Everyone has already heard of such a thing as cryptocurrencies, and specifically about Bitcoin. However, many wonder why cryptocurrencies are so expensive and what their purpose is in general. Often, cryptocurrencies are mistaken for assets created and owned by some group of scammers who decided to profit from another racket and financial pyramid, while the high cost is explained by market manipulations and the inflating of a bubble that is about to burst. Consequently, for the average person, crypto can theoretically offer no benefit at all.
Let us debunk such misconceptions and convince ourselves that cryptocurrencies are not a fraudulent scheme and are even extremely necessary for us. If you already know how cryptocurrencies work, or if at some point you tire of reading the technical part but manage to understand why crypto is a reliable medium, you can skip directly to the section of the article titled “What is the Benefit of Cryptocurrencies.”
Decentralization of Management
Let’s start by explaining why cryptocurrencies are not a financial pyramid. To do this, although in a rather crude form, we will describe their structure to demonstrate the general concept. The essence is that a significant portion of cryptocurrencies has no central governing body. Their network is completely decentralized; every person, including you, can run a Bitcoin node on their own computer.
You might say that Bitcoin has specific developers who implement their updates, which indicates that they have power over the crypto network. Yes, there are developers, but they are not the owners of the network. Any changes and updates they propose are implemented only with the permission of the number of miners working on the network who possess more than 50% of the network’s computing power. In effect, we have democratic management (but it should not be compared with state democracy, which is nonetheless imposed by force; in this democracy, no one forces you to participate), and this democracy is quite direct, since although it has representatives in the form of developers, no decision can pass without the explicit consent of more than half of the network.
A question may arise: why create and maintain cryptocurrencies at all, if one cannot earn from them without having power over them? However, this is not the case; crypto developers usually perform a so-called “pre-mine,” meaning that before the public release, they create a certain number of coins for themselves, calculating that in the future their crypto will become popular and these coins will increase significantly in value. Additionally, crypto developers can earn money through donations from wealthy users who find further development beneficial.
New cryptocurrencies, which currently have a small network, are often subject to the risk of concentration of more than half of the power in one set of hands, which allows for network manipulation. However, the larger the network becomes, the more rapidly this possibility diminishes. Bitcoin, for instance, has involved such gigantic computing power worldwide that perhaps even large corporations and governments would not find the means (at least without causing significant harm to their own economy) to unilaterally subordinate it and disrupt the network’s operation.
Furthermore, the largest crypto miners are usually mining pools, which are also decentralized organizations. Mining pools are created so that people and organizations with insignificant computing power individually can unite and thus mine coins collectively. The mined coins are then typically divided among participants depending on their contribution to the total computing power. There have been times (for example, in the case of Bitcoin) when some mining pools approached the 50% threshold in power at different periods. However, thousands and millions of pool participants, naturally, cannot agree among themselves simply because of their number; in such a situation, they preferred to leave that pool and join others to prevent the centralization of the network and the loss of value of the coins they had already mined and could mine in the future.
Strict System Operation and Stable Emission
The algorithms by which the networks of many cryptocurrencies operate are fixed and based on unsolvable mathematical problems. The mining process—the creation of new coins—is usually based on finding a hash of appropriate complexity to add a new block of transactions to the network. Hashing, especially in the case of the SHA-256 algorithm used in Bitcoin, is an irreversible function; the only way to obtain a hash that fits a certain condition is to sequentially iterate through a special block parameter. The condition itself, i.e., the mining difficulty, becomes stricter over time; additionally, the mining reward regularly decreases. All of this is also strictly programmed with the calculation that more computing power will connect to the network as needed to maintain a stable currency emission.
Regarding the emission itself, the number of Bitcoins is limited to 21 million coins (currently about 18.5 million coins have been mined). It is simply impossible to just print new Bitcoins; inflation based on the standard paper currency model is simply impossible in the case of cryptocurrencies.
It is also impossible to interfere with the operation of cryptocurrencies via hacking (although there were hacks of Bitcoin, these occurred in the early stages of its development when its software code was not sufficiently perfect). Suppose a hacker wants to submit a false transaction with fake coins into the Bitcoin network. However, every block of transactions in the network contains the hash of the previous block. Other nodes will simply not accept a node that attempts to introduce an invalid chain of blocks into the network. It is also impossible to pick the right block parameters to produce the exact same hash as the original block. Hashing, again, is an irreversible function; it can only be broken by brute force. The SHA-256 hashing algorithm can produce 2^256 unique hash variants—finding a parameter that gives a specific hash would take more than the lifetime of the Universe, even with all the computing power on the planet. Mathematics of large numbers stands guard over the stability and inviolability of cryptocurrency operations!
What is the Benefit of Cryptocurrencies
Fine, cryptocurrencies truly lack centralized management and are absolutely reliable. But why do we need them in practice? After all, ordinary currencies are more popular and easier to use. What is the benefit of your Bitcoin, especially considering that supporting its network and mining new coins consumes an unbelievable amount of computing power and electricity?
The entire benefit of cryptocurrencies lies in the fact that they prevent anyone, including governments, from artificially devaluing your savings through inflation, unhindered taking of your cash funds, and restricting your economic freedom. Let’s start with a simple example. In a survey about Bitcoin usage in Nigeria, about a third of respondents stated that they use it or once used it. This is because the Nigerian government set a tax that is too high on transferring funds across borders. Cryptocurrency became the only option for Nigerians working abroad to send money to their families with minimal losses, bypassing idiotic government laws.
Many such examples can be thought of, as the stationary bandit (the state) tries to rob its citizens in every way. And cryptocurrency comes to people’s aid. You don’t want the stationary bandit to levy giant taxes on your transactions and demand an explanation regarding the origin of funds every time? Pay with cryptocurrency! You don’t want the state to be able to sue you at any moment for non-payment of alimony or take half of your assets in favor of a cheating ex-spouse? Keep them in cryptocurrency! Authorities have limited or banned some type of economic activity and control your income? Accept payment in cryptocurrency!
Cryptocurrency will save your savings, income, and economic freedom in these and many other situations. Cryptocurrency coins cannot simply be taken from you (unless you yourself give away the password to your wallet or your device, where the password is stored in unencrypted form, is taken—always keep this point in mind). Your savings in cryptocurrency will not lose their value over time because someone is regularly printing billions of new banknotes. You can use cryptocurrencies completely anonymously. Although, of course, Bitcoin is pseudo-anonymous, as all transactions in the network are visible to everyone; however, this problem is solved by using Bitcoin mixers (intermediary services that mix coins with the coins of other mixer users before sending them to the recipient, thereby making the transaction untraceable), including wallet clients with a built-in mixer (for example, Wasabi Wallet). There are also cryptocurrencies where coins are mixed automatically within their own network (for example, Monero, Dash, ZCash). Additionally, try as much as possible not to link your wallet to your real identity. If it is necessary, use a separate Bitcoin address for each transaction; this will make systematic tracking of your transactions impossible.
We can now confidently conclude that cryptocurrency is an excellent economic tool for avoiding regulations, bans, and the theft of funds by the stationary bandit. Cryptocurrency provides maximum economic freedom. This is precisely what forms its value.
So what, governments will just go ahead and ban cryptocurrencies
The thing is, it is impossible to ban the use of cryptocurrencies. As we remember, they are decentralized; there is no single server that manages everything. Millions of servers worldwide are involved in cryptocurrency networks; any person can run a cryptocurrency node even on their home computer. You cannot simply block a specific IP address, as is usually done with online services, and thereby achieve a ban on using the service. Cryptocurrency can only be blocked through a total shutdown of the internet, which certainly will not happen, as everything now works via the internet; such a step would result in gigantic losses for the governments themselves.
It will also be impossible to ban specific types of transactions using cryptocurrency, such as buying goods with cryptocurrency on gray and black markets, or exchanging cryptocurrency for fiat currency. In the case of exchange, the P2P exchange model comes to our aid. For example, you want to exchange Bitcoins for rubles, but services engaged in such exchanges have been shut down by the force of the stationary bandit. You simply use a P2P exchange to find another person like yourself who wants to exchange rubles for Bitcoins and carry out the exchange. The state will not find out that your deal was related to cryptocurrency, because if anonymity measures are observed, it cannot track cryptocurrency transactions. A ban on cryptocurrency is simply a useless and unrealizable measure.
Cryptocurrency is still useless because it is not popular as a means of payment
Now this is an outdated claim. Current trends regarding the adoption of cryptocurrency say the exact opposite. For example, Tesla recently announced its plans to start accepting payment in cryptocurrency. The Apple Pay payment service has already added the ability to link cryptocurrency accounts to wallets and use them within the USA. Google Pay and Samsung Pay have announced similar plans. At this rate, considering that these services are actively used for making payments for purchases worldwide, including in the CIS (admit that you have seen the icons of these services on store signs regarding the possibility of cashless payment, or even used them yourself), cryptocurrencies could become a popular means of payment. Of course, since these services operate by government permission, using cryptocurrency in this case may only add anonymity to the origin of the funds, but it is not a way to evade tracking of their expenditure and taxation by the stationary bandit. However, this should be enough for the general public to accept cryptocurrencies as a means of payment and begin treating them more tolerantly. People for whom cryptocurrencies are commonplace will gradually begin to actively conduct transactions using them directly, without intermediary services. This will allow all of us to achieve significant economic freedom, regardless of the orders imposed by the stationary bandit.
Cryptocurrency will not become a popular means of payment due to slow transactions and high commissions
This is also an outdated claim at the moment. Of course, pure Bitcoin itself is indeed quite slow (on average, transaction confirmation takes 10 minutes, and sometimes it can stretch to several hours) and expensive (the average Bitcoin network commission per transaction at the time of writing this material is about 24 dollars), so it is only profitable to make large transactions that do not require instant execution. However, solutions already exist for small transactions, such as buying a cup of coffee. One of these is the Lightning Network—a payment protocol that allows instant transactions between participating nodes and is proposed as a solution to Bitcoin’s scalability problem. This problem has also been solved in many alternative cryptocurrencies to Bitcoin.