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Not so long of a while ago you’ve probably heard of or seen the word “Bitcoin”, and how it is the “new form of money” perpetuated by its high price of value. See? You have just stumbled upon the word a few seconds ago! Beneath the vast connectivity of the modern day Internet, it is no surprise that even advertisements nowadays are filled with Bitcoin-related information. Under such circumstances, any average citizen would start to question what the fuss is all about. Questions like “What is Bitcoin?” , “Why does it sound like a new type of money?”, “Why is Bitcoin created?” , etc would be seemingly spammed all across the internet medium; sparking discussions, gossips and debates among people from all fields of demographics, educational background and status.

Subsequently, this article was written with the intention of “clearing some doubts” towards Bitcoin on a generally sufficient level. On the surface, the purpose of Bitcoin is the same as our tangible money. Before we dive into the technicals, here’s a quick refresher on the definition and functions of money:

Money

Money is a collective illusion of mankind that has allowed us to build a civilization upon the back of a concept that is, by its very nature, ephemeral. It’s only worth what people think it’s worth. What we call Fiat money.

Money can be defined as any asset that is widely accepted as means to make payments or settling debts. Its three characteristics/functions are: 1) A medium of exchange. 2) A unit of measurement. 3) A Store of Value. Without currency, an economy can’t easily function, because it’s too hard to get everything you need via barter (imagine trading a chicken for a cup of coffee).

The problem with our current money

Ok good things first.

Firstly, cash runs without batteries. When the ATMs fail or your iPhone runs out of battery, cash is always there for you. You don’t have to depend on technology. Secondly, cash is totally anonymous. Think about it, kidnappers usually demand ransom in cash eh? “Duit kopi” is also paid in cash right? Third, cash comes with that physical, evolutionary feeling of safety. It generates the same nice, lovely, warm feeling that your cat feels when she sees a bowl of milk.

But, what if you want to buy a house? You can’t just go up to the seller and pass him truckloads of cash? You’ll probably have to go to the bank and withdraw money from your savings? Or perhaps transfer it directly to the buyer’s account?

Problem 1: Trust no one but your mom

With an introduction of a third party in the transaction – in this case, the bank – you are required to trust “the bank” with your money. What if the house you’re buying is in the United Kingdom? Now two banks are involved. Put it this way, the only person you should trust with your money is your mom, and the bank is not your mom, but she doesn’t have the ability to do what a bank could perform, so technically you’re obliged to trust the bank, everyone is obliged to do so. Hence, this is a centralized banking system.

“Family forced into poverty after bank’s $2.1M overdraft mistake” 25th April 2018

“Money vanishes from hundreds of Ulster Bank accounts in the Republic” 24th April 2018

“’TSB gave me access to someone’s £35,000’” 23rd April 2018

“Oops! Deutsche Bank makes €28 billion transfer in error” 20th April 2018

This is in fact a worldwide issue and it happens more frequently than you think. Tell me again why are you trusting the banks?

Problem 2: Transaction cost, everything also “kena” charged

What does a centralized system and standing in front of a raging rhino have in common? You’re gonna get charged. In fact, almost everything you do in a centralized system will get you charged. From common actions such as opening a bank account, using an ATM, or making a purchase from a random shop to less frequent acts such as paying in another currency, or making a withdrawal overseas. As you can see, the sheer number of actions that will get you charged can be quite a burden. Well thank god for the shops that give you a 10% discount if you pay in cash (#lifehacks).

Same goes with Paypal, where there is no fee to use Paypal to purchase goods or services. However, if you receive money for goods or services (such as from selling an item on eBay), the fee for each transaction is 2.9% plus $.30 USD of the amount you receive. Visa and Mastercard works in the same way.

Problem 3: Inflation (??)

TL;DR – Let us just say that if Malaysia doesn’t have enough money to pay its bills, it can simply print more Ringgit Malaysia (MYR) but that would result in economic instability which can lead to extreme inflation, or diminishing of purchasing power.

Allow me to illustrate.

Imagine you’re back in 1900, chilling at your backyard garden in Soviet Russia. Your name is Виктор which really doesn’t matter I just thought it will be cool to… Anyway, it’s a peaceful and sunny day, you help yourself to a sip of coffee. You think to yourself: hmm, maybe it’s time to sell my car to kickstart my business. You then sold your car, and stored the money in the bank for the time being.

It was a really bad time. Just the next day itself, Voldemort decided to attack Russia. Russia declared war and to fund for war, they started printing money to buy wands and to pay the soldiers. They even started increasing the salaries for army to attract more people to participate. You were unfit for war so you just hang at home.

By the time the war ended, the money you got from selling your car, now can only get you a bar of Snickers.

Why? Too much money chasing too few goods, hence inflation. Due to massive amount of printing, the supply of money increased by a lot. After the war, people are willing to pay more money for the same old goods, causing the purchasing power of money to reduce.

Nowadays, central banks and governments create new money mainly by “printing” them (quantitative easing). They buy Treasury bills and notes from major banks and pay for them by a few keystrokes that increases the bank deposits of the seller banks. They also create money by lowering interest rates which makes borrowing more attractive to bank customers

Problem 4: Try paying for food with MYR in China

Currently, there are probably around 9,000 different bills issued by 1,600 different banks in 180 different currencies, all carrying different values, go figure!

Stay tuned for our Part 2…

As such, it is inevitable that money poses some drawbacks despite it being the one thing that humans generally use on a consensus to indicate the worth of goods and services. Bitcoin addresses such issues and signifies that its characteristics are built upon the flaws of our current money. To see how Bitcoin does such rectifications, stay tuned for part 2 of this article!

 

Prepared by:

Researcher – Do Wey Qing, Gan Kien Keng, Tang Wei Jet

Editor – Mohamad Syafiq, Nur Iman Tan