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  • Writer's pictureAkeju Abiola

The Bitcoin Revolution: A Continual Battle or a Passing Facade?

Updated: Dec 20, 2023

Bitcoin revolution
Bitcoin revolution

If there's one thing that defines the human race, it is our relentless drive to seek better solutions to everyday problems. Think about it: throughout history, we've constantly sought better ways of doing things, especially in how we exchange value.

Every time a new method emerged, we were quick to realize its limitations, pushing us to explore better alternatives. This cycle continued until we stumbled upon gold, a discovery that eventually gave rise to the gold standard. The gold standard weakened over the years, culminating in the 1944 Bretton Woods Accords, which set the US dollar as the world reserve currency, retaining some level of conversion between gold and the US dollar.


The arrangement seemed great, but the "Nixon shock" of March 1971, when then US President Richard Nixon ended the convertibility of the US dollar for gold, saw the end of the gold standard. The world then moved to fiat money, paper money issued solely by central governments and enforced as the legal tender of that country. Such legal tenders are not backed by gold or other commodities but are enforced as the official means of exchange. 

That is just one of the problems with fiat money; there are many others.


The Problem with Money

The need for a defined means of exchange arose when early humans encountered the problems of trade by barter. We started using commodities as money, including stones, metals, farm produce, cattle, cowries, silver, and gold. Gold immediately became the peak of value exchange because of its great intrinsic value. This changed when it became apparent that gold was a very scarce natural resource, clearing the way for paper money to become the mainstay means of exchange. 


Paper money is not without its challenges; one, it is paper, but issued by the government and enforced to serve as legal tender in a defined country. This means that paper money can suddenly become useless if the government issues a directive declaring it illegal. Even the US currency is no longer backed by gold. Also, paper money can be very bulky and cost very high fees when doing cross-border payments. There is also the issue of delay, as international transfers sometimes take up to three working days before getting to the other party. 


The main problem with traditional means of payment is their centralized nature. Governments issue paper money with nothing backing it. Some governments may print excess money to prosecute elections or spend on frivolities, while the average citizen faces the inflation that follows. Does the Bitcoin revolution present a viable solution to this? We’ll find out.


Bitcoin and its promise of a financial system

Bitcoin is a blockchain-powered digital currency created by Satoshi Nakamoto. It is a very popular cryptocurrency, with many adopters seeing it as the next evolution of money. It has brought many changes to the world of finance and investment, disrupting traditional financial systems and sparking discussions about the future of digital currencies. 


While the promise of a peer-to-peer digital means of payment, a core component of the Bitcoin revolution, is great, some experts believe it is only a passing facade. They see it as a temporary innovation that will eventually fizzle out. Is the Bitcoin revolution truly a passing facade, or will it someday become the dominant means of exchange?


What is Bitcoin? 

Bitcoin, short for BTC, is a decentralized digital currency built on the Bitcoin blockchain. It is a virtual means of payment that transcends borders, making the world akin to a united global village where value exchange is not limited by borders or political dispensation.


Although Bitcoin is the most successful cryptocurrency, it was not the first to be created. There were several attempts at creating a cryptographic digital means of exchange before Bitcoin. One of the most popular earlier attempts was the issuer-based e-cash protocols by David Chaum. Another example was BitGold, which proposed a collectible market-based mechanism to control inflation but was never implemented.


In 2008, Satoshi Nakamoto, an anonymous figure, published the first Bitcoin document titled "Bitcoin: A Peer-to-Peer Electronic Cash System" providing early information about Bitcoin. This document, popularly called the Bitcoin white paper, detailed methods of using a peer-to-peer network to facilitate a system for electronic transactions without relying on trust.


A few people soon keyed into the Bitcoin idea, with the former CEO of Binance, the world's largest crypto exchange, Changpeng Zhao resigning from work and selling his house to go all in on Bitcoin in 2014. For the vast majority of people at that time, Bitcoin was one of those internet money scams they needed to avoid. To be fair, their skepticism might have been rational because, after CZ’s daring risk, Bitcoin fell from around $600 to $200 and remained so until after about two years.


In May 2010, Laszlo Hanyecz made the first real-world Bitcoin transaction by purchasing two pizzas in Jacksonville, Florida, for 10,000 BTC (worth a whopping $360 million today). The successes recorded by Bitcoin saw the introduction of other cryptocurrencies, including Ethereum, Tron, Binance Coin, Litecoin, e.t.c

Bitcoin payments are now more popular than they were 12 years ago. The successes it recorded have led to the cryptocurrency boom we're enjoying today. Its growing acceptance despite the 2017 market crash, coupled with the impact of the COVID-19 pandemic, is a testament that it is an important technology that will shape the future of payment.


How does Bitcoin work?

Bitcoin is a decentralized digital means of payment built on blockchain. A blockchain is a decentralized and publicly accessible ledger that records transactions across many computers such that the transactions cannot be altered once they are recorded. The ledger is divided into blocks that are “chained” and linked together with a cryptographic hash.

The Bitcoin blockchain is secured with the proof-of-work (POW) consensus mechanism, which ensures the continuity of the blockchain and prevents users from carrying out fraudulent transactions. POW is a crucial component of Bitcoin security.


New Bitcoins are introduced into circulation through a process called mining. The process begins with the collection and verification of unverified transactions on the network. After they are verified, they are fused into a blockchain (a block of data chained together by a cryptographic hash).

Next, miners compete to solve a cryptographic puzzle known as the proof-of-work. The first miner to solve the proof-of-work puzzle notifies others on the network, who then verify its correctness. If it is valid, the new block is added to the existing blockchain.


Finally, the winning miner is rewarded with a specific number of newly created bitcoins. This is known as the block reward, which was initially 50 BTC per block. However, Bitcoin undergoes a halving process approximately every four years. The most recent halving occurred in 2020, reducing the reward to 6.25 bitcoins per block. In addition to the block reward, miners also earn transaction fees.


The Bitcoin mining process serves two primary purposes: it validates transactions on the Bitcoin network and introduces new Bitcoins into circulation. The combination of proof-of-work, decentralized verification, and a capped supply of Bitcoins (21 million) contributes to the unique characteristics of Bitcoin as a decentralized and deflationary digital currency.


Bitcoin adoption is on the rise.

Bitcoin has seen an increased adoption drive across various sectors in the past few years. Businesses, individuals, and institutions continue to show growing interest in leveraging Bitcoin to transform their businesses. Notable companies, both traditional and tech-oriented, have embraced Bitcoin as part of their means of payment. For instance, major payment processors like Square and PayPal now allow users to buy, sell, and hold Bitcoin.


Additionally, in 2021, Tesla, under Elon Musk's leadership, briefly accepted Bitcoin as payment for its electric vehicles, strengthening Bitcoin's acceptance in the payments industry. Institutional adoption has been a significant trend, with prominent financial companies and investment funds allocating portions of their portfolios to Bitcoin. Investments from companies like MicroStrategy and Grayscale Investments have contributed to Bitcoin's credibility as a legitimate asset class.

Also, many investment companies, including the world's largest asset manager, Blackrock, are preparing to launch their Bitcoin ETF. This further solidifies the positive impacts of the Bitcoin revolution.


Bitcoin Regulatory Challenges and Legal Issues

When you realize that Bitcoin is a borderless means of payment for all citizens of the world, you already picture some of the legal hurdles it may face. To begin, most countries maintain firm control over the legal tender in their countries, so when Bitcoin started growing, some of them banned it. Meanwhile, many others embraced Bitcoin, recognizing it as a legitimate form of currency or commodity. While others impose strict regulations or outright bans, they create an enabling environment where Bitcoin has seamlessly integrated into the legal tender of their country. For context, El Salvador made Bitcoin a legal tender in September 2021.


The decentralized and borderless nature of Bitcoin is a great challenge for regulators trying to create a unified monetary framework. Legal issues surrounding the Bitcoin revolution include concerns about taxation and its potential use for illicit activities. Although some tax authorities now tax Bitcoin more effectively than before, many others still grapple with how to classify and tax Bitcoin transactions.


In addition, the anonymous nature of Bitcoin transactions raises concerns about its potential use for money laundering and other criminal activities. The Bitcoin network addresses this fear. For starters, Bitcoin runs on a decentralized ledger, meaning everyone on the Bitcoin network can view and verify every transaction. Furthermore, the Bitcoin industry is self-regulating. Many reputable on-chain data analytics companies scan and audit suspicious transactions regularly, helping to sanitize the industry. Every single transaction on the Bitcoin network can be traced to the point where it was converted to cash. This implies that irrespective of the privacy Bitcoin offers, it cannot be successfully used for money laundering or fraud without setting off anti-money laundering alarms.


Bitcoin's decentralized nature also challenges traditional regulatory models, as it mostly operates outside the control of any central authority. For the first time, governments are not in charge of issuing "money.” Citizens can send this “money” across borders for a fraction of the usual fees, and it reflects almost immediately. This presents a huge challenge to governments, as Bitcoin threatens their ability to control the money supply and regulate the economy, making it more difficult to track economic activity. 


While Bitcoin adoption has increased across various sectors, regulatory challenges and legal issues remain significant hurdles. This is because pre-existing regulatory models may not work for Bitcoin. There is also a need to create an effective framework to protect everyone participating in the Bitcoin economy. Regulators must strike a balance between fostering innovation and ensuring end-user protection. As the cryptocurrency landscape continues to evolve, clear regulations will play a crucial role in shaping the future of Bitcoin. While Bitcoin holds great promise for financial inclusion, regulatory uncertainties must be addressed to provide it with the full legal framework it needs to function optimally.


Bitcoin Critics and Skeptics

Despite its potential benefits, Bitcoin faces skepticism and criticism. Many say that Bitcoin is a bubble and will burst someday. They limit it to a speculative asset and argue that its price volatility and the involvement of speculators contribute to an unpredictable market. They fail to understand that regular currencies are also traded on the forex market. The fact that people attempt to predict Bitcoin's price to gain from its price movements does not limit its effectiveness as a viable means of payment, though it challenges it as an effective store of value.

Others argue that Bitcoin lacks intrinsic value, saying its value is not tied to any physical asset or government guarantee, which stands in contrast to traditional currencies or commodities like gold. Furthermore, there are concerns about market manipulation, particularly in a relatively small and unregulated market. Large holders (whales) may influence prices through substantial trades.


There have also been rising environmental sustainability concerns about Bitcoin. This is because the process of creating new bitcoins has become energy-intensive over the years. Critics highlight the energy-intensive nature of Bitcoin mining, especially its proof-of-work system, and its potential contribution to carbon emissions. With a new Bitcoin halving coming up in April 2024, the Bitcoin mining difficulty will also increase, resulting in even more energy demands.

Addressing these concerns involves ongoing dialogue, regulatory clarity, and technological advancements. For Bitcoin to be more widely accepted and understood, it's crucial to involve both supporters and skeptics in tackling challenges and unlocking its potential benefits. 


Bitcoin revolution: a continual battle for a new financial system

As noted earlier in this text, no single method of payment remains forever. Whenever we thought we had the perfect means of exchange, they discovered an underlying challenge or new reality that changed the status quo. For example, Ria stones once reigned supreme as the means of exchange on Yap Island in the present-day Federal States of Micronesia. The stones were not native to the island and required a rigorous process before they were quarried and refined into the beautiful stones they were. This method of exchange continued for centuries until British American David O’Keefe brought in modern machinery to quarry large portions of these stones from a neighboring island. Though they were initially rejected, his stones were accepted, leading to the end of Ria stones’s use as a means of exchange. They thought they had perfected money, but new realities proved them wrong.


The medium of exchange in use today lacks in many areas; these are areas where Bitcoin triumphs. The fact that central authorities issue paper money and guarantee its scarcity also means they can print money at will, often in abuse of existing limits, which leads to inflation. Bitcoin, on the other hand, has a capped supply. Only 21 million bitcoins will ever be created, of which at least 19 million have already been mined. Bitcoins are not created at will; they are only created after a set of complex mathematical tasks are executed. These tasks get more difficult with each Bitcoin halving, with another halving expected next year.


The argument that Bitcoin can be successfully used for illegal activities is disputable. The nature of Bitcoin ensures all transactions are traceable and can be audited by anybody. This is transparency at its finest. With Bitcoin, financial crimes are laid bare and can be nipped in the bud.


Additionally, self-regulatory actors monitor suspicious transactions in the Bitcoin ecosystem. These organizations have worked tirelessly with law enforcement agencies to root out bad actors in the industry. The latest Chainalysis report, released this year, estimates that transactions involving illicit addresses made up only 0.12% of the total cryptocurrency transaction volume in 2021 and 0.24% in 2022; this is even without the presence of a clear regulatory framework in some jurisdictions. When these regulations are standardized and the rules become clearer, illicit transactions will drastically decrease. As for paper money, getting accurate data about the money used for crimes is very difficult because the moment the monies are withdrawn, they are no longer trackable, unlike Bitcoin, which is traceable to the last Satoshi (the smallest unit of Bitcoin).


Although some argue that Bitcoin has no intrinsic value, the fact that it cannot be duplicated but is only introduced into circulation through a difficult process called mining puts some value on it. On the other hand, paper money is paper, and central governments can print it as they deem fit. Also, the comments about the environmental impact are mere distractions. For context, Elon Musk, CEO of Tesla, dropped Bitcoin as a means of payment for their vehicles, some months after he announced they had started accepting it as a means of payment. He cited environmental factors and the unsustainability of Bitcoin mining. However, according to research by ESG analyst Daniel Batten, over 50% of the power used in Bitcoin mining comes from renewable energy sources. This trend is expected to continue increasing until Bitcoin mining becomes carbon neutral.

Finally, Bitcoin is not a bubble; it has stood the test of time and piqued the interests of serious traditional players in the finance industry, including Michael Slayor, Microstrategy, Tesla, Microsoft, Paypal, Starbucks, and Twitch.

 

Since Bitcoin has a limited supply, has addressed sustainability concerns by shifting to renewable energy, is decentralized and away from government control, and has laid the foundation for disrupting the financial industry, should we say Bitcoin will eventually replace paper money? 

No, maybe in the future, but not now.


Although Bitcoin has demonstrated its capabilities, there are some areas industry players have to address before the Bitcoin revolution can be deemed a successful and effective replacement for traditional money

To begin, while Bitcoin is only popular among internet-savvy folks, there is still a need to create applications that will be easy to use among older folks and more accessible to small businesses in rural areas. Some people argue that Bitcoin has no physical form and is a liability because older people are only confident with using paper money and have refused to adopt the different types of Internet banking available today. So, how will they use Bitcoin as a digital means of exchange?

Well, it's interesting to note that central governments around the world are rolling out programs to encourage a cashless society. The present system of paper money will ultimately become a cashless one. Bitcoin has already made that a reality, but industry players still have to define ways to onboard the older generation to use Bitcoin; this may be in the form of integrating USSD or similar technology into the Bitcoin network.


Furthermore, Bitcoin is plagued with network fee challenges. Because Bitcoin uses a proof-of-work system, miners set high fees so they can offset their electricity costs. The lightning network and wrapped Bitcoin have created solutions for this, as network fees are usually below $1. However, blockchain enthusiasts have raised questions about the lightning network.


The battle between custodial and non-custodial solutions is another area that needs improvement. Some experts argue that “not your coins, not your keys” This sounds like great advice until maybe you misplace your phone and cannot recover your keys. Meaning your bitcoins are essentially lost. A crypto exchange presents a better solution, right? Well, so did many FTX users think, but the lack of strong regulatory guidelines, which Sam Bankman-Fried (former CEO of FTX) exploited, saw FTX, then the second-largest exchange in the world, go bankrupt, with bankruptcy proceedings still ongoing at the time of publishing this article. Bitcoin needs clear regulations.


There is a need to create trust in the Bitcoin ecosystem, and there is no better way of doing this than to create clear and standardized regulatory guidelines for crypto exchanges and ensure their strict adherence to these laws. Another pain point for Bitcoin users is the high rate of volatility. This is because the Bitcoin market is still relatively small compared to other financial markets; therefore, big Bitcoin whales sometimes coordinate their buying or selling decisions, causing serious disruptions in the market. This challenge can be solved if most of the world's biggest companies hold some of their balance sheets in Bitcoin, which can increase Bitcoin market capitalization, making it immune to such coordinated moves; however, this will remain a dream until the industry sees clear regulation.


The promise of the Bitcoin revolution is a great one. While Bitcoin trumps the present monetary systems by moving to decentralization, addressing inflation, making payments borderless, and creating a transparent financial system, among others, it has failed to resolve some lingering operational issues like high volatility, clear regulation, and leaving out the older segment of the population. 

Until these challenges are met, the Bitcoin revolution, although not a facade, may remain a continual battle. A battle it may never win.





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