Understanding How Bitcoin Creates Wealth

Understanding How Bitcoin Creates Wealth

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Last Updated on January 7, 2022 by Yetty Akindele

This is a contributed post courtesy of Netcoins.

For most people, myself inclusive trading with Bitcoins and other cryptocurrencies feel like a dreadful task. This is perhaps due to the relative novelty of this type of money and our little to no understanding of how it works to create wealth.

Being a subject area of particular interest to me (since it has to do with making money…lol) and one in which I am still trying to learn the ropes, I jumped at Netcoins offer to contribute this post for the enlightenment of Living Smart and Thrifty readers.

So lets dive in!

2020 will be known as the year of bitcoin. The financial uncertainties caused by COVID-19 caused savvy investors to transfer out of traditional investments into bitcoin instead. Why? Because they see bitcoin as a way to protect their wealth from inflation.  

Why the masses haven’t caught onto this is simply because bitcoin is difficult to understand. It’s complicated, it’s technical, and honestly, it’s probably boring to the average consumer. 

But I think that the biggest reason bitcoin is difficult to understand is because we don’t really understand money. You see, understanding bitcoin asks us to first understand money which most of us don’t. So let’s start with money before talking about bitcoin. 

What is Money? 

Money is a “medium of exchange,” which really just means that it’s a ‘good’ we use to exchange for other goods.

For example, “I will give you $3 for bananas.” 

Money allows us to obtain the things we need to survive. In Canada, our national money is the “Canadian dollar.”

The CAD has value only because of our faith in governments and our tendency to conform to tradition. Other than that, it has no inherent value. it’s just a piece of paper. 

Related: How to invest in Stocks in Canada

The Evolution Of Money.

It might come as a surprise that throughout our history, many goods have performed the role of money.

“Gold and silver most notably, but also copper, seashells, large stones, salt, cattle, government paper, precious stones, and even alcohol and cigarettes in certain conditions.” – Saifedean Ammous.

Let’s take the example of seashells as money. Collecting seashells from the sea requires human effort, time and resources. Hard work is what gave seashells their value.

But humanity has always – and will always – find innovative ways to accumulate wealth. We will invent tools and technologies to collect as much of the money supply with as little effort as possible. 

So when the technology that would allow these savvy sea hackers to capture a ton of seashells was invented, it caused a surge of seashells to arrive in land and therefore lose value. 

You see, technology invents and reinvents money. When money becomes easy to acquire, it loses value and society turns to the next monetary tool. 

Today’s ability to print so much money is devaluing the worth of a dollar. And technology once again is changing the fate of money.

This time, it introduced bitcoin as the next step in the evolution of money. And like the dollar, it’s also backed by our faith in it. 

What Is Bitcoin?

Bitcoin is the first and most popular cryptocurrency (digital money) invented. It was invented in 2008 by Satoshi Nakamoto. 

Fun fact: We still don’t know who Nakamoto is – whether they are a man, a woman, a group of people, or even if they’re still alive.  

Being digital money, bitcoin does not exist in a physical form like a paper bill or coins. Yet it’s still money like the dollar or euro. (And yes, it is legal in Canada.)

Who Controls Bitcoin?

Bitcoin is not owned or managed by banks or governments which means that you can send bitcoin from one part of the world to another part of the world instantly, securely, and with minimal fees. It’s like sending an email where there’s no one in the middle. 

Just that allows you to grasp how disruptive this technology is going to be in terms of international payment systems and trade. But this is just the beginning. 

So if there is no government controlling bitcoin – then who controls it? Bitcoin is managed by a consensus-based network of people and computers, emphasis on the word “consensus” (meaning agreement).  

This means that no decision or changes can ever be made to bitcoin unless there is consensus within the network of people and computers that manage it. 

At least 51% of the network must agree that a change must be made before it can be made. This could be seen as a more democratic and transparent process of managing money and transactions than our traditional banks and governments.  

Another way bitcoin differs from traditional money is that bitcoin is capped at 21 million bitcoin.This ‘scarcity’ means that no one can create more of it, and so (theoretically) bitcoin can hold value in the long-term (remember the seashells story?).

Meanwhile, the supply of dollars is limitless which is why it continues to lose value over time. 

Why is Bitcoin “money of the people”?

About 3 billion people have access to banking, credit and international finance capabilities – they’re mainly upper class and Western nations. 

The rest of the world’s population is underbanked and operates in a cash-based system with very little access to international resources. 

But with the internet, and with bitcoin, the underbanked (and those denied financial support) can immediately participate in an international economy. 

For example, a Venezuelan farmer who is looking to buy seeds for her farm can tap into an international economy by buying bitcoin.

She no longer needs to lean in on a repressive government that is limiting her economic opportunities and withholding wealth from her and the entire nation. 

With bitcoin, no one can seize, freeze, confiscate, or withhold people’s wealth in bitcoin. This is why bitcoin is the money of the people. 

Why is bitcoin so buzzy these days? 

It comes down to one concept: protecting wealth. 

Generally speaking, banks and governments print money in order to “support” the economy. However, when they print money, it doesn’t get circulated fairly throughout society. 

“If you pour honey into a cup, it won’t spread out evenly. It will clump in the middle of the cup first before spreading out.” Austrian economist, Friedrich August von Hayek.⁠

In 2020, governments accelerated money printing as a response to COVID-19. This is good in the short-term because people can now afford to pay their bills, rent, medicine, and food. 

What most people don’t know is that the most expensive type of money is free money. What we get for free today means we pay for in the future in the form of inflation and hidden taxes. 

All this excess money circulating our economy makes the value of the dollar shrink. Your earnings and savings get smaller and smaller with every year. By the time we retire, our money won’t be able to last very long.  

While we might feel safe having our money in banks, the reality is that sitting there is causing it to lose purchasing power. And savvy investors know this. 

That’s why they’re turning to bitcoin. Because with a limited supply of 21 million, bitcoin should hold value in the long-term.

Investors are buying bitcoin now because they think it will be the future of currency, because it’s money that can store wealth in the long-run due to its scarcity, and because it’s the future of technology too.

Bitcoin’s volatility worries me so why should I invest in it? 

This is a fair point, but keep in mind that all forms of investments carry with them an inherent level of risk. 

That’s why we should never invest more than we’re willing or ready to lose. That goes for stocks, real estates, bonds and more. 

Yes, cryptocurrencies like bitcoin are known to be volatile. Its price fluctuates quite a bit on a day to day basis. 

Many bitcoiners can withstand this volatility because they see this as the growing pains of a new, better, more fair financial system being put in place. If they’re right, they will see huge gains. 

What’s important to keep in mind is to zoom out and look at the bigger picture. In 2010, 1 bitcoin was worth less than $0.10. Now (10 years later) in 2020, 1 bitcoin is worth over $20,000 CAD (at time of writing). 

This is why the saying goes “It’s not about timing the market, it’s about time in the market.” And that applies for bitcoin too. It’s never too late to buy bitcoin. 

Bitcoin can be hacked, why should I feel safe with it? 

You may remember when earlier this year a 17-year old hacked celebrities’ Twitter profiles and asked for bitcoin donations. The media said that bitcoin got hacked. Bitcoin didn’t get hacked, Twitter got hacked. 

The thing is that the bitcoin network (known as the blockchain) has actually never been hacked. It’s almost impossible to hack because the network is run among thousands of computers spread around the world. 

So a hacker can’t find a single, central point of weakness for an attack. Most of the hacks we’ve heard about have been caused by human error like sharing passwords, or allowing other people to manage their funds.

At Netcoins, we work really hard to educate our customers on the importance of understanding and protecting their cryptocurrencies. 

That’s what motivated us to create our new Crypto Academy. We encourage Canadians to check it out before getting started with crypto investing.

Who should invest in Bitcoin?

Those looking to diversify their portfolio can benefit from investing in bitcoin by having non-traditional assets mixed in with traditional assets. Similar to stock trading, you need to be comfortable with a certain level of risk.

The great thing about bitcoin is that you can start out small. You can buy bitcoin in fractions. For example, 0.5 BTC, 0.1 BTC, 0.01 BTC. 

This means that even if you’re relatively risk averse, you can still test out the crypto waters with just $10. 

FYI This is different to buying stocks, where you have to buy the full stock price in order to invest. 

Investing in bitcoin probably isn’t a great fit for those that are looking for quick and guaranteed profit. 

Bitcoin is volatile, so it does require some patience and time to reap the benefits. This is also true about stocks and real estate. 

How do I get started buying Bitcoin?

Buying bitcoin is super easy now, and you can do this directly with a cryptocurrency exchange (a platform that allows you to buy, sell, and trade cryptocurrencies) like Netcoins. 

You would need to create an online account, deposit Canadian dollars, then buy the bitcoin (or another cryptocurrency of choice). 

That’s it. It’s literally all done with the click of a few buttons and generally takes between 5-10 minutes to complete.

Here are a few resources to guide you as you continue in your bitcoin journey. 

Good luck, and if you have any questions please drop it in the comment section below or contact the Netcoins support team at [email protected].

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