Popularly, Bitcoin is defined as a type of digital currency that does not rely on central authorities like banks or governments. Bitcoin, in contrast to other digital currencies, operates on a decentralized peer-to-peer internet network to validate transactions amongst users.
The above definition does not do enough justice to the topic. Quite a number of people still view Bitcoin from the eye of the traditional finance they are used to. Some people even relate to bitcoin as some form of stock or investment option. In reality, bitcoin cuts way deeper than these narratives.
What is Bitcoin and How Does it Work? Using a Relatable Real-life Example.
As a child living with strict parents, most people (me included) were always required to give account for every money they got and state the source of such income as well. The basic standard then was that you would have to tell them the person who gave it and the value of money that was given to you. Sometimes, you would be required to give an account for the money and detail how you spent it. In most cases, this money was taken from us with promises that it would be given back at a later date. Most of these promises were never kept and we could do absolutely nothing about them.
We can admit that while it seemed ok for your parents to checkmate all your funds, as time went on it became very annoying. I mean, I’m an adult and I can get money from a plethora of places and I definitely need my privacy with nobody snooping about my financial business.
Well, guess what, this is exactly what the current banking system is like. Our Strict Parents! How so? Imagine the scenario below;
Let’s say you went swimming and stumbled on a very rare artefact. You proceeded to a gallery that buys such and because of its uniqueness, you sold the artefact for $100,000 and the entire amount deposited into your bank account. Listed below are some of the experiences you will have with that bank account.
- Your account gets frozen for KYC compliance.
- It could take days even weeks for you to get access to withdraw such funds.
- You must give a detailed explanation to the bank of where that money came from.
- Some banker somewhere now knows your worth and using your SSN they can trace your value across your other bank account.
What then is the difference between banks and our parents? It is your money and you absolutely do not need to explain to another person how you earn your money provided it is not fraudulent.
What Makes Bitcoin Unique?
Bitcoin, unlike traditional finance, does not require you to divulge any information about yourself before you can send or receive money. By utilizing blockchain technology, bitcoin transactions are secure and can be monitored in real-time.
Below are the possibilities and benefits Bitcoin poses over the known traditional finance systems;
Your wallet can never be blocked or frozen — Bitcoin transactions, unlike bank wires, are usually not able to be blocked or frozen. No matter the size or quantity of bitcoin a user receives or wishes to send out, his/her wallet will be active and nobody will require any KYC compliance.
Bitcoin is built in such a way that there is no central authority or body that checkmates its transactions. Conducting bitcoin transactions does not require any form of KYC compliance whatsoever.
This in itself is both a blessing and a curse. It is a curse because unlike your regular bank account where you may request for your account to be frozen and transactions stopped if your account gets hacked. If you lose your private keys and your bitcoin wallet gets hacked, there is no stopping the thief from accessing all your funds and carrying out transactions.
Bitcoin Transactions are Faster — Unlike regular bank transactions (especially cross-border payments) which could take days or even weeks to complete because of verifications from all the parties involved, Bitcoin transactions are near-instant.
Bitcoin has made payments fast and easy. Let us say you sold the artefact you found to an online shop in the US and you live in Africa, on finalizing the exchange agreement, you can receive the payment on the same day using bitcoin. This is not so for traditional financial systems as most foreign transfers take between one and four business days to complete.
No Central Authority — Bitcoin is powered by Blockchain Technology which is a decentralized ledger that records transactions in an immutable manner and distributes them among different computer nodes scattered all over the world.
What this means is that there is no particular agency/body/organization in charge of bitcoin and its transactions. Transaction records are kept on the blockchain openly for everyone to see and transactions are approved automatically after a node has been able to solve a series of complex equations.
No matter the amount of BTC you receive in your wallet, nobody will call you to ask you any questions, no agency will seek to know the source of your finance or how you manage to get the BTC.
This also has its disadvantages as bad actors have now resorted to Bitcoin to carry out their illicit financial transactions and launder funds.
100% Privacy Guaranteed With Bitcoin — Unlike the regular financial systems, getting a bitcoin wallet does not require your name, phone number, house address, SSN, or any sort of personal details whatsoever. You’re not required to attach a picture of yourself or any other details that would directly link your Bitcoin wallet to you.
All you need to do is download a non-custodial wallet, save your private key securely and start transacting.
What is provided instead of a regular account number is a unique wallet I.D that cannot be traced to you or any other entity. This way, nobody can know your net worth or track your assets across your wallet. You can have multiple bitcoin wallets and send bitcoin across your different wallets with ease and zero restrictions.
No Third-Party Involvement — Because of the P2P model employed by bitcoin using blockchain technology, there’s no interference between transactions.
When making transactions using the traditional financial system, there is the need to trust a third party; Banks, to process your transaction in good faith. Some of the risks involved in trusting a third party when performing financial transactions are fraud, misuse, and lack of security.
Peer-to-peer (P2P) consists of the direct exchange of any item, such as a virtual currency, between individual participants without the assistance of a central authority. Bitcoin, the most commonly used cryptocurrency, was created with the idea of strictly peer-to-peer financial transactions as its primary purpose.
Bitcoin P2P model ensures that transactions are end-to-end encrypted. Sending bitcoin to another user does not require interference from a third party as the wallets are all built on the blockchain and as such transactions are processed from wallet directly to wallet.
Immunity to Risk Associated With Bank Failure — When a bank is unable to satisfy its responsibilities to depositors and other stakeholders, it is regarded as a “Failed Bank” and is shut down by regulatory bodies in charge of such situations within a geographic location.
This catches most stakeholders unaware because the ledgers of a bank are kept private and as such, customers do not know when the bank is running negative due to bad investments.
Unlike banks, Bitcoin ledgers are public and as such, can be viewed by everyone at any time. There can be no case of bad investment or bank failure because the money in your wallet is owned and controlled 100% by you.
Final Thoughts
The technological breakthrough that Bitcoin has sparked promises a very bright future. Despite the bright future that bitcoin projects, it is very important for people to understand what Bitcoin is and how it works. To this end, this article has been written in the simplest possible way. Questions like; What is Bitcoin? How does Bitcoin work? And other related questions have been answered as simple as possible in this article.
Written by: – Aderemi Lanre