The Zero Hour of Bitcoin
If you want to pay cashless, you need a bank account. The bank is the central point of control for every transfer, direct debit, and every booking. It guarantees the payee that he receives his money. A bank assumes responsibility for any risks in transactions and gives security and trust. Both are essential for a functioning payment system. The intermediary function between sender and receiver gives the commercial bank the power over the accounts and the payments. It can decide if and when the transaction takes place and at what fees. The central bank also has the option of setting interest rates as well as printing and circulating banknotes. This gives the bank control over the money supply and the value of the money.
Unstable Currencies and Financial Crises
While the banking system generally works well in stable economies, particularly in Africa and South America, there are nations whose currencies are unstable. The money can lose its value overnight, so to speak. For many people around the world, this makes it very difficult to build and secure a livelihood. The vulnerability of the banking-dominated system, but also of stable economies, has been demonstrated by the Great Financial Crisis in 2007/08. The crisis has shown how systemically important banks are, so that their collapse leads to enormous upheavals and considerable financial damage to society.
Bitcoin as an Alternative to the Banking System
In 2008, a document titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published on the Internet under the pseudonym Satoshi Nakamoto. In response to the Great Financial Crisis of 2007/08 caused by check-book money, the author first described the algorithm of Bitcoin: the blockchain. He wrote, “What is needed is an electronic payment system based on cryptographic proof instead of trust […]” (Nakamoto 2008: 1). The identity of the author is still unknown.
As an alternative to the concept of currencies issued by central banks, Nakamoto developed Bitcoin on the basis of an encryption system. Unlike the banking system, the Bitcoin network is not operated and developed by financial institutions. Instead, computers, the so-called “nodes”, operate and secure the Bitcoin blockchain in a global peer-to-peer network. The blockchain is based on open-source software and is constantly being developed by programmers worldwide. Bitcoins have the desirable properties that everyone expects of a means of payment. They are divisible, distinctive, exchangeable, unforgeable, and limited (in 2140 all 21 million bitcoins will be mined). They have proven their value stability even with strong fluctuations in the price. In addition, you can always carry them with you, like a purse, in any amount and across national borders.
New Bitcoins have to be Mined First
The so-called “miners” are responsible for the generation of new bitcoins. Miners are high-performance computers that mine bitcoins by finding computationally-intensive, rare, random codes, called hashes. These codes are required to cryptographically encrypt the blockchain block by block. Anyone who operates one or more such computers himself is also referred to as a miner, which may be, for example, persons or companies. Miners use their computing power to continue the global transaction list (the blockchain). They are paid by the system with new bitcoins. Currently, this amount is 12.5 bitcoins per block.
Bitcoin as Social Phenomenon
Bitcoin is clever, digital technology, means of payment, and social phenomenon at the same time. It’s so new that it cannot be put into old, common categories. It is often referred to as a “cryptocurrency,” but it is not a classic currency because it is neither issued nor controlled by a central bank. For bitcoin transactions, no commercial banks or other banks are involved. Therefore, Bitcoin is also referred to as a decentralized (peer-to-peer) payment system.
The relationship between Bitcoin and traditional payment systems is similar to email and letter delivery. In the case of a letter, the post office is the intermediary – when paying, it is the bank. If the post office goes on strike, no letter will be forwarded. Furthermore, the post office determines the fare to be paid and letters can be lost. The email, however, as well as Bitcoin, is transferred without the complex postal infrastructure, directly between sender and recipient. Transactions with conventional currencies are based on trust created by the activity of the banks. In the Bitcoin system, too, the sender and the recipient must trust each other for a transaction to be achieved. But here banks are superfluous. The guarantee that a bitcoin transaction runs correctly is given by the SHA-256 hash algorithm.
Bitcoin Wiki. (2019). Bitcoin. Retrieved January 17, 2019, from https://en.bitcoin.it/wiki/Main_Page
Nakamoto, S. (2008). Bitcoin : A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf
Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton, New Jersey: Princeton University Press.
Northern Bitcoin AG. (2018). Half-Year-Report. Frankfurt am Main. Retrieved from https://northernbitcoin.com/wp-content/uploads/2019/01/Northern-Bitcoin-Half-Year-Report-2018.pdf