Bitcoin as a Currency

Before we examine the Bitcoin currency, it is highly important to ground ourselves on the currencies we are already familiar with as a foundation.

Most of us are familiar with government issued currencies which include the US Dollar (USD), Euro (EUR), Canadian Dollar (CAD), and many others.

Government issued currencies are established by government officials within each respective country and serve as a medium of exchange, or simply put, a method to pay others with.

If we go back in time, government issued currencies have been historically backed by something of value such as gold or silver. In this scenario, each piece of money was either made from precious metal itself, or could be exchanged with authorities for precious metal.

The United States of America previously maintained a gold backed dollar where each USD could be converted into a fixed amount of gold. Hand the banker your dollars and receive a fixed amount of gold.

On August 15th 1971, the United States ended the practice of backing the USD with gold and in turn created what we now call ‘fiat money.’ All remaining countries worldwide have followed suit with this shift, ending with the Swiss Franc leaving a 40% gold backing in 2000.

In simple terms, fiat is created by a country writing a law that declares their new currency as having value to pay debts with.

Along with the legal order to use fiat as a payment for debts, the government creating fiat will want taxes paid to them in this fiat currency.

Unlike gold or silver backed dollars, fiat money has no value in and of itself. The word fiat comes from latin meaning ‘let it be done’ and instead represents the authoritative command from a government for the currency to be taken seriously.

So what’s so bad about fiat currencies if everyone worldwide uses them?

In the beginning, implementing fiat currencies wasn’t so bad…

With honest policies, countries are able to smooth out some inconsistencies with a little extra dollar printing here and there to get to stable ground. Sounds great, right?

Over time, a little extra dollar printing here and there turns into a lot of dollar printing every time a small crisis pops up.

To understand the impact of dollar printing, let’s pretend there are only 1 trillion dollars in a country to start with. Every item in the country, including your salary is then priced according to the available 1 trillion dollars. Great, all seems fair.

Now what happens when 100 million more dollars are printed? This could be as simple as a segment of the population wanting a good old fashion government hand out.

Well, now that there is more money in the system, each dollar is worth less since the same amount of goods and services exist. So, as a result, every item on the shelf goes up in price.

So now you find yourself going to the store and the milk you wanted to buy is $0.50 more expensive. Not only the milk, but also every other item in your cart.

Not to mention, your employer did not increase your salary in sync with the government’s printing…and you weren’t one of the select few receiving the newly printed dollars.

The effect? You now have less purchasing power, and as a whole, you can now only afford 90% of the lifestyle you had before.

Oh wait, the banking industry just made another poor choice in regulations and needs the government to print another 100 million dollars to compensate…

There is now 1.2 trillion dollars in circulation, and your milk is up $1.00 per gallon. Your salary hasn’t gone up either and you have lost purchasing power once again. Your $1.00 can now only buy $0.80 worth of goods compared to before.

You see, ever since August 15th 1971 countries worldwide have been stripping you of purchasing power by printing new fiat dollars at will, further decreasing your purchasing power.

The challenging times of 2020 have further exasperated this trend by the United States government adding almost 4 trillion dollars in debt to the books. That’s 4 trillion dollars ‘printed’ with just a few clicks on the federal reserve database.

To connect the dots, those 4 trillion dollars of extra debt make every dollar we hold just a little bit less valuable. And if you haven’t already noticed, the grocery store prices are already rising.

If the past 50 years of fiat currency has taught us anything, this money printing trend will not stop… the trend will surely only get worse.

Welcome to the Bitcoin Currency lifeboat

The Bitcoin system and its currency were created in direct response to the gross mismanagement of fiat currencies by governments worldwide. It is the financial lifeboat we all have needed.

For starters, Bitcoin wasn’t created through a government by law decree like fiat currencies… it was instead created by an anonymous computer programer code-named Satoshi Nakamoto.

Satoshi created the code for the Bitcoin system and then released it into the wild before he disappeared forever. He is definitely not around (or able) to ‘print’ more Bitcoins either.

In-fact, no one person can control the Bitcoin system. That’s great news because the Bitcoin system is programmed to only ever allow 21 million Bitcoins to ever exist, solidifying an unchangeable currency supply.

An unchangeable currency supply is so important because with Bitcoin you never have to worry about your currency value being watered down with freely printed dollars.

What happens when you have a fixed supply of Bitcoins, and demand (i.e. system usage) increases from the general public wanting a currency that the government can’t water down?

It is simple Economics 101 – when supply stays stable and demand goes up, the price will rise!

Let that sink in and consider there will never be more than 21 million Bitcoins.

So where do the 21 million Bitcoins come from? And better yet, how can I get one before it is too late?

Here is where the genius of Bitcoin truly shines: Bitcoins are only created as a reward to miners who successfully add a new block (i.e. grouping of transactions) to the global blockchain.

Miners are paid for their efforts because they perform the very complex mathematical computations required to analyze and organize transactions to and from Bitcoin addresses.

It is very resource intensive in both computing power and electricity to perform Bitcoin mining computations, so to compensate miners and encourage free market competition, the most efficient miner gains the ‘block reward’ after successfully posting to the blockchain.

Put another way, instead of a bank’s IT department sending transactions to another bank’s IT department in the legacy banking system, the Bitcoin system has miners to facilitate transactions. Instead of the bank’s IT department employees receiving a salary from your banking fees, Bitcoin miners receive the Bitcoin currency as their salary.

If you contribute meaningful value such as processing someone’s Bitcoin transaction with your hard-earned computing power and paid for electricity, you should rightly receive a compensation for your time and money.

And there you go, the only way the Bitcoin currency is ever created is through Bitcoin miners providing value. Never printed, and only received for hard-earned work.

Put frankly, there is no free lunch in Bitcoin. To earn Bitcoin, you must provide value, and essentially, you must provide the most value at any given time.

So if Bitcoin miners receive rewards in Bitcoin, and no more than 21 million Bitcoins can ever be created, won’t the system stop working at some point?

The Bitcoin system shines brightly again when examining the schedule in which the Bitcoin currency is released into the world.

For starters, the first Bitcoin block reward was granted on January 3rd, 2009 and generated a reward of 50 Bitcoins. Bitcoin’s block reward continued on at 50 Bitcoins per block mined for the first 210,000 blocks, or approximately 4 years.

For each subsequent block mined, the miner’s Bitcoin block reward is cut in half every 210,000 blocks.

To break it down, from January 3rd, 2009 until November 28th, 2012, miners received 50 Bitcoins per block mined.

From November 29th, 2012 until July 9th, 2016, miners received 25 Bitcoins per block mined, and from July 10th, 2016 until May 11th, 2020, miners received 12.5 Bitcoins per block.

This takes us to current day where miners have been receiving 6.25 Bitcoins per block mined and will continue so until approximately 4 years from May 11th, 2020.

As you can see, the Bitcoin block reward is quickly diminishing per cycle, so at this rate, payout will continue until approximately year 2140.

When all Bitcoins are mined by the year 2140, it is expected that Bitcoin will be worth so much and the network will be so strong that transaction fees alone will sustain miners. Time will tell.

So how do I obtain the Bitcoin currency if I am not a Bitcoin miner?

One thing we know for sure is that over 18.5 Million of the 21 Million Bitcoins have already been mined!

This means over 88% of all Bitcoins ever mined are already owned! Less than 2.5 Million remain…

This means if you want a piece of the most fiscally sound currency that can not be watered down in value, you had best act quick before the price continues to rise.

So in summary, the only way to get Bitcoin now is to either A) Become a Bitcoin miner, which most people won’t do or B) Buy Bitcoin from someone who already owns Bitcoin.

Let’s be honest, buying Bitcoin from someone who already owns Bitcoin is going to be the easiest way.

But how do you even go about buying Bitcoin from someone who already owns it?