Why Does Bitcoin Work?

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During the past few years, there has been a tremendous amount of growth in the way people handle virtual currency. Cryptocurrency has grown by leaps and bounds and has given rise to one of the most popular forms of virtual currency in the world, which is called Bitcoin. While some people might have only heard about Bitcoin during the past few years, Bitcoin has actually been around for more than a decade. It was first proposed in 2008 and has grown since that time. While there has been a lot of debate during that time, it is impossible to deny that Bitcoin itself has succeeded.

Bitcoin has already been on the market for more than a decade. During that time, it has amassed an impressive market capt of more than $100 billion. This rivals some of the largest companies that are traded on the New York Stock Exchange. Bitcoin has even given rise to an impressive ecosystem for those who are looking to start a business using this type of currency. There are lots of open-source projects that are available for investors and business leaders. Of course, Bitcoin has also given rise to plenty of imitators as well.

While it is impossible to deny that Bitcoin itself works, it is still interesting to take a step back and look at why Bitcoin has worked. After all, when the idea was first proposed, it was seen as revolutionary. Therefore, what set Bitcoin apart and why did it go on to succeed? How does Bitcoin act like money? There are a few key points for everyone to keep in mind.

The Inflation Factor that has Led to Time Preference

When it comes to thinking about the overall functioning of a society, it is essential to look at what is known as time preferences. For example, someone who has a high time preference is someone who would rather have things as soon as possible. On the other hand, someone with a low time preference is willing to wait now in the hopes of receiving something even better down the line. This concept is important for the next discussion.

This is important because if there are a lot of people who have a high time preference, they will think about the present and give up on the future. A key point to consider is that there are high time preferences that will spill over into other areas of life as well. For example, some people even develop chronic illnesses due to their high time preferences. Obesity often develops as a result of overeating, which comes from a desire for pleasure at the time. A society that has a loose monetary policy would expect to see a lot of these types of diseases if this were true. With Bitcoin, there is a monetary policy set in stone. Any inflation is expected and calculated. Its supply was capped at 21 million. In this way, Bitcoin was designed by people with low time preference given the low rate of inflation and this idea of ​​planning for the future. This is one of the most important things people should take note of when they first start getting involved. People have to worry about saving money. While it’s hard to see how and why this works, the point is, it does. Those who get involved in Bitcoin tend to save more. This is one of the most important reasons Bitcoin works.

At the same time, when people hold Bitcoin, it also makes the currency more scarce. It also makes Bitcoin more valuable and, therefore, more desirable. This leads to even more people holding Bitcoin. It’s a cycle and it has driven Bitcoin’s value up over the past few years. This kind of cause-and-effect relationship is one of the first and most important reasons Bitcoin works as a form of currency.

The Idea of Fiat Money

It is important to note that fiat money does not belong to individuals. To take a closer look at this concept it is important to take a look at what happened at the beginning of World War I. This war did not originally start as a global conflict but instead as a small conflict between Serbian rebels and the empire of Austria-Hungary. Eventually, it exhausted the bank accounts of nearly every country in the world.

Fiat money allows central banks to inflate certain types of currency, shrinking its purchasing power. This hurts the people who hold that currency and this type of taxation takes place without the consent of those who hold that currency, which is a major problem. Instead of spending the money that the government already has, fiat money essentially means that the government is able to take value from the owners of fiat currency by inflating the currency. With Bitcoin, the monetary policy is expected and calculated. Its supply is capped at 21 million.

It is important to note that fiat is not the only way that money can be seized. Today, most money is not cash. This includes Bitcoin. Seizing money that is being held in bank accounts is another way for money to be confiscated. The point of AML and KYC laws is to monitor the flow of cash, making sure that it does not end up where it doesn’t belong. Bitcoin is different. There is no central party when it comes to Bitcoin. This means that Bitcoin is nearly impossible to seize. Anyone who wants to confiscate Bitcoin will have to have the right keys in order to make this happen. In this manner, Bitcoin is completely different from fiat. This type of security is simply another reason why Bitcoin has become so popular and continues to work to this day.

The Ability to Plan Using Bitcoin

Clearly, Bitcoin has a number of benefits going for it. Because of the security of Bitcoin, it is easier for people to plan using it. When money is sound, this allows people to accumulate capital, which is another advantage of Bitcoin. When people are able to accumulate enough capital, this can be used to generate larger projects that will make production more efficient. For example, people can use capital to fund construction projects and other major developments that make society what it is today. This makes people more efficient and more productive overall.

There are some people who wonder why these shouldn’t be centralized, this could lead to the same benefits. This is what happens with most government institutions; however, the decisions on where and how to invest the money often comes down to the minds of politicians who might not have the expertise or the incentive to invest this money appropriately. This results in corruption, waste, and other issues that have to be addressed. Think about the building of bridges to nowhere, which is often a hallmark of pork spending, or waste. On the other hand, if these decisions are made by entrepreneurs, they are more likely to act in the best interest of their investors (and themselves) because they have a strong aversion to loss. This increases the chances of their projects becoming successful down the road. This is another reason why Bitcoin works. It is a sound currency that is used appropriately by the people who use it.

The Future of Bitcoin Is Bright

This is a very brief overview of a popular currency that still works even to this day. While the future of Bitcoin might not be totally mapped out, there is no debating that it is here to stay. Today, Bitcoin has one of the largest market caps even when compared to companies that are traded on the New York Stock Exchange. There are more people who are using Bitcoin today than ever before. In the future, it might even be possible to take Bitcoin into typical shops and restaurants and buy things with it and with second-layer solutions, there are many more possibilities entering the realm of Bitcoin.

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Disclaimer: The information provided on this blog is for informational purposes only and should not be taken as any form of advice.

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