How is the price of Bitcoin formed? Part 2

Back

2017-02-21 00:00:00:


In the first part of the story, we talked about how the value of fiat money and bitcoins is formed, but why do financiers value cryptocurrency so highly? First of all, because before we perceived money as a means of payment, and payment systems as their instrument of transfer. Due to the fact that in the past, when conducting transactions, there were a number of different restrictions, we could not even imagine that in the future there will be special networks in which it will be possible to transfer real money equivalents.

Previously, to send money abroad, you needed dollars and bank cards, or European money and PayPal. A number of other payment services were created specifically to carry out transactions in yuan, and in each case intermediaries were used to carry out currency transactions. At the same time, a relationship of trust must be ensured, according to which the intermediary making the payment will be sure that you will pay the required amount.

Real money and the transferred equivalents have always been different concepts, and as an exception, one can name situations when the sender and the recipient were close to each other. After all, if you need to pay a couple of dollars for pizza, you wont need intermediaries. In cases where the recipient is located in another city / country or even on the other side of the globe, you have to use payment systems and trust payments. This is why companies like Visa and other financial institutions were created, which are happy to provide a wide range of services (of course, not free).

Payment manipulations are carried out by monetary organizations, which will allow you to perform any operation, regardless of geographic boundaries. But the problem is that not everyone can use modern banking services. According to statistics, more than half of the worlds inhabitants still do not have access to high-quality banking. People who have not received access to the global market are engaged in local trade, which does not represent great prospects.

Why did Bitcoin come about?

Bitcoin emerged to solve global economic problems in poor regions. The blockchain protocol combines both the currency and the payment system. This is a bundle that forms its own ecosystem. The interconnection of digital money and the instrument of their transfer distinguish cryptocurrency from a number of other payment systems. Even Satoshi Nakamoto believed that in its structure it was the payment system that played the part of the first violin.

According to Mr. Nakamoto, the peer-to-peer digital currency network makes it possible to send transfers directly between system participants without any interference from a third party or official regulators. The digital signature solves the problem of user identification, but with the participation of third parties, this encryption method becomes irrelevant. The peer-to-peer network is an excellent protection against double standards - it records all operations, assigning hashes to them and combining confirmations into one network. If there is a long network of hashes, it serves as proof that they all come from the same pool. Most of all processes on the network are controlled by nodes, which together create a long chain of transactions, protected from external attacks.

In the first works, Mr. Nakamoto did not even mention the word: "Bitcoin", as he put the payment system at the forefront. The specialist spoke only about double spending, a problem that occurs in any money subject to inflation. It was not a digital currency that was considered as an innovation, but a cryptocurrency network. In fact, the progress of Bitcoin is closely related to the development of its ecosystem, which evolves over time and space.

The ledger, also called a blockchain, is located in the digital cloud - a distributed network in which all participants can observe the processes. Thus, tens of millions of interested and independent observers get the opportunity to analyze the situation and monitor it at any second. This allows you to get rid of the risks during the transfer of money from one user to another. Moreover, each of the digital blocks is additionally protected by digital identifiers, which indicate that it belongs to one of the users. The register stored in the digital block makes it possible to confirm the rights of the owner of the money without the use of intermediaries.

Mr. Nakamoto, due to the integration of the blockchain, was able to get rid of the eternal problem of interested intermediaries who can be scammers. Previously, the need for a third party arose due to the geographical component, but now there is no need to trust intermediaries. There is no need to establish a relationship of trust, which was previously unreliable and required a certain amount of time.

By creating a distributed ledger, each network member has access to operations, which solves the problem of trust. The register records the date, amounts and public keys that were used to complete the transaction.

The record can be viewed by a user from any part of the planet, since a copy of the register is updated and free for access. Thanks to the presence of the registry, the overall level of network security increases, and each unit of account receives an additional digital link to a specific user.

You just need to understand the principle of the Bitcoin network, and you will understand why it is preferred to many modern money. Its capabilities, as a cryptocurrency and a payment system, are a confirmation of Misess theorem, because they constitute the usefulness of digital money. The greater the spread of the unique ecosystem and the more perfect it will be, the higher digital coins will be evaluated, and if it had not manifested itself, the situation would be exactly the opposite.

The theory is correct

The bitcoin currency in another aspect has confirmed the theory of Mises. So, since the appearance of the first cryptocurrency in 2009, the cost of its coins has been zero. Immediately after the publication of Satoshi Nakamoto, digital money was still worthless, as in the next 10 months. At the same time, the first trial operations were already carried out, which could not yet be evaluated outside the network.

Bitcoins rate shifted from zero on October 5, 2009, when the first coin was offered to the buyer for about 1/10 of a cent. At that time, the stock exchanges did not predict anything good for the sluggishly launched asset. Therefore, those who ventured in those days to buy several hundred or thousands of Bitcoins today can safely appear on the covers of Forbes magazine. But what happened in 8 years that caused the price of digital coins to skyrocket? First and foremost, the success of cryptocurrency is the work of enthusiasts, entrepreneurs and financiers who have experienced the benefits of blockchain.

Can double costs be avoided in the transaction process? Is there enough processing power to confirm and verify all operations? Are there any problems with Bitcoin transfer? And is this network that perfect? The system had to answer these questions for about 10 months to gain the trust of users. After a year and a half of existence, the price of one coin exceeded the dollar. It is important to understand that the process of increasing the rate took place in accordance with the theory of Mises. Bitcoins simply corresponded to the benefits brought, because the ledger responsible for the transfer and storage of information has high internal and external usefulness. Thus, the age-old theorem was proved again.

Conclusions

You can forget about the theorists who talk about the uselessness of cryptocurrency and the fact that its value is taken out of thin air, since the useful characteristics of Bitcoin make it a unique payment system and money. In addition, digital coins have acquired their own market value and have successfully proved themselves during the strength test in the process. Thus, we are not dealing with a soap bubble, but with the sphere of high financial technologies, which has great prospects. Therefore, the Bitcoin exchange rate will tend to rise, following the adoption of technology by humanity. Bitcoin has a good chance because the system is secure and the coins are divisible, easy to use and limited in quantity.

Do not forget that the blockchain can store / send not only money, but any other information as well. This is facilitated by the reliability and security of the distributed ledger, which will allow in the future to completely eliminate intermediaries. In fact, humanity has acquired a revolutionary technology capable of changing the world for the better, not just the financial sector. Mises would be very surprised to learn about Bitcoin, but he can be proud of his work, which, a century after its publication, remains relevant.