Researcher believes bitcoin may become as important as the internet

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Cryptocurrency is primarily a private currency, which unlike ordinary fiat money isnt controlled by the state, says Svein lnes, a senior researcher at Vestlandsforsking, the Western Norway Research Institute.

Fiat money is traditional currency made by privately owned banks, but subject to control by the state. Fiat means let it happen in Latin.

lnes explains that the US dollar had a fixed value in gold until 1971. Because other currencies were linked to the dollar, they were also linked to what is known as the gold standard. Under this system, central banks are obliged to be able to redeem notes in gold and to buy gold against payment in notes.

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Without such a gold standard, or silver standard, money no longer has any intrinsic value. It’s the trust in the money that determines its value. This is fiat money, and all the world’s money today is fiat money.

Cryptocurrency is private money too, but its produced in a different way and the government doesnt regulate its quantity and value, says lnes.

He says that bitcoin, the best-known cryptocurrency, has no intrinsic value either. Its value is rooted in trust.

The trust relies on cryptography working the way it should, that it cant be manipulated and that the number of bitcoins never exceeds 21 million, lnes says.

So far 19.1 million bitcoins have been mined. So most of it is out. But not everything. That’s because the amount to come is halved every four years, the researcher explains.

Svein lnes says that bitcoins value reacts to all kinds of news. It tends to fall quickly in downturns, but recovers again quickly. (Photo: Vestlandsforsking)

Value fluctuates a lot

lnes says that bitcoin started with 50 newly created bitcoins every ten minutes. Every four years the reward amount is halved. Currently the reward is 6.25 newly created bitcoins every ten minutes. In 2024, the number will be 3.125 and continue to be halved in this way until it eventually rounds down to zero in approximately 2140.

This process almost approaches a gold standard, which is set on the basis that the world has a certain amount of gold. One to two per cent more gold is mined in the world every year, so the amount stays very stable, says lnes.

Having a fixed amount has made investing in bitcoin more interesting than trading with them so far.

This is due to several factors. Bitcoin is a small currency. It fluctuates a lot in value, so it doesnt lend itself to being used for the three normal functions as well as money does, says lnes.

These three functions are as a medium of exchange, to store value and as a yardstick for comparing prices of goods and services.

Bitcoin has worked best for storing value. Although the value has fluctuated, its risen sharply since it was introduced. So its functioned as an investment vehicle, but it hasnt worked well to trade with, since its value fluctuates. And you can’t set prices in bitcoin, because it’s not stable or at least it hasn’t been, lnes says.

He says that the value of bitcoin reacts to all kinds of news. It tends to fall quickly in downturns, but rises again quickly.

In the last year, the stock market has taken a beating, and cryptocurrency fluctuates accordingly. Cryptocurrency is 100 per cent governed by supply and demand, in contrast to ordinary currency, where states operate purchase schemes to stabilize the currency.

Cryptocurrency Cryptocurrency is a form of decentralized digital currency that is based on blockchains.A record of who owns cryptocurrency is stored on a digital blockchain and is accessible and open for all to see.Cryptocurrency does not exist in physical form like coins and banknotes.Approximately 2000 different cryptocurrencies exist.The most famous of these is Bitcoin. Other cryptocurrencies include Etherum, Ripple, Litecoin and Monero.

Source: SNL.no

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Bitcoin is not the only cryptocurrency. It makes up around 40 per cent of total crypto worth, and so-called altcoins account for the rest.

I have less faith in altcoins, at least most of them. There are thousands of them. We have no use for most of them, but perhaps a handful have properties that could complement bitcoin, says lnes.

I really pay attention almost exclusively to bitcoin, which I trust. But when the market falls, Bitcoin’s share increases because its more stable than the altcoins. We can see that now, since cryptocurrency has been down for the past year.

Bitcoin requires electrical power, but lnes explains that extraction is not what uses the most energy. The bulk of energy use comes from maintaining the security of the whole system.

lnes believes bitcoin will win out in the long term, because it is easier to use than regular money.

Bitcoin already reigns supreme across national borders. It takes less time and is a lot easier. It has no financial intermediaries.

Value lies in the bitcoin itself

lnes explains that unlike money, bitcoin is a bearer instrument. The value is in the bitcoin itself, just like physical cash. But bitcoin can be transported digitally, which you cannot do with physical cash. When you send regular digital money from one country to another, it has to go through several countries, and sometimes four to six banks.

All of these take on some risk and demand a slice of the pie. This isn’t the case with bitcoin. No one risks anything and you make direct transfers without intermediaries.

To the comment that ordinary currency has worked for hundreds of years, lnes says we may think its quick to shop with a credit card online, but it isnt. The process takes several days, and various entities take their share of what you pay. Its expensive.

Some people ask how bitcoin can be trusted with such a limited quantity, when we can just keep printing ordinary money.

The amount isnt dangerous, says lnes. Im more concerned about the exchange rate fluctuations.

Linked to owner with personal encryption key

Each bitcoin is equal to 100 million satoshis, or sats for short. Enough units exist for everyone in the world if everyone wanted some, according to lnes. A US dollar equals about 5000 satoshis and a Norwegian krone is worth around 500 satoshis.

lnes explains that bitcoin will experience some inflation because more bitcoins are constantly being made, but that when all 21 million coins have been mined, the opposite will probably happen and bitcoin will become increasingly valuable.

In addition, a good deal of bitcoins get lost because the owners lose their keys to them.

Bitcoin is personally connected to the owner through a private encryption key, similar to the security mechanisms used when you log in to your online bank accounts.

What is a blockchain? A blockchain is a decentralized and distributed digital “accounting book” that makes it possible to register, track and make visible all digital transactions.A blockchain stores data in blocks that are linked to each other using cryptography.The most well-known use of blockchains is cryptocurrency such as bitcoin, and cryptographic certificates of ownership (NFT).

Source: SNL.no

Personally invested

lnes has invested in bitcoin himself.

I make a point of mentioning this so that it isn’t used against me. I can’t say how much I’ve invested.

The first commandment is never to disclose the amount to anyone other than the tax authorities. That would be stupid, because then you make yourself a target. Youre responsible for your own security, so theres a lot to keep track of. Bitcoin does not have any bank hedge fund. If you go out and boast of your investment, you might be visited by people who want you to hand over your keys, he says.

Inheritance is a challenge.

“Some people take their keys to the grave with them. You need to plan carefully so that your descendants are able to manage your investment, says lnes.

You have to give them the key while you’re alive, which requires a vote of confidence. You can be defrauded by your children if the trust isn’t there.

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lnes says he believes bitcoin could take over a lot of the global money transfer because it is so much simpler than the current system.

Theres still a lot to be done. We have strong and colossally heavy financial systems. But if people start adopting bitcoin as a transfer system, the ball could quickly start rolling, he says.

lnes says bitcoin is easy to use. All you have to do is register on one of a handful of exchange services that have committed to comply with the rules for anti-money laundering.

The value of bitcoin today amounts to approximately EUR 400 billion calculated in today’s price conversion, or a third of the value of Norways Oil Fund. In the big picture that amount is not very much, but lnes says cryptocurrency taking over as a global means of payment requires thinking ahead.

Bitcoin could have various roles as a transfer currency, also called a transfer medium. To increase its use in commerce, more people have to adopt it. But surveys show that 400,000 Norwegians say they own cryptocurrency.

Similar to Islamic money transfer system

The system is similar to Islamic hawala that is used to transfer money across borders and is used in large parts of Asia and Africa. Hawala serves as an alternative to the banking system and is based on personal trust and Islamic traditions.

For example, you deliver something to one person in another country with a code word, and the recipient receives a different currency in their country by using the code word.

Bitcoin is similar to hawala in a lot of ways. Its based on a chain of trust. While hawala is based on personal trust, bitcoin is watertight, lnes says.

Bitcoin has worked for almost 14 years without being hacked, although there’ve been plenty of attempts. Strong security and strong decentralization are the reasons it hasn’t been hacked. Thousands of machines around the world run the system. If a thousand machines break down, the system is still just as reliable. It has hardly experienced any downtime in 14 years.

Believes upside is greater than downside

El Salvador has lost huge amounts of money by buying a lot of bitcoin when the country made it a fiat currency last year. Some people think it was idiotic, but not lnes. Although bitcoin has decreased in value substantially over the past year, El Salvador has not sold their bitcoin and therefore not realized any loss.

What do they have to lose? says lnes. I think the upside is greater than the downside. The International Monetary Fund (IMF) is no doubt making fun of El Salvador. The IMF doesn’t like countries using cryptocurrency, because it’s out of their control. This also applies to states, and part of the criticism should also be understood as such. Bitcoin is a threat to those who control today’s monetary systems.

lnes notes that even the Norwegian Oil Fund has invested in bitcoin, even if indirectly.

The Oil Fund has invested in companies that have invested in bitcoin. I think it would be smarter if they invested in bitcoin directly. Investing 10 million euros would be a miniscule amount for the Fund, but the upside would be huge.

I have a lot of faith in the upside, and thats why Ive invested. Bitcoin is a radical idea, and its a solution that could turn out to be as important as the internet, says lnes.

Read the Norwegian version of this article at forskning.no

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