August of 2013, detected and corrected almost immediately.

4 - Transparency and Trustability

Current traditional methods of information and wealth exchange carry with it large risks in the form of single points of failure. This means that a single failure can cause downtime, outages, or even the loss of information, funds, and senstive data.

One very notable example of the failure of centralized client-server model systems was the Equifax data breach of 2017, in which the personal data of over 143 million americans was leaked over the internet. In fact, it was discovered that the main database for Equifax's Argentinian site had the login "admin" and password "admin". Such oversight is possible with centralized systems, and much trust is needed for the public to continually place their faith in these institutions.

Banks currently work with a combination of secrecy and centralization. Their networks are more or less secure, since hackers aren't privy to their software's source code. Intrusions and hacks do happen, but they are mitigated by the crisis teams and vulnerabilties are patched reactively. Banks try to safeguard people's privacy by attempting to not allow anyone to see what others have in their accounts.

Blockchain technology, by contrast, is an open ledger, so anyone in the world can look up any public address on the chain and see how much is stored in said address. Rather than shielding the balances from everyone, Bitcoin is instead "pseudonomous", meaning that your personal identity isn't tied to your funds. While the argument has been made that this keeps the government out of your money, it will have the future benefit of making large scale financial crimes much more easily investigated, by not only law enforcement, but also by the public.

This transparency is built in to Bitcoin, as everyone is able to take a peek under the hood at how it is running and ensure a fair system for all participants.

Bitcoin is often described as a "trustless" technology. What this means is that there is no "trusted" 3rd party intermediary holding on to your funds, or sending them for you. Alice sends money directly to Bob, rather than Alice's bank sending money to Bob's bank.

Conclusion

I applaud you if you've made it this far! While I have done my best in this article to demonstrate the positive aspects of this exciting new technology, there is much growing for it to do, and many steps to be taken to gain the trust of the general public, especially in the face of the many scams out there!

I will address scams, pitfalls, and exchanges in a future post, but always make sure you know what you're doing and get the proper help when you foray into this exciting new world!

Please don't bet your hard earned savings on something you don't understand. Get someone who knows what they're doing to help you, and that's where myself and Coinsight come in! Get in touch with me in inquire about consultation services, what they provide, and how I can help you invest with confidence and safety!

-Chris