Exploring the Impact and Benefits of Bitcoin
Bitcoin played a big role in the genesis of BCB Group. BCB Group was set up in 2017 to service the blockchain and cryptocurrency industry with durable financial infrastructure and to cater to an ever-growing number of companies looking for ways to trade and manage digital assets.
To this day, we celebrate the innovation Bitcoin brought to the world, and we closely monitor its journey as it matures as a financial asset . With this article, we’d like to cut through the noise and provide a comprehensive overview of the impact and benefits of Bitcoin. In this way we aim to highlight what we believe Bitcoin has brought to the world and why we’re passionate about providing robust infrastructure (business and trading accounts) to companies in the ecosystem that Bitcoin birthed.
What is Bitcoin and how does it work?
Digital currencies fulfill the same purpose as regular money serving as means of exchange, store of value, and unit of account. They serve these purposes while improving on the current Fiat currencies in a number of ways.
The earliest digital currencies were simply money in electronic form exchanged by banks instead of using paper bills. Before Bitcoin, other digital cash technologies attempted to create an alternative to bank digital currencies. Issuer-based eCash protocols were among the first to rely on computational puzzles as part of currencies. In 1997 Adam Back used computational puzzles called Hash Cash as a scheme to prevent spam. These innovations fuelled the proposals of Wei Dai’s b-money, Nick Szabo’s bit-gold and David Chaum’s eCash, which all helped inspire the creation of Bitcoin.
While previous approaches failed, Bitcoin was the first digital currency that enabled people to transfer value without relying on a central authority to prevent double-spending. This was made possible by its underlying technology, the blockchain, which facilitated the distribution of trust across thousands of nodes running open-source software. When Bitcoin’s creator Satoshi Nakamoto shared his vision for the digital currency, he referred to it as “a system for electronic transactions without relying on trust.”
The deep distrust in traditional financial networks was fuelled by the financial crisis that painted the backdrop to the launch of Bitcoin.
The launch of Bitcoin: 2008-2009
Satoshi Nakamoto, an anonymous individual or group of individuals, published the whitepaper introducing Bitcoin on October 31st, 2008, to a cryptography mailing list, outlining how a “peer-to-peer electronic” cash system” could work and inviting feedback. From the start, Bitcoin has been an open-source protocol built and maintained by community developers.
A few months later, on January 3rd, 2009, Bitcoin launched with Satoshi mining the first block, also called the genesis block. Embedded in the block was a headline referring to the news of the day: “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks.” further illustrating Nakamoto’s disapproval of the existing financial system. Initially, Bitcoin remained pretty niche, with most of its supporters being tech-savvy individuals, cryptographers, libertarians, and crypto-anarchists. They were also the first to start mining new Bitcoin using their spare computing power, as the barrier to entry was very low. Anyone with a GPU could start earning Bitcoin. As the currency’s value slowly grew, more and more individuals began running the Bitcoin open-source software, further decentralizing the network.
One could say that Bitcoin’s launch was most likely the fairest launch of all cryptocurrencies, as it enabled anyone to contribute and earn their share. Bitcoin has come a long way since its early days, now recognized as an alternative asset and traded globally. Below are the ingredients that set it up for success.
The features and traits of Bitcoin
Decentralization
Bitcoin is designed to distribute power across a network of nodes. Decentralized currency empowers individuals to contribute and is the backbone of the trustless system. According to bitnodes, more than 15,000 nodes run the Bitcoin network all across the globe.
When the price of Bitcoin is rising, mining becomes more attractive, often leading to a surge in new miners. Additionally, storage costs declining in combination with the size of Bitcoin growing predictably sets it up on a path to continue decentralizing the base of archive nodes (nodes that store the entire transaction history).
High security
Unlike centralized databases, Bitcoin lacks a central point of vulnerability. It uses Proof-of-Work to enable nodes to reach a consensus on the validity of transactions. As more miners join the network, the harder it becomes to mine a new block ensuring that bitcoin’s blocktime remains consistent.
Any attacker attempting to include an invalid transaction in a block would have to accumulate 51% of the entire hashrate of the network. Doing so would be an uneconomical endeavor and further made difficult by the longest-chain rule.
Sometimes during mining, two miners work on the same block leading to two branches of the chain. Eventually, this gets resolved through the longest chain rule: the chain with the most computing power going into it is the correct chain every other node will follow. So an attacker would have to build a longer chain and maintain it long enough to trick the rest of the network. Despite the significant price drop and recent recovery, the amount of computing power protecting the Bitcoin network (Hashrate) has continued to grow.
Limited supply
As a currency devised during a global recession, Bitcoin addresses one of the biggest problems in modern economics: inflation. Instead of creating an asset that continues inflating and diluting value for its holders, Bitcoin’s total supply is capped at 21 million. While some speak of Bitcoin as a deflationary currency, it remains inflationary until the last block is mined in 2140.
Mining rewards are halved every four years to control inflation. While initially, miners received 50 BTC for mining a block, now rewards stand at 6.25 BTC. Bitcoin is designed around scarcity rather than abundance, therefore often likened to gold.
Removal of third-parties
Only a wallet is required to start using Bitcoin. These crypto wallets can be downloaded as an app or even be something as simple as a key printed on paper. All transactions happen through the protocol and code without intermediaries involved.
With peer-to-peer platforms, users can even onboard without relying on traditional financial infrastructure.
Censorship-resistance
With thousands of nodes globally adding and verifying transactions, it’s nearly impossible for a single actor to censor transactions on Bitcoin. In contrast, banks can and will limit people from using funds for certain things. Unsurprisingly, they will often block and limit funds flowing to and from crypto exchanges. Censorship resistance is a compelling feature enabling individuals all across the globe to transact without obtaining approval from any entity – making Bitcoin a perfect match to fund protest movements but also for donations.
Immutability
Unlike in a centralized system, Bitcoin’s immutability means that no recorded transaction can ever be altered or reversed after it has been submitted. While there is a short time when the risk of a fork exists, after three block confirmations, transactions on Bitcoin are considered final and irreversible. Immutability fights corruption and contributes to the reliability of Bitcoin, as anyone can check all previous records associated with a specific wallet. If anyone wanted to reverse transactions, they’d have to spend vast resources on energy, sufficient to win the proof-of-work game and validate the blocks from the point where they submitted a change. This would cost billions. And when considering the dynamics of demand and supply, anyone attempting to rent such a significant amount of computing power would drive up the price drastically in the process.
No single spokesperson
Cryptocurrencies like Ethereum or Polkadot all have well-known founders who speak and meaningfully shape the network. It’s often argued that this is just another form of centralization. However, Bitcoin’s anonymous founder Satoshi Nakamoto disappeared 12 years ago, in February 2010, and the Bitcoin he mined remains unmoved in his wallet. To this day, his identity remains a mystery. Nevertheless, Bitcoin has thrived thanks to a very passionate community of Bitcoin core developers continuously discussing new ways to improve Bitcoin and implementing changes as voted upon. Some extensive upgrades of the recent parts established through community efforts include SegWit – a signature scheme, and the addition of Taproot.
By disappearing, Satoshi Nakamoto further decentralized control over Bitcoin handing it over to community developers – in the spirit of open-source, accessible networks.
Through a combination of the above, Bitcoin offers substantial benefits for individuals, companies, and even societies.
The key benefits of investing in Bitcoin
- Accessibility and liquidity: All one needs to start using Bitcoin is a Bitcoin wallet. Countries in Central and Southern America use Bitcoin extensively with El Salvador making Bitcoin legal tender. Bitcoin knows no borders making it suitable for cross-border payments. It’s also widely available on crypto exchanges and other p2p platforms as it maintains the status as the cryptocurrency with the biggest market cap and most liquidity.
- Pseudonymity: Since users interact as wallet addresses, they interact more privately than when using the traditional banking system. Bitcoin runs on a UTXO (unspent transaction output) model, where users hold unspent outputs in their wallets. This makes it harder to track coin ownership than in the account model as long as users regularly switch public addresses.
- Independence from central authority: Bitcoin empowers users to hold their private keys, allowing them to become more self-sovereign. It makes them independent from the central government’s and central bank’s monetary policies. Bitcoin’s monetary policy is defined in its code and accessible to all – without sudden changes to the issuance rate or overall supply.
- Transparency: All transactions on Bitcoin are stored on a public ledger, allowing anyone to check previous transactions of their counterparties and the veracity of the network’s state. It ensures Bitcoin’s integrity and promotes accountability and trust within the community. All changes to the Bitcoin protocol are going through a public process from proposal to implementation, highlighting its open-source nature.
Taking a look at Bitcoin’s future
Bitcoin faces a variety of criticisms, the biggest being its perceived negative impact on the environment. Nevertheless, increasingly, Bitcoin miners rely on renewable energy, and countless examples of miners contributing to stabilizing energy grids exist.
Beyond that, we believe Bitcoin will continue positively impacting the world directly and indirectly.
- Banking the unbanked remains a challenge that the traditional financial system most likely won’t undertake due to the low profits to be made. In stark contrast, Bitcoin provides hope to millions to access a scarce currency with fixed monetary policy, which corrupt governments won’t impact. Unsurprisingly, adoption rates of cryptocurrencies are highest in countries where citizens have low trust in their governments and developing countries.
- Challenging expansionary monetary policies as practiced by governments worldwide, often at the expense of future generations, and a drop in purchasing power of their currencies. Bitcoin’s opposite approach challenges expansionary policies and might lead to better awareness and increased levels of responsibility.
- Similarly, Bitcoin and blockchain overall could force financial service providers to innovate and become more transparent and accessible – ultimately benefiting end-users.
- As mentioned above, Bitcoin’s energy demand could turn into a user of last resort, supporting the adoption of renewable energy and increasing access to energy grids in less developed areas, while circumventing the energy storage problem.
Scaling Solutions for Bitcoin – The Lightning Network
Another criticism of Bitcoin is that it is too expensive to use for smaller payments. This is because the design of Bitcoin prioritised high security and decentralisation at the expense of scalability. The implication of this is that we are unlikely to buy our morning coffee with Bitcoin (on the Bitcoin network) as Bitcoin adoption increases as the transaction fees will exceed the cost of the cup of coffee itself.
A solution to this problem is the development of layer-2 solutions that are far less decentralised than the Bitcoin network but offer fast and cheap transactions. The Lightning Network is the best example of a functioning layer-2 protocol for Bitcoin. The Lightning Network has enabled many small communities, businesses and even sovereign countries to start accepting Bitcoin as a transactional currency. As liquidity increases on the Lightning Network this could lead to increasing rates of adoption and more benefits of this network effect.
The development of layer 2 protocols like the Lightning Network is crucial if Bitcoin is to satisfy the purpose of money in that it is a medium of exchange.
A look beyond Bitcoin
With Bitcoin being the currency that led to the creation of BCB, we celebrate its potential and the opportunities it has given rise to. At the same time, we don’t ignore other use cases of blockchain, leveraging blockchain technology’s potential to improve upon the data economy, the art industry, supply chain management, and more. We do feel that Bitcoin’s longer track record and clear use-case make it a lower risk investment option.
We’re looking forward to contributing our part to the industry by empowering businesses to safely gain exposure to this ecosystem and leading conversations with regulators to ensure sensible legal frameworks are implemented.
Please note that this article is not financial advice and we strongly encourage everyone to consider their own financial situation and consult with a financial advisor before deciding whether Bitcoin suits their risk profile. BCB Group does not offer services to retail clients.
The information contained in this document should not be relied upon by investors or any other persons to make financial decisions. It is gathered from various sources and should not be construed as guidance. The information contained herein is for informational purposes only and should not be construed as an offer, solicitation of an offer, or an inducement to buy or sell digital assets or any equivalents or any security or investment product of any kind either generally or in any jurisdiction where the offer or sale is not permitted. The views expressed in this document about the markets, market participants and/or digital assets accurately reflect the views of BCB Group. While opinions stated are honestly held, they are not guarantees, should not be relied on and are subject to change. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This document may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Past performance of the digital asset markets or markets in their derivative instruments is not a viable indication of future performance with actual results possibly differing materially from those stated herein. We will not be responsible for any losses incurred by a client as a result of decisions made based on any information provided.
