"Bitcoin is the new, digital gold": interview with Sergey Bazanov, author of "Bitcoin for Everyone"

By: Vladyslav Nuzhnov | 05.06.2023, 09:34

What associations do you have with the word Bitcoin? A way to become a millionaire? A new phase of the global financial system? Or maybe you still think it's a pyramid scheme that is about to collapse. Or maybe you opened this text completely by accident and you want to understand what it is? And maybe there's not as much news about cryptocurrency as a couple of years ago, and video-cards don't cost as much as during boom of mining popularity, but the topic is still interesting. To help understand in more detail what Bitcoin is all about, whether it can even die, what changes Bitcoin is bringing to this world and more, gg talked to Sergey Bazanov, Bitcoin popularizer and author of the book "Bitcoin for Everyone", as well as a series of publications revealing more details about this sphere, who found time to tell us many more interesting things especially for us.

"Bitcoin is the new, digital gold": interview with Sergey Bazanov, author of "Bitcoin for Everyone"

gg: For those who are still not in the know: in simple words, what is a bitcoin?

Sergey Bazanov: By "Bitcoin" we mean two things. The system itself (the network, the technology) and the system's unit of account - the currency. In texts it is common to write Bitcoin with capital (big) letter, if the question is about system, and with small (small) letter, if the question is about unit of account of this system (currency) - bitcoin or stock ticker BTC. And I want to talk more about Bitcoin system and technology.

Bitcoin is a massive phenomenon, so there are many different definitions of it, and most of them are correct. I like brief and at the same time succinct definitions of Bitcoin - "digital gold" and "financial internet or internet of money". But for everyone's understanding, it's worth telling in more detail.

Bitcoin is a whole new stage in the evolutionary development of money

If we go back to the history of money, what was there before Bitcoin? There are three known stages in the evolution of money. The first one is when the so-called 'commodity money' appeared, i.e. money in the form of a widespread commodity that could be used to exchange for any other good or service. This money could be grains, seashells, arrowheads or the like. 

The next phase in the development of money was metal money in the form of bars or coins. Coins were minted from copper, bronze, gold and silver.

The final stage in which we are now at is the so-called fiat or fiduciary money - this is the coloured paper called banknotes which are printed by the state in its central banks.

Also at this stage, alongside cash money (banknotes and coins), so-called non-cash money appears - money which is transmitted by electronic communication channels. It can be transferred over long distances, but requires an intermediary - a bank or a payment system (Visa, Mastercard, PayPal, etc.). Cash and non-cash have advantages and disadvantages - transactions in cash do not need an intermediary, but a meeting of the parties is required, whereas non-cash can be transferred over long distances without a meeting of the parties, but a financial intermediary is needed.

Bitcoin is the first ever engineering solution that combines the advantages of cash and non-cash and eliminates their disadvantages.

Its creator, Satoshi Nakamoto, called his brainchild the Peer-to-Peer Electronic Cash System.

In addition, Bitcoin creates a fundamentally new monetary (money) system in which issuance is transparent, the number of units is limited in volume, transactions are uncensorable, counterfeiting is impossible in principle, and the ownership of the money is absolute, i.e., not influenced by third parties.i.e., it is not subject to the influence of third parties, primarily the state and its punitive authorities, as well as financial intermediaries - banks.

But that's not all! Bitcoin is a fundamentally new payment system, which is fundamentally different from existing ones. Transactions in it are transparent, but users are anonymous and connected to the payment system only on the level of private keys, not personal data. The protection of this payment system is almost absolute because no sensitive data is transmitted to the network. And the money transactions themselves cannot be subject to censorship.

So, in essence, Bitcoin is not even an evolutionary, but a revolutionary stage in the development of money and monetary relations.

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"Bitcoin is the new, digital gold": interview with Sergey Bazanov, author of "Bitcoin for Everyone" -2

You can read more about all this in the book "Bitcoin for Everyone" and on Bitcoin Review, created by Sergey Bazanov to popularize Bitcoin.

gg: Hash, blockchain, cryptography and others. How do people understand all these concepts? It's still a mystery for most

Sergey Bazanov: Actually, an ordinary user doesn't need to understand it all. Look, if a person wants to drive a car, he does not need to know the structure of the engine, gearbox or transmission. To drive a car, it is enough to know how to drive it and the rules of the road. If a person is watching TV he doesn't need to know how waves are transmitted or how an image is formed, knowing the remote control is enough. 

It is the same with Bitcoin. In fact, all those hashes and all that cryptography is needed, either by specialists or people who are just interested in how the hell it works from the inside and how it works. The ordinary user doesn't need this knowledge. It does not improve his interaction with the system. So there is no need to complicate things!

Very simply and briefly, A hash is such a short special code that is derived from a set of data. A sort of fingerprint or image of that data. For each data set, the hash is unique. Therefore it is like a fingerprint of a person. After all, it is known that for each person his fingerprint is unique. This is why the hash is used in cryptography to provide security and control the integrity of transmitted information.

Blockchain, as opposed to Blockchain technology or DLT (Distributed Ledger Technology) is actually a database - a way of storing information. It is a single, secure and decentralised list, or ledger, in which all transactions are stored. Each block contains information about transactions, and all blocks are linked together in a larger chain by hashing - each successive block contains the hash of the previous block. This ensures the integrity control and security of transaction data storage.

Blockchain technology or DLT is the combination of three things into a single mechanism - the blockchain itself as a distributed database, a peer-to-peer or peer-to-peer computer network and a way of achieving consensus on that network. The latter is called Proof of Work (PoW) or mining.

And Cryptography is the science that deals with the confidentiality (secrecy) and integrity (immutability) of data, as well as the authentication of objects (authorship and other data parameters). In Bitcoin, cryptography is used to protect the data stored in the blockchain and secure transactions. This helps ensure user authentication, user privacy and transaction integrity on the Bitcoin network.

Another thing to know about Cryptography is that it works with very, very large, huge numbers. These numbers are comparable to the number of atoms in the visible part of the universe. Processing such numbers requires colossal computational resources, which ensures data security based on modern cryptography, also called Public Key Cryptography or Asynchronous Cryptography.

If you want to know more about this, my book "Bitcoin for Everyone" has it all in plain and simple language. You can also read on my website Bitcoin Review.

gg: There is also such a thing as mining. Has it become less popular now? If yes, what is the reason of it?

Sergey Bazanov: If we speak about mining in the context of mining capacity, for example, how much cumulative CPU capacity is now mining, we see a growth dynamics. This suggests that the popularity is not going down, because the capacities are growing, they are getting bigger and bigger. If we're still talking about popularity, which is measured in the number of direct participants, then what's happening is that it's become very expensive to get into mining. If in the past you could mine on a CPU that was in your PC or on a video card, nowadays it is almost impossible. Nowadays ASIC processors are being used (processors specifically designed to do specific tasks - editor's note). So you have to have a lot of processing power to make money. Of course there is another way when miners with small resources join in pools. When the earnings are distributed proportionally to the hardware capacity of each participant. But that hardly justifies the time and investment for a small participant.

Now mining is a big industry, where people build huge data centres, usually near cheap energy sources, because everyone knows that mining is energy intensive. It's a big power, which is already counted in mega- and even gigawatts.

gg: Wouldn't it turn out that there would be three or four players left here and that would be it?

Sergey Bazanov: The situation here is that miners are driven by the thirst to earn, if you like - the thirst for profit. They are interested in making bitcoin price go up and not down. In fact, it is the incentives of the miners, their desire to profit, that are the basis of Mechanism design of Bitcoin.

Let us imagine that there are only two participants in this race. This means that one of those two would own more than half of the total mining power. And more than half of the mining capacity would allow for a so-called "51 percent attack". In this case, the owner of more than half of the total mining power can censor transactions, skipping something, not skipping something, doing something contrary to the rules of the network in general. After that, the bitcoin price will simply collapse, everyone will realise that the system doesn't work. Right now, no one is interested in getting even 50 percent of the power. There was a case several years ago where one mining pool was getting close to 50 percent of its total mining capacity and it made an organisational decision to reduce its total capacity itself. He realised that this could disrupt the market and all his profits would be at risk.

Although, in principle, there could be a player who wants not to make money, but to disrupt the Bitcoin network as such, in other words - to destroy Bitcoin. In theory, such a threat exists. Who could it be? It could be a large state, which would understand that Bitcoin poses a threat to its monopoly on money. But such an operation would now cost enormous amounts of money, amounting to tens of billions of dollars. And for someone to go for it, it would still have to be decided at the state level. Moreover, it is necessary to create a proper infrastructure, to provide logistics, to hire and train personnel, to provide a source of colossal electricity... This is a huge amount of money and time. If someone does try to do it, the bitcoin community will react immediately.

gg: Who could theoretically do it? The US?

Sergey Bazanov: No, unlikely! There is no dictator there who could say, "Let's destroy Bitcoin!" There's a bipartisan system there, a bunch of lobbyists, a developed civil society. Any government there that decides to do this will simply be "eaten" the next day. It is unreal! China, maybe, but it has no reason to do it either, it's easier to introduce various bans on cryptocurrency activity. So it's all theoretical now...

gg: In your book you gave an example that Bitcoin was buried many times already. Does this trend continue now and can it really die?

Sergey Bazanov: In this world everything can die. History is an unpredictable thing and it is impossible to predict anything. There is even a phrase: "Never say never", so I won't be so categorical that Bitcoin is impossible to kill. But I don't see any serious preconditions for Bitcoin's death right now. In general, during those 15 years of flawless operation Bitcoin proved itself as a stable, and fail-safe system. There have been many attacks on Bitcoin in that time, but none of them have been successful. It is a very reliable system.

The cryptography that Bitcoin is built on, works with numbers so huge that their order is comparable, if not greater than the numbers that measure the number of atoms in our galaxy.

That is, they are numbers on the order of 10 to the 77th power. And the number of atoms in our Galaxy is estimated somewhere in the order of 10 to the 70th power. I made such estimation, that if all computer powers of the Earth would undertake the task to find a private key to some Bitcoin-address, and since it's impossible to find it algorithmically, only by brute force method. So, in order for all of Earth's computing power to pick a key and actually crack Bitcoin, it would take time that is measured in the order of trillions of times of our universe.

gg: What are the most popular myths about Bitcoin?

Sergey Bazanov: 

1. Bitcoin is a pyramid scheme. People who say this, they absolutely do not understand the essence of the pyramid, much less the essence of Bitcoin. I don't even want to discuss it.

2. Bitcoin is a financial bubble. I am not hiding the fact that in the history of Bitcoin these bubbles have been inflated more than once. That is, when the price went up, up, up - that is the financial bubble, but the basis of it lies in human psychology, that is, if something goes up for a long time, people start to get interested and think: "Oh, I need to buy, to sell at a higher price later". New buyers enter the market and the price rises further. A rush ensues! But this is inherent to any financial or material asset.

3. Bitcoin (BTC) is not backed by anything. This myth is based on a misunderstanding of what is actually behind the backing or security of the currency. Yes, Bitcoin is not backed by anything, but it doesn't need to be. Because Bitcoin in its characteristics is, you could say, perfect, organic money, even better than gold. What is commonly referred to as "hard currency" or sound money. Unlike fiat money, which is really not backed or backed by anything, apart from a state system of coercion in the form of laws.

Bitcoin is the digital analogue of gold. Gold is backed by what? Nothing. Only by its existence and its unique properties

gg: What is the advantage of bitcoin over our usual currency?

Sergey Bazanov: What is currency, money? Let's take the dollar, which is called the best currency in the world. Take $10, go to any grocery store in Ukraine and try to buy something for $10. If you fail, you have to go to an exchange office. So, the dollar is not money in this situation? And if you try to buy something for 100 UAH in Europe? Same story, just find where else to exchange these UAH. That is, if you can't buy bitcoin directly in a shop, it doesn't mean that it is not money and has no purchasing power.

So, what is money? It is thought to be some entity that has a number of properties, can perform a number of functions and is accepted by buyers and sellers for exchange. That is, anything that has the properties of money, can perform the functions of money and is generally accepted as money - is money. It is like the well-known expression - "If something walks like a duck, quacks like a duck and swims like a duck - it is a duck!" 

So it is with bitcoin. It has all the properties of money:

  • rarity - limited quantity (bitcoin issue decreases with time and is limited to 21 million coins), which makes bitcoin resistant to inflation, unlike constantly depreciating fiat currencies;
  • longevity - stored forever (actually - it is records in a distributed registry - a database on tens of thousands of computers)
  • divisibility - can be split (divided) into very small homogeneous units - up to 1 hundred million units, called "satoshi" (1 satoshi = 0.00000001 BTC);
  • mobility (portability) - easily transportable to almost any distance in any quantity, since for Bitcoin there are no distances as such transactions take place on the blockchain;
  • interchangeability - bitcoin exists solely in the context of transactions and has no physical entity, so it has absolute (total) interchangeability;
    can be accepted as payment for goods and services;

Furthermore, bitcoin is virtually impossible to counterfeit (protected by cryptographic protocol). Unlike fiat currencies, including the notorious dollar, which has been repeatedly counterfeited by counterfeiters, whose excessive issuance leads to inflation and a drop in purchasing power, worn-out notes are not accepted by shops and the like...

Also in Bitcoin it is impossible for money to be in transit, meaning you transferred money to another person, you no longer have it, while the other user does not yet have it. In Bitcoin, withdrawing money from an account and transferring money to another account happens simultaneously when the transaction is recorded on the blockchain, and everyone is happy. 

It is also important to note that bitcoin currency does not exist outside the Bitcoin network. You can't take bitcoin out of the blockchain, as some say. Bitcoin proper, as a currency, exists only in the context of transactions recorded on the blockchain. Not only is it not a tangible object, it is not even a digital object. It is difficult to understand for people who are used to money in the form of coins and notes, i.e. tangible objects. But bitcoin is built on the concept of value (value) transfer, or equivalently, the concept of debt. For anyone interested in this concept, I recommend reading David Graeber's book "Debt. The First 5000 Years of History".

It is also worth noting that bitcoin is not so much owned by a person, but by a private key corresponding to a bitcoin address. There's even a phrase among bitcoiners that describes this well: "Not your keys, not your coins".

This property allows bitcoins to be used for settlements on the Internet of Things, that is, the exchange of value between technological objects, not people.

And one more important detail. Take cash, in which case there is no need for an intermediary. You come to the market, give money to the seller, get the goods and leave. That's when the money is in your wallet - only you own it. But the disadvantage is that you need to meet in person to carry out the transaction. And if the person is on another continent? Then you have to go to the bank and turn it into non-cash. And so we move on to non-cash, where it's the other way round. You need an intermediary (a bank) and you are not 100% the owner of this money, because you have to instruct the bank. There is a risk that you can't freely dispose of your money, but you can transfer this money anywhere in the world. And Bitcoin takes all the good things of cash and non-cash and removes their disadvantages.

Don't forget that bitcoin will help save your money and avoid inflation. What you could buy for $100 5-10 years ago, you can't buy now. And what was worth 1 bitcoin can now be bought for a tenth or even a hundred-thousandth of a bitcoin.

And with bitcoin there is one interesting trend - whatever price you buy bitcoin at, within the next four years you can sell it for more.

gg: What factors influence bitcoin price?

Sergey Bazanov: now I will say this globally and then you can fantasize. Bitcoin is a commodity. And when it comes to pricing, it does not differ from any other commodity. The price of any commodity in a free market in a competitive environment depends on only two things: supply and demand. Of course, supply itself depends on some factors, demand also depends on some factors. What factors does the supply of bitcoin depend on? On the one hand this supply is limited to the maximum number of coins that can exist at all - 21 million bitcoins, or exist at the moment. Right now there's about 19 million on the blockchain. 

And demand is shaped by a number of factors, including media publications, rumors, large deals, and the behavior of speculators. There aren't many players on this market yet - only about 40 million bitcoin wallet holders. The more users - the more stable and predictable the market will be.

gg: And what are the risks of bitcoin?

Sergey Bazanov: Good question, but we need to clarify - the risks for whom? For the state? Yes! It loses its monopoly on money.

Potentially, Bitcoin can bury the existing fiat money system like the Internet and social networks actually bury newspapers, that is, they deprive media empires of their monopoly on information distribution. In the same way, Bitcoin can deprive the state of its monopoly on money and money circulation.

As for the risks to the user, the main risk is the loss of private keys to one's Bitcoin addresses. Here you need to secure the data yourself, not entrust your bitcoins to someone else. Once again, "Not your keys, not your bitcoins". Storing bitcoins on bitcoin exchanges and the like is a loss of control and a risk of losing your bitcoins. 

Bitcoin itself, as a system, as a network, is secure. It cannot be hacked, but third-party services associated with Bitcoin can. Crypto-exchanges, for example. A crypto-exchange is a gateway that exists between bitcoin and the fiat system. That is, if someone needs to buy bitcoins for fiat currency or sell them, there are places where you can buy and sell bitcoins. How does that work? A person has to transfer money from his Bitcoin wallet or Bitcoin address to the Bitcoin address of the exchange. When he does that, he is effectively no longer the owner of his Bitcoins. So, if someone hacks the exchange, he can get access to bitcoins.

Therefore, the risks of storing bitcoins with so-called custodial services (a service that gives access to bitcoins, but not with private keys, which the owner keeps, but with accounts, which are created - editor's note). This is where the risks are already there.

gg: So, buying from exchange you actually don't have your own address, and if you buy by yourself, it's a very torturous system. What to do then?

Sergey Bazanov: And the thing is that you can't buy bitcoins without intermediary, because Bitcoin network does not accept payments itself, as such, so there are owners, physical bitcoin owners and they can transfer from their bitcoin address to your bitcoin address for certain fee. Cryptocurrency exchanges and over-the-counter exchange centres do this. But here already there is a question of trust, though there are big exchanges, behind which there was not a single history of fraud.

gg: What are the barriers to Bitcoin development?

Sergey Bazanov: I would name two main barriers:

Convenience. It is necessary to provide what is called convenient operation. Imagine if a car had to be controlled like a military aircraft. It is unlikely that we would have many drivers. So you have to provide a very user-friendly interface. Unfortunately, right now the bitcoin interface still leaves a lot to be desired. For example, our banking applications are very user-friendly and everything is clear there. When Bitcoin creates something convenient and secure at the same time, it will be great.

Government regulation. If the state starts to put sticks in the wheels and block the gateways between Bitcoin and fiat services in every way, it will not encourage mass acceptance of Bitcoin.

It should be noted here that the state has no ability to interfere in Bitcoin network, block transactions there or arrest Bitcoin addresses. But the state can regulatively restrict the ability to exchange bitcoins for fiat currencies, can prohibit bitcoin settlement and mining. It can even impose criminal liability on Bitcoin network users. In short, the state is one of the main barriers to mass acceptance of bitcoin as a currency.

gg: How to start "mining" bitcoin for those who haven't done it yet?

Sergey Bazanov: Ordinary users should definitely forget about mining, that time has passed. Bitcoin can be bought on any reputable exchange, which is available in Ukraine, the same Binance or Kuna.

gg: Bitcoin will not be able to fully replace the usual money? It is hard to imagine that worldwide transactions will go through BTC

Sergey Bazanov: Horses didn't disappear completely, they just have another role. For example, from time to time rich people come for horseback riding. And newspapers in the future will become another kind of expensive collectible. First of all Bitcoin can and must become a system, where value can be stored so that it won't be eaten by inflation. Bitcoin could well become the world's reserve system for storing value, competing with gold. It is an investment to preserve what it earns. 

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