With a simple Google search, anyone can find an overwhelming amount of information about bitcoin. Unfortunately, a sizeable portion of that information comes from critics who haven’t taken the time to deeply understand the technology and its implications on society. In the crypto community, we call this FUD (fear, uncertainty, and doubt). And, while valid criticisms of bitcoin and crypto industry very much exist, Onramp Academy wants to dispel those misconceptions that simply are not true. Is bitcoin actually bad for the environment? Does it have intrinsic value beyond a speculative asset? Is it true that it’s used by criminals? In our Bitcoin Mythbusting Series, we tackle all of these and more to give you the facts about what bitcoin is and isn’t.
Estimated Time: 7 Minutes
Truth: The Bitcoin Blockchain is the most advanced payment system in existence and bitcoin (the coin) is inextricably linked to the Bitcoin Blockchain (ie: you can’t use one without the other). Thus, should interest in bitcoin as an investment drop, it would still be valuable as a superior method for sending and receiving money.
Gold is tangible. It is used in jewelry and is a highly efficient conductor of electricity. It is used in most electronic devices, including cell phones and computers. Gold alloys are used for fillings, crowns, bridges, and orthodontic appliances. Therefore, the argument goes, gold has intrinsic value as a material. This all but guarantees that there will always be demand for gold, even if it stops being a form of money, and thus provides holders of gold with the assurance that it will retain its value over time.
Bitcoin, by contrast, is digital. It can’t be worn as jewelry or used in making electronic components. You can’t eat bitcoin, decorate with it, or use it in medical applications. Thus, a common criticism of bitcoin is it has no inherent value beyond a speculative asset.
This critique of bitcoin makes the mistake of only looking at bitcoin the financial asset (ie: the coin) and fails to consider Bitcoin the blockchain network. While bitcoin the coin is used to store and transfer value, Bitcoin the blockchain network is arguably the most advanced payment system on the planet. Jeffery Tucker, the Editorial Director for the American Institute for Economic Research, argues that this “payment system is the source of value, while the accounting unit merely expresses that value in terms of price.”
We are used to thinking of currency and payment systems as separate things because this is historically how commerce has worked. If I want a cup of coffee, I can go to a café and exchange cash for coffee. There is no need for a third party to be involved in the transaction. However, the moment we want to transact without being physically present or transact using credit, we have always had to rely on third party payment systems. There is the dollar and there are Visa and Mastercard. There is the euro and there are PayPal and Square. There is the yen and there are Western Union and MoneyGram.
As Jeffery Tucker so astutely points out, for the first time in history, Bitcoin “weaves together the currency feature with a payment system. The two are utterly interlinked in the structure of the code itself.” The real value of Bitcoin lies in the ability to transfer value in a peer-to-peer manner, without the need for a third party and without either party having to take counterparty risk.
Another benefit of being decentralized is that the Bitcoin payment network is far more secure than any traditional payment network. Over the course of more than a decade, the Bitcoin Blockchain has had nearly zero downtime, zero fraudulent transactions and no hacks. Compare that to Visa and Mastercard which had 4.8 million reported instances of credit card fraud in 2020 alone.
Bitcoin is also the first and only globally interoperable payment system while most payment systems are not interoperable. Try sending a Venmo payment to a Zelle account or using Visa to send money to your friend’s bank account, you simply can’t do it. The ones that are able communicate with each other are poorly stitched together and carry with them differing levels of fixed costs, inefficiencies, counterparty risk, settlement delays, and fees. International bank transfers can take anywhere from 1 to 5 days because these legacy systems are not directly connected. Instead, payments go through intermediaries known as corresponding banks, similar to how passengers often have to take a series of connecting flights to arrive at a destination. In contrast, anyone with an internet connection can send money directly to anyone else’s bitcoin wallet anywhere in the world. Bitcoin is borderless and natively global in a way legacy infrastructure never has been.
Not only does the Bitcoin network allow someone to send money anywhere in the world, but it also allows anyone to do it. In order to send a bank wire, one must have a bank account. That immediately prevents a vast swath of the global population from having access to basic financial services. In contrast, Bitcoin is totally inclusive, allowing anyone with internet access the ability to send and receive money.
Bitcoin’s network is also a far cheaper to use. Services such as Western Union or MoneyGram can charge upwards of 30% to send money internationally. Even for those who have access to bank wire services, wire transactions come with a host of fees including bank fees and transfer operator fees that can cost up to $50 per bank involved, depending on the bank you use. Worse still, banks often inflate currency exchange rates to increase their profits. In fact, Wells Fargo was recently exposed to have routinely overcharged clients on foreign exchange rates. Visa and Mastercard aren’t much better. They charge 2-3% on every transaction. In contrast, Bitcoin is practically free to use. In 2020, a Bitcoin wallet transferred $1 billion worth of Bitcoin that cost the sender a grand total of $0.68 in transaction fees. Better still, these large transactions can finalize in a matter of minutes rather than days because one party is transacting directly with the other party.
Historically, the one drawback to the Bitcoin payment system has been its limited throughput. However, with the recent advent of the Lightning Network on top of Bitcoin’s base layer blockchain, we now can scale the throughput of transactions and increase the speed of settlement. Transactions are now being completed nearly instantly anywhere in the world. And because bitcoin (the coin) is a digital bearer instrument, these near instant, global transactions achieve final settlement without the need for credit or third-party intermediaries.
Bitcoin’s Blockchain is the most advanced payment system ever created because it’s the world’s first open, global, singular monetary protocol that anyone on the planet can use. It achieves final settlement faster, cheaper and more securely than any legacy system. This functionality, regardless of bitcoin’s market price, is incredibly valuable in a global economy.
Much like if gold were to drop in value it could still be used for electronics or jewelry, if bitcoin were to drop in value it would still be useful as the fastest, cheapest, most global, and most inclusive payment network ever created. Remittances over Bitcoin’s blockchain are far superior to using services such as Western Union regardless of bitcoin’s price. Using the Lightning Network, businesses can now leverage Bitcoin’s payment rails (rather than having their customers pay with Visa and Mastercard) then immediately convert back to their fiat currency of choice thus saving 2-3% on every transaction and bypassing any volatility risk of bitcoin.
The Bitcoin payment network is the most valuable payment system ever created and bitcoin the coin is merely an expression of that value.