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Bitcoin is not a Virtual Currency

October 2013

Bitcoin is not a virtual currency, calling it so would mislead us about the changes it will cause. Bitcoin is a decentralized and virtual proof of ownership. Currently the asset it virtualizes the bitcoin currency (XBT). Let me clarify this sentence by giving few definitions.

Virtual

Virtual means that the proof of ownership of the underlying asset can be transferred using the internet, without dealing with physical items.

(De)centralized

If there has to be a third party other than the sender and the receiver to tansfer the ownership, It is called centralized. However If It can be transferred without the help of the third party, It is decentralized.

Layers of Virtualization

Next, let me very shortly explain how currently our financial system deals with the buying power a.k.a money which is an asset.

Purchasing Power

Wikipedia defines purchasing power as:

... (sometimes retroactively called adjusted for inflation) is the number of goods or services that can be purchased with a unit of currency.

Currency

Currency is a scale of purchasing power issued by the governments. It is like a time, It helps people to communicate efficiently.

However, It's value can be manipulated by it's issuer via adjusting interest rates, increasing the circulation volume, etc.

Cash

Cash is a physical representation of a currency. It is used for transferring the underlying currency. It is a medium of exchange.

Cash is decentralized. Two parties can exchange cash without the third party.

Cash is not virtual meaning that the cash physically has to move so that It can be used by someone else.

Banks

Bank is a virtualization layer for cash. They are basically WaaS, Wallet as a Service. They translate cash into bits and bytes to make the cash "virtual", so that the currency can be transferred between two parties using the internet.

However, this comes with a cost which is that It is not decentralized anymore, meaning that without the banks two parties can't send or receive the money they own.

The Future

Bitcoin, or it's derivatives are the future of medium of exchange. They will provide virtual and decentralized ways to exchange many different physical or virtual assets. They will also have other benefits like keeping the parties anonymous. As happened in the history, the decade old technologies/standards that people are used to limit their ability to make good estimations about the future. We have to forget a lot about our daily routines, if we wan't to get a better understanding of how this will affect us. Imagine yourself as the one of the first people who have experienced the internet, Don't make the mistakes they have made.

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