At its humblest, Bitcoin is a new type of payment system. But, trying to compare Bitcoin to USD, Visa or PayPal is like trying to compare apples to crackers, cheese, or cucumbers. Although they serve a common purpose, they go about it in extremely differing ways.
Unlike traditional payment systems, Bitcoin uses NO CENTRAL AUTHORITY (government or bank) that can interfere with the supply or verification of money and payments! This is a huge tenet of the cryptocurrency mission.
The blockchain is a chain of blocks. Each block houses a certain number of transactions that recently happened using bitcoin. Once a block is verified, it is added to the chain. Over time, this chain serves as an immutable ledger of all the bitcoin transactions that have ever happened.
Miners are in charge of building the blocks of transactions and checking to see that the transactions are valid and honest. Any other user/miner can also run the bitcoin node software to validate new transactions, and audit that blocks being posted are honest.
Unlike with a bank, any user can go into a block explorer and verify that transactions actually happened.
Transactions also happen much faster than having to wait a few days for payments to clear amongst traditional banks, because a new block of transactions is added to the chain every 10 minutes.
This all creates a relatively fast and secure, peer-to-peer network for carrying out transactions.
Users (nodes) employ software that follows identical mathematical rules, to verify transaction blocks.
When there is divergence among developers and investors as to how the network should be run, a fork can happen (i.e. Bitcoin Cash). Although its network design is open-source and public (accessible to anyone with internet and an allowing government), Bitcoin still has some developers andinvestors who have gained considerable influence over the community.
There is no doubt that Bitcoin maintains a considerable advantage as the first mover and trend setter in the market of digital currency, but does it do a good job at matching up with the principles that define what we know currency to be? Here is the current definition of money (as defined by economists) and how Bitcoin compares:
Medium of exchange-Allows participants to easily transact goods and services, without having to barter over swaps of actual physical like-value goods, or like-value services. You can use currency to pay for your foot massage, instead of having to give a back massage, in order to get one. It allows for a much simpler way to trade goods and services, as long as participants in the given economy accept the form of money.Bitcoin is setup to be a good potential medium of exchange, once more retailers accept it as a payment method, and buyers choose to use it to pay with. You don’t even have to worry about exchange rates in order to use BTC across borders. The network makes transaction processing a bit slow and expensive, relative to other (more liquid) crypto, like Litecoin. BItcoin is still used as the primary medium of exchange currency for purchasing other cryptocurrency, which helps keep it relevant and valuable.
Store of value-In order to function as a reliable medium of exchange, the value of the currency should not experience large fluctuations. Certain assets like USD, gold, and real estate are classic examples of stores of value. In the long run, if you stored your money in either gold or real estate, the value of your money would likely appreciate at a rate that allows you to keep up with inflation. Your purchasing power remains strong, even as prices rise in the economy. In the short run, gold and real estate might fluctuate a lot, but they have proven to stay relevant as stores of value throughout history (when ownership is allowed).
Liquidity is also an important feature of money if it is to be a store of value and a medium of exchange. Although precious metals and real estate have proven themselves as a store of value, they are not a good form of currency because it takes extra effort to make them liquid; readily transferable. This is where the US Dollar has an advantage. Although digital currency is a relatively liquid asset, there has not been enough experience and history to elapse for us to consider it a reliable medium of exchange. And in the relatively short amount of time digital currency has existed, it's fluctuations have made for an extremely volatile store of value.
For example, people would be much less likely to use the USD if they were not able to store it at a relatively similar value. Otherwise, the same energy it took you to earn $20 might be able to buy you a few cups of coffee in January, but might be able to buy you a Lamborghini in September (or vice-versa). Predicting the directions of such movements is too risky and unreliable for the average hard-working consumer to trust and rely on. This is indicative of why so many governments around the world are not trusted by their citizens to reasonably control inflation; maintain purchasing power and reliable value for their citizens' hard work. Large value fluctuations in an asset are more likely to have it defined as a speculative investment, not a form of reliable currency to use for buying goods and services. Bitcoin is NOT proving to be a good store of value, because the price fluctuates a LOT. Bitcoin has proven to fluctuate in value by over $1,000 USD in only a couple weeks.
Unit of account-Provides a common measure of the value of goods and services. Allows buyers and sellers to easily communicate the value being exchanged, for any particular good or service. Bitcoin is facing a psychological roadblock when it comes to its economy’s participants, because most consumers and investors are not accustomed to thinking about the value of their money, in terms of such small fractions of whole numbers. It is extra difficult for buyers and sellers to communicate the value of a good or service, when the value of the currency used to trade it is fluctuating so much, like with Bitcoin. See “Store of value” section, above. For example, if a restaurant uses BTC as its primary form of currency, it would have to update menus constantly to communicate accurate prices to customers. The restaurant would also have a ton of extra administrative work in constantly updating wages for employees, in order to give them a relatively consistent amount of value for their work performed. Further explained- only someone with a gambler's mentality would work for and hold only bitcoin, in order to cover relatively consistent daily/monthly/weekly expenses.
The bottom line: Cryptocurrencies that have higher circulating supplies (liquidity), or are pegged to a more stabilized asset, do a better job at being a medium of exchange, store of value, and unit of account.
All this being stated, the US tax code currently treats digital currency just like the USD, when it is being used in the same way (to exchange goods and services, compensate employees, make investments). Click below for details-
Supply capped at 21 million. Rate of block creation is adjusted every 2016 blocks; mining prize is halved every 210,000 blocks (EX. in 2012 25 BTC are available every 10 minutes, in 2016 12.5 BTC are available every 10 minutes).
Assuming BTC sticks to the 21m supply cap, the price per BTC has a chance of going very high, if demand remains strong. As a currency, users will have to transact in fractions of BTC to make purchases.
NOTE: Although designed to be decentralized, there are a few large mining pools that are responsible for generating a vast majority of BTC supply.
As I mention for supply of EVERY asset, ever- "The supply only matters as much as there is demand to outpace it, and by how much. This is what determines price/value."
Although more advanced and less energy intensive consensus mechanisms have emerged, BTC's protocol is still valuable because the network was able to become well-established, before it became a big target for hackers. Also, developers have done a good job of updating the protocols, to keep BTC competitive with other blockchains. Click here for in-depth info on Bitcoin's consensus protocol (Proof of Work)
This is also an impressive article on how the Bitcoin network processes transactions, behind the scenes. Like revealing how a magic trick is done.
When nodes are widely distributed, Bitcoin is among the most secure because the development of the network has outpaced a reasonable and economically worthwhile way to attack it. The fact that BTC was "off the radar" for most attackers for so many years while the chain was developing, helped a lot with its security. First mover advantage. However, in reality, because such few operations account for so much of the BTC market, they can more eaisly collude to conduct a 51% attack on the Bitcoin blockchain.
BTC is not a platform. There is a protocol layer build on top of the Bitcoin blockchain that allows for increased functionality, mainly in the form of smart contracts and/or custom currencies. Here is the most recent data on how many tokens are currently built on the OMNI platform, relative to competitors.
Projects built using Omni are supported by Bitcoin’s Proof of Work consensus and SHA-256 hashing algorithm.
OMNI coins are tokens of the Bitcoin blockchain. Any wallet or exchange that supports BTC is automatically able to support OMNI coins without major changes. Since Omni is a platform built on top of the Bitcoin blockchain, all OMNI transactions are recorded and confirmed by the Bitcoin network.
Custom assets - The Omni layer acts as an interface between users and the main Bitcoin blockchain. It facilitates the creation and trading of custom cryptocurrencies or tokens that can be bought and sold at will.
Crowdsales - The Omni protocol also supports a crowdsourcing platform where ideas, events, and inventions can fundraise cryptocurrency in a decentralized, peer-to-peer, trustless, and cryptographically secure way.
Decentralized exchange - User created tokens and currencies can be freely traded over the Omni protocol. Sellers can issue a requested transaction to the Omni layer, with the item offered and a sale price, then anyone who wishes to fulfill the transaction request and has the amount required in their wallet, can perform the transaction instantly, without the seller or any third party involvement.
Extending capabilities of existing networks - Unlike most other cryptocurrency platforms, Omni does not actually have its own blockchain. Instead, it uses the hashing power of the Bitcoin blockchain to implement features such as smart contracts or custom currencies. This reduces the amount of energy used for mining, and improves the security for users in the network.
Shopify- budding ecommerce platform, like Etsy and Ebay.
Dish Network- major satellite TV and ISP.
Roadway Moving Company
Pizza For Coins- allows you to purchase food from major pizza companies, using crypto.
Intuit- created a PayByCoin service, to allow small businesses to collect cryptocurrency as payment, and is integrated into their QuickBooks record keeping.
Microsoft- allows users to deposit bitcoin to fund their Microsoft and Xbox Store apps.
Gyft- gift card retailer.
CheapAir- travel company.
BTC is used as the primary medium of exchange for purchasing other cryptocurrency, which helps keep it relevant and valuable.
MARKETING & SOCIAL MEDIA
Bitcoin has significantly more followers and active community members than most other blockchain projects.This was determined by evaluating Github, Twitter and Reddit platforms. More on how to evaluate this info is available in the "Crypt Keeper by Criteria" section of this site.
BTC is the purest form of currency/assets associated with decentralized and unregulated markets. There is no official person or team that is responsible for compliance, and there is no official country that BTC has to answer to (comply with). Individual users may still be subject to regulations within their home country. Although Bitcoin as a project is relatively immune to regulation, the fact that it's so difficult for central governments to control makes it a bigger threat; thus is a bigger target for regulation by the threatened governments. Countries still have the ability to deter their citizens from using Bitcoin.