Ten years ago, the 2008 financial crisis was sweeping across the developed world and threatening the financial system. It was the culmination of years of government-induced inflation reminiscent only the depression of the 1930s. The situation ultimately led to the creation of Bitcoin, a cryptocurrency designed to be anti-inflationary.
Bitcoin would be “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution,” the whitepaper said.
Bitcoin embodied the disillusionment with government arbitrarily devaluing people’s wealth. Instead of losing value over time, Bitcoin would rather appreciate as demand for it grows. The mechanism was simple: fixed supply.
Like gold in the real world, new bitcoins would be created through a process called mining which involves solving complex computational problems. The mining difficulty increases with more miners, and only 21 million bitcoins would ever be created. Although oneBitcoin can be divided into several units, the capping has since emerged as a problematic idea.
Apart from trying to solve the problem of trust in fiat money, Satoshi Nakamoto, the pseudonymous creator of Bitcoin was also out to ensure privacy and security. As we all know, identity thieves can literally drain your bank account. Holders of Bitcoin however fully own their coins unless they lose their private keys.
High cost of transactions
Thirdly, Bitcoin also aimed to resolve the high costs associated with bank mediated payments which makes micropayments impossible.
Earlier, we saw how Satoshi Nakamoto went about ensuring Bitcoin’s purchasing power remains strong; by limiting the supply of Bitcoin in the source code. The number of Bitcoin that can also be mined halves every four years. This means that we will never experience any unexpected increase in the supply of bitcoins.
The problem with the fixing supply
This code sounds like a stroke of genius, but it has also proven a liability towards the wider adoption of the pioneer cryptocurrency.
For one, Bitcoin has proven unyielding to shifting demands hence the wild volatility in its value. This gives rise to a real problem; how does one accept it as a form of payment when its value could dip in just a few days or days?
Holders could also be hesitant to release their Bitcoin because its value can rapidly increase. Bitcoin does not leave any room for adjustment other than price. Any such adjustment would, after all, require a trusted authority like a central bank.
A problematic solution
A number of stablecoins have emerged to fill this need. The most prominent one is Tether linked to Bitfinex exchange and pegged on the US dollar. While it has gained some considerable trust in the community, the stablecoin is stalked by controversy.
Only a month ago, it came almost untethered losing considerably to the US dollar. Claims that Tether does not have dollar reserves to back it have long been in the air although the company denies this. Other stablecoin projects vary the supply algorithmically.
The second aim of Bitcoin was to ensure privacy. While Bitcoin allows users to send money without a central authority, all transactions can still be seen in a public ledger. This means addresses can be linked to real identities.
As to whether Bitcoin can provide cheaper payments, we saw the answer at the end of 2017 and early 2018 when transaction costs were as high as $28 per transaction. During this time, there was a lot of congestion in the network. Projects such as the Lightning Network hope to solve this problem. Transactions speed have also proved a problem.
Ten years later, Bitcoin is nowhere near mainstream adoption. Only a handful of merchants accept it as a form of payment. Its value has tumbled from a high of $20,000 in December 2017 to about $6300 now, underscoring its volatility.
Nevertheless, there is more awareness about the digital asset and what it is capable of.
A growing number of notable retailers now accept it although Bitcoin payments are relatively low. For countries with deep economic challenges like Zimbabwe, it provides an invaluable alternative.
Blockchain technology which powers Bitcoin has given rise to a wide array of different uses. Whichever direction it goes, Bitcoin has shown it is possible to create a new type of currency.