Although Bitcoin appears to be infiltrating the mainstream, only those who understand it deeply will truly reap its benefits.
Laurence Newman is the cofounder of Coinmama, a bitcoin exchange.
Since this time last year, the number of wallets holding bitcoin has grown by a whopping 8 million, with this growth accounting for over 20% of all 38 million bitcoin wallets in existence. This adoption trend shows no signs of slowing down, as our news feeds continue to fill up with stories about institutional investors and Fortune 500 CEOs diving into Bitcoin. Both the statistics and the stories suggest that Bitcoin is crossing the threshold from the early adopter stage to mass use. Yet, despite the record-high prices and elevated sentiment, many people are still unaware of the true privilege of holding bitcoin and how to do so properly.
Getting into Bitcoin is one thing, but staying around long-term is a whole other ball game. Going back to basics to understand the true nature of bitcoin and how to keep it safe could be the difference maker between financial freedom and failure—not only for newcomers but for everyone.
The Money That Holds You Back
To grasp how much of a privilege it is to hold bitcoin, we first need to understand the other options available to citizens looking to store their wealth or move money around.
For millennia, gold was humanity’s first-choice asset. Not only was the illustrious metal a symbol of wealth and status, it also served as the basis for entire monetary systems. Even the end of the gold standard couldn’t stop gold from growing. Gold has historically done a great job of preserving wealth through time, although its price has dropped slightly throughout this year. However, when it comes to transmitting money through space, gold fails miserably. It is physically heavy, making it a substantial task to carry around for use as currency.
Fiat currencies occupy the other side of the spectrum from gold. Thanks to emergent fintech and digital banking solutions, fiat currencies are well-equipped to transfer value quickly across space. Although the fiat-based economy tends to be constrained by physical borders and a complex web of intermediaries, it is still a functional option for sending and receiving money.
However, preserving wealth in fiat currency is a different story. Because they are no longer pegged to gold, fiat currencies are now solely controlled by the central banks that print them. Printing money has become the proverbial axe that central banks wield anytime crisis strikes. Since the COVID-19 pandemic began, for example, the Federal Reserve has printed over $3 trillion, almost doubling the supply of dollars in a single year. With an unlimited money supply chasing a limited pool of goods and services, the result is almost always inflation. Fiat currency loses purchasing power by the minute, and the cash held in a checking or savings account cannot accrue interest at pace with today’s inflation rates.
Moreover, fiat currency lacks the qualities of a true bearer asset. Fiat assets are subject to seizure by governments, and transfers are limited to recipients who are recognized by the bank. Just ask the customers of Laiki Bank, the second-largest bank in Cyprus at the time, who saw their account balances slashed during the 2013 Eurozone crisis. Over €3.4 billion was drained from customer accounts, even from some customers who had purchased insurance.
Holding The Real Thing And Holding It Properly
Where fiat and gold fail, bitcoin succeeds. Not only was bitcoin the best-performing asset of the past decade, demonstrating an unmatched ability to preserve wealth through time, but it is also gaining traction as a payment system. Unburdened by borders of any kind, bitcoin is comfortably growing into its role as a fast, global option for transferring money across space.
The rise of Bitcoin has fuelled a boom in assets that are deceptively similar to the real thing but fall short in granting the financial freedom inherent in Bitcoin. For example, PayPal’s decision to enable bitcoin purchases, while exciting, came with a notable caveat: users who buy bitcoin through PayPal are unable to withdraw it into self-custody. This inability to control your bitcoin flies in the face of the values of financial self-sovereignty that Bitcoin was designed to enable.
Some fintech platforms have strayed even further from actual bitcoin. A growing surge of retail investors may stumble upon platforms that claim to allow them to buy bitcoin when that isn’t strictly the case. Instead, such platforms facilitate trading in CFDs (contracts for difference), which are synthetic assets that mirror the price of bitcoin. Although CFDs might be suitable for short-term traders, those who wish to accumulate and hold bitcoin will be left disappointed to discover that they don’t own any real bitcoin.
Aside from the fact that it exists outside of government-controlled monetary systems, one of the biggest differences between bitcoin and everything else in the world of money is that it is both an asset and a monetary transaction log. Just as bitcoin meets the basic definition of money, it also meets the definition of a payment processor. As a monetary network, Bitcoin handles transactions between parties by relaying value from one to others, recording all transactions in a distributed, public ledger.
Becoming a first-class Bitcoin citizen requires running your own wallet that contains your own private keys and keeping that wallet safe. Only by buying real bitcoin, not CFDs, and storing it in a secure wallet can you record your balance on the open Bitcoin ledger.
Taking Back Your Money
Once you venture into the world of obtaining and holding bitcoin, you become your own banker. This may seem like a scary prospect, but the banks find this scarier than you do. In fact, the biggest banks and most prominent voices in the industry recognize that their disintermediation by the self-banked is well underway.
When you own bitcoin, you possess a store of value that can be used relatively quickly as a means of exchange, and you also have a means to exchange that value. You can’t hold your bitcoin in your hand, but since we left behind gold doubloons in the 1600s, the only thing we’ve ever been able to hold is a government-issued promissory note of value. The development of credit cards and digital payment processors like Venmo and PayPal has decoupled money even further from physical currency. Bitcoin takes us deeper into financial freedom by decoupling a store of value and its exchange from central banks and financial institutions. This opens enormous opportunities for and gives power to people worldwide who, by relinquishing their hold on cash, gain something far more valuable and powerful.
This is a guest post by Laurence Newman. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.