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Bitcoin, the forerunner of cryptocurrencies, was a technology created based on the characteristics of gold. So to begin understanding Bitcoin, we have to understand well what currency is.
Analyzing the historical context, we can see that several goods have already been used as a bargaining chip. So, the idea of currency would be some kind of commodity that was accepted as a means of exchange throughout the world.
Surplus items were used as currency in ancient communities over the years. Example was wheat, cereals, animals, metals, spices and various other articles
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For a given commodity to be characterized as money, it needs to fulfill three functions. The first function is to serve as a means of exchange, which is nothing more than a type of product that is accepted by all, to buy and sell other goods, or assets, thus giving it a certain value.
The second function is to serve as a unit of accounts. See that the goods are now quoted using a certain currency for this. For example, a barrel of oil costs X dollars, a ship costs 100x dollars, and so on. So a unit of account is when you use a certain thing as a reference to apply value to others.
The third function, on the other hand, is to serve as an applied reserve, that is, a commodity, which even if you keep it stored over a certain period of time, it may have a purchase value over that time, and may even increase this purchase value, when it is valued.
So to be characterized as currency, the article needs:
Another important issue is the guarantee that this particular commodity, or currency, continues to be accepted as an article of exchange over time, as it would make no sense to keep something that would no longer be accepted in a while.
Gold is an article that once was, and continues to be widely accepted as currency and also as backing for coins because it has fulfilled this function very well for hundreds of years.
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It has been accepted by humanity for years as an article of exchange, in addition to being a unit of account, as it attributes value to other goods, and due to its constant appreciation, gold has always been used as a store of value.
An important fact that characterizes gold is its scarcity. A government could then put its currency, money, backed by gold, however it could only issue more money if it bought or mined more gold.
Due to these limitations, the gold standard was abandoned, and governments could issue money, in the amount they wanted, thus causing the issued currency to lose value, due to its large supply in the market. This is the fact that causes the well-known issue of inflation.
Inflation would then be the loss of purchasing power of a given currency. This is an important issue, as the state can print more and more currency, and the value we have in our hands loses its purchase value. So, in the end, we are the ones who pay the bill for this system.
From this assumption, we assess that the less of a given commodity is available, the more it is worth and the more merchandise available, the less value it will have.
With the above explanation, it is then understood that a state currency, which is the currency issued by countries to be used as an article of exchange, purchase and sale, has no backing. It was still believed that the state currency had some ballast, but the truth is that this same currency is issued only by the will of the legislator, that is, it wants to make money, presses a button and manufactures more.
Based on the principle of having already understood what currency is and what ballast is, let's evaluate the issue of Bitcoin. Satoshi Nakamoto, who doesn't know whether he is a person or a group, managed to accomplish something that was sought after in ancient times. Turn something into gold.
Understanding better, Nakamoto defined that Bitcoin, would also be a limited currency, just like gold, and would only have 21 million units available. This protocol is already defined and included in the Bitcoin programming, and cannot be changed.
This scarcity creates value, just like gold. Evaluating the issue of the US dollar, it has already lost 96% of its value, since it started its creation, this due to the indefinite printing by the US government and central bank.
There is no one who has control, and can make more than the 21 million units of Bitcoin already predetermined to be produced. The Bitcoin issuance curve is downwards. It is believed that the goal of 21 million units will be reached in 2140, and the closer you get to that date, the more difficult your production will be.
An important point is that there is no central bank in the world that controls Bitcoin. Anyone in the world can create a Bitcoin, thus using computational power to mine the currency.
Mining Bitcoin is using data processing to record and validate transactions. There are thousands of miners around the world, contributing computational power to process transactions. Then miners can create their Bitcoins, as payment for mining work.
A miner is a company that invests in computers and machines that provide processing capacity for Bitcoin transactions. In addition to doing this processing, these miners contribute to the security of the network, which has the capacity to process more than 70 million terahash per second.
There is no set of computers on Earth that has greater computational processing power than the Bitcoin network. There is no computer capable of breaking into such a network to make any changes to the blockchain of Bitcoin. The very design of the system makes it armored and safe.
All this technology of being a limited currency, having a large processing network, and great technological power, give Bitcoin ballast and value. In view of all this, and the understanding that state currencies devalue over time, the use of assets that really are a store of value, such as gold, silver and today Bitcoin, becomes more attractive.
In this article, we explain a little about how Bitcoin works and how traditional state currencies work. I hope you enjoyed. If you want to read more about interesting subjects about finance, search our tab Tips. Hug to everyone.
