Why Invest In Bitcoin?

 


A Need for New Currency

Bitcoin was “discovered” in 2008 in the middle of one of the worst financial crises in recent memory. Largely due to irresponsible practices within the United States housing market, this economic downturn shook not only the United States, but rippled throughout the world economy and is often considered a major factor in the subsequent European debt crisis. In a convoluted chain of risky lending, loans based on the high default rate of subprime mortgages (essentially high-risk loans) were bundled and sold off to other financial institutions. With the inevitable collapse of this house-of-cards lending schema, several large financial institutions found their assets devalued, and investment bank Lehman Brothers Holdings, a significant perpetrator of subprime mortgage lending and holder of many of these debts, filed for Chapter 11 Bankruptcy in September, 2008. Though US federal bailouts prevented the further collapse of large financial institutions, preventing an implosion of the global economy, the stock markets took a steep dive, straining the assets and investments of many organizations and individuals.

This crisis was unique in that it was based on trust. The individuals receiving the loans placed a certain trust in the institutions granting them, and trusted their bankers and investment managers to act in their best interest. The message many received from this financial crisis was loud and clear: you don’t control your money, and the people who do don’t care about you. The stereotype of the backstabbing, slick Wall Street investor had been gaining momentum since the 1980’s and the collapse of the mortgage market in 2008 was seen as the natural conclusion of those pump and dump, short-sighted trading tactics.


Trouble with Traditional Money

It was this message that the Bitcoin whitepaper was a response to. In only nine pages, author Satoshi Nakamoto outlined the mathematical and computational basis for Bitcoin, a “peer-to-peer electronic cash system.” (Nakamoto). With commerce ever shifting towards the digital realm, and more power placed in the hands of the electronic payments processors and clearinghouses that enabled companies like Visa to hold such authority, many people were growing uncomfortable with the amount of third-party organizations required to conduct business day to day. The simplicity, and clear ownership, of cash was ideal, and the ability to privately and anonymously transact ‘off the books’ was a huge bonus. However, fiat currencies like the US Dollar, Euro, or Bolivar come with their drawbacks and challenges that a growing movement of individuals found could be overlooked no longer.

The centralized authorities that issues these currencies had ultimate control over the supply, and therefore distribution, of the currencies. This essentially granted the ability to rapidly, and without cause or warning, bring about significant inflation, devaluing the currency held by individuals in the process. Looking at the Bolivar, for example: Venezuela is known for its economic instability, with many citizens making a living off of acting as black market currency exchanges, and even those who wish to not circumvent the law have to go through shady intermediaries to conduct large transactions (such as buying a home).

This left a void. Physical currencies offered a high degree of control of ownership (if not value), and because of their physical nature were able to be used privately and anonymously. Digital means of payment allowed for international transactions, instant payments, and convenient ways to transfer value from one person to another, but all of these services came at a high price. Fees on international transactions, currency conversions, and even monetary transfers often price these services out of being available to low income individuals or citizens of developing nations. Companies like Western Union, MasterCard, Moneygram, and Visa are able to charge such outrageous amounts because individuals have no other choice than to use their networks and their services.

The Birth of Bitcoin

Enter Nakamoto. A major problem with previous attempts at purely digital currency is what’s known as the ‘double spend problem.’ Essentially, there was no way to create digital scarcity, an innate quality that imparts rarity to an asset and contributes to its perceived value. Digital objects, such as documents, emails, images, and any other file type imaginable, are easily duplicated. With cash, when a customer hands a merchant a bill, the customer

Continue Reading...


Disclaimer: The opinion expressed here is not investment advice — it is provided for informational purposes only. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.

Post a Comment

Previous Post Next Post