How to use Bitcoin?5 min read
A question that comes up a lot from newcomers and critics of Bitcoin is “what is Bitcoin even used for?”. In this article, we will address this question by looking at the current use cases for BTC. Some of the ways to use Bitcoin include:
- Method of payment
- Secure and fast cross-border transactions
- Censorship resistance
- Store of value
Using Bitcoin as a method of payment
Bitcoin has proven to be an extremely useful method of payment for businesses and individuals around the world. The Bitcoin network has made it possible for people who are neglected or excluded by traditional payment methods to finally be included in commerce. For example, businesses in Nigeria looking to import or export goods from other countries have to deal with very restrictive banking regulations and have found Bitcoin to be a welcome alternative. One of the issues that make international trade difficult in Nigeria are the limits on foreign currency exchange imposed by the central bank. These limits have led to the formation of a black market for foreign currencies where businesses have to pay a premium just to get the funds to engage in trade. Businesses that have started using Bitcoin have been able to avoid these added costs and hassles. Aside from the example stated above, Bitcoin has also recently been gaining adoption as a method of payment by some of the biggest companies in the world and more recently data analytics company Palantir Technologies announced that they have started accepting it as well.
Using Bitcoin for secure and fast cross-border transactions
Businesses that accept payments internationally have few options. International transfers using legacy payment processors can be very costly and take days or weeks to complete. For example, the global average fee rate for remittances is 7.14% while the standard charge for OpenNode is 1%. Additionally, online payment processors such as PayPal are not accepted in every country whereas BTC can be accepted by anyone globally. OpenNode can help make moving money across borders much cheaper and faster than international payments through traditional payment channels by allowing your business to accept Bitcoin. With Bitcoin, there’s no need to wait on a bank to verify and process a transaction. Instead, the transaction is verified on the blockchain and can be completed in minutes. If the transaction is carried out using the Lightning Network, it can be completed instantly.
One of the benefits of Bitcoin is its censorship resistance. Without any central authority to dictate who can and can’t use Bitcoin, it has proven to be the currency of choice for many individuals and organizations who have been left out of traditional payment methods. One of the best examples is the whistle-blower nonprofit Wikileaks, which was blocked from receiving cash transfers by Visa, Mastercard, Paypal, and other payment processors for publishing classified U.S. State Department documents. Without Bitcoin donations, Wikileaks may not have been able to continue operating.
Using Bitcoin as a Store of value
One of the main uses of Bitcoin that has helped people around the world the most is its use as a store of value that they can use as a savings mechanism to help save their wealth from being devalued. As mentioned above, Nigerian businesses have been using BTC as a payment method to bypass foreign exchange limits but they are also more likely to hold on to Bitcoin instead of their national currency due to the Naira’s 12% inflation rate. At such a high inflation rate, Nigerians are losing a very significant amount of purchasing power if they decide to hold their wealth in Nairas. Citizens of many nations with high inflation rates have moved their wealth to Bitcoin as a safe haven in order to preserve their purchasing power. Some examples of hyperinflationary countries where this phenomenon is prevalent are Argentina and Venezuela, the latter of which had an inflation rate of 6500% in 2020.
Bitcoin is often referred to as “digital gold” because of its scarcity but the comparison doesn’t really paint the complete picture. While gold has relative scarcity, Bitcoin has absolute scarcity. There will only ever be 21 million coins mined, with the mining scheduled to end in 2140. Bitcoin has a predetermined schedule of new supply being mined every 10 minutes and this new supply is halved every four years making it scarcer over time regardless of demand or price increases. In contrast, the US government has increased the supply of dollars by over 25% just in 2020 from $15.33 trillion at the end of 2019 to $19.19 trillion at the end of 2020, which will undoubtedly lead to inflation and loss of purchasing power for citizens. In fact, the latest US consumer price index (CPI) numbers which are used to gauge the change in prices were much higher than expectations (4.2% actual vs. 3.6% estimated). Additionally, with supply shocks such as the global semiconductor shortage and the recent cyberattack on the Colonial Pipeline causing prices to rise more, it seems reasonable to assume that inflation will rise even more in the near future. With these factors in mind, BTC looks to be the best hedge against future inflationary pressures.
Hedge fund manager Paul Tudor Jones, who is widely regarded as one of the best investors of our time established a position in Bitcoin in May of 2020 as a hedge against the inflation that he thought would arise from central bank money printing. When asked about why he chose BTC, he said “The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.”