21 Questions About Bitcoin V
17. What is a stablecoin?
A stablecoin is a type of cryptocurrency aimed at maintaining a stable value, most often pegged to a traditional asset such as the US dollar, euro, or even gold. While the price of Bitcoin or other cryptocurrencies constantly changes, stablecoins are designed to hold a steady value, for example, 1 stablecoin = 1 dollar.
To maintain this stability, they use various mechanisms, based on which we can divide them into three main categories:
- Stablecoins backed by real reserves – As the name suggests, these "coins" are backed by real reserves in traditional fiat currencies. Examples of such stablecoins are Tether (USDT) and USD Coin (USDC). If someone wants to obtain 1 USDT, they send 1 dollar to Tether, the company that manages the stablecoin. This company then creates a new USDT and sends it to the user. These real dollars are held as reserves. If the user wants to exchange the stablecoins back for dollars, the firm destroys the stablecoin (so-called "burn") and sends back the original fiat currency. The goal is for every stablecoin to be 100% backed by cash or its equivalent (e.g., government bonds).
The disadvantage of this approach is that we rely on Tether to actually hold the given amount of physical dollars and not create additional fictitious stablecoins to profit. What does Tether live on? Is it worth it for them to issue stablecoins? For example, they buy government bonds with the dollars, which provide a low but safe interest rate. Tether reached a net profit of 5.2 billion dollars in the first half of 2024 from holding US government bonds.
- Crypto-backed stablecoins – Instead of fiat money, these stablecoins are backed by other cryptocurrencies (e.g., Ether) and operate through smart contracts. An example is DAI. Briefly, it works by a user locking, for example, 150 dollars in cryptocurrencies (e.g., ETH) into a smart contract, which issues them 100 DAI (thus a stablecoin backed by cryptocurrency). In this case, there is always so-called over-collateralization in case of high cryptocurrency volatility. If the value of the backing falls below a certain threshold (e.g., the price of ETH drops), the system forces the user to top up the collateral (add ETH so the value doesn't drop below 1 dollar), or their security is sold to maintain the stability of the entire system. In this case, we do not trust a third party as in the first example, but we must trust the security of the smart contract. In the past, it has happened several times that hackers managed to find a security hole and stole the collected tokens.
- Algorithmic stablecoins – I must also mention algorithmic stablecoins. These are stablecoins that are not actually backed by anything physical. They rely fully on an algorithm that issues and liquidates them based on supply and demand. If the demand for the stablecoin rises (price is e.g. 1.01 USD), the system creates new coins and lowers the price. If it falls (e.g. to 0.98 USD), the system reduces the number of coins in circulation to raise the price back to 1 USD. Does it work? Theoretically yes, practically in my opinion, no. A beautiful example is the fall of the stablecoin TerraUSD (UST) in 2022, which caused losses in the billions of dollars.
Stablecoins serve to store dollar value against volatile cryptocurrencies. Their price is unchanging, yet they offer the benefits of the crypto-world, such as transaction speed. That is why they are increasingly used for international money transfers. They also serve as a means of payment. Many shops fear volatile cryptocurrencies and therefore choose this path. They also have great significance in the field of decentralized finance (DeFi). There, they are used for lending, staking, or so-called yield farming. They thus allow people who fear higher volatility to stay in the crypto-world.
But in my opinion, their main role is for people from countries suffering from high inflation and strict regulations. In many countries with high inflation, such as Argentina, Venezuela, or Turkey, people often do not escape directly into Bitcoin, but first into stablecoins. The reason is simple – the price of these coins is much more stable than their own currency. In Argentina, in 2023, the year-on-year inflation was over 140%, which means the local currency lost value every month. In such a situation, people try to quickly exchange their paycheck for dollars, but due to strict regulations, they cannot buy them in banks. And so they use stablecoins as digital dollars. Some hold them for only a few days until they buy groceries or pay rent. Others hide them as a form of emergency reserve. Stablecoins in these countries have become the digital dollar for the average person, especially for those who do not have access to traditional banking or a dollar account.
18. What is "Bitcoin Maximalism"?
This book has been focused on Bitcoin from the beginning, and not by chance. Yes, there are thousands and thousands of other cryptocurrencies, known as altcoins, which since their inception have promised to surpass Bitcoin. They claim to be faster, more scalable, greener, more flexible, and often say they will "solve problems" that Bitcoin doesn't actually even have. These claims may seem persuasive at first glance, especially for new users entering cryptocurrencies with expectations of quick profit.
For many, the price is particularly attractive – when you see Bitcoin trading for tens of thousands of dollars and some altcoin costs only a few cents, you subconsciously tell yourself: "If this coin grew to even 10% of Bitcoin's value, I would be a millionaire." This way of thinking is completely natural. People often think they entered Bitcoin late – that they "missed the boat." People said this when Bitcoin's price was 1 dollar, 100 dollars, 1,000, 10,000, and they say it today. And so they start looking for the "next Bitcoin" that could repeat its growth.
It is a path that most people go through. I don't know anyone who bought only Bitcoin and never tried any altcoin "just in case." It is often a combination of curiosity, hope, and fear of missing out. They buy altcoins, watch them with tension, and then bitter disappointments come. Altcoins often lose tens or hundreds of percent in value, or it turns out to be a scam, or a project with no real use. In the best case, they simply do not fulfill what they promised. Many people had to go through this natural path. Bitcoin maximalism is the natural outcome of this journey.
Bitcoin maximalism is a philosophical stance according to which only Bitcoin makes sense as a true, decentralized, unstoppable digital currency, and all other cryptocurrencies are useless, risky, or even dangerous. For many, it is something like an awakening – especially when they compare what their portfolio would look like if they held only Bitcoin instead of twenty altcoins. They realize that behind that "glitter of news," there is often nothing. No other cryptocurrency has the properties that make Bitcoin exceptional: absolute decentralization, a fixed supply, an unchangeable protocol, the highest security, and the greatest trust in the network.
A Bitcoin maximalist is not someone who doesn't know altcoins; quite the opposite. It is usually someone who has already "tried" them and found that Bitcoin is the only asset that makes long-term sense. These are often people who got burned, miscalculated, but learned their lesson. Bitcoin does not only offer appreciation in dollars or euros. It offers freedom. It offers the possibility to live in a world where you manage your own finances without the need to trust banks, government institutions, or unknown development teams with intentions that can change at any time. Bitcoin maximalists often quote the famous rule: "Don’t trust, verify." Never trust – verify. Do not leave your money in a system where someone promises to take care of it. Take responsibility into your own hands. Such people have begun to understand that Bitcoin is not just an investment; it is technology, ideology, and a tool of freedom. Many people have gone through this path (including me) and stopped believing in any instant miracles. And it is from this understanding that Bitcoin maximalism is born.
19. Is Bitcoin also suitable for common daily payments?
It is really hard to answer this question in general. It depends on the specific preferences of people, their life situation, and various external factors. At first glance, it may seem that Bitcoin is not completely ideal for everyday purchases. Every transaction carries a fee, i.e., a payment for miners for its processing. This fee changes depending on the network load and in the past could have been several dollars, which significantly made common payments more expensive. Today, however, this disadvantage is solved by the so-called second layer of Bitcoin – Lightning Network. Thanks to it, instant transactions can be performed with fees lower than one cent and with almost instant confirmation. It is this technology that opens the door to everyday payments for coffee, lunch, parking, or gasoline.
Another factor that may discourage people from everyday use of Bitcoin is its limited supply of 21 million coins. Taking into account its potential long-term value growth, many perceive it as digital gold. Every satoshi spent may be many times more valuable in the future. For this reason, a large part of users chooses the "HODL" strategy – holding their bitcoins and using them only in exceptional situations.
Tax legislation can also pose a problem. In many countries, every bitcoin payment is considered a sale of an asset, thereby creating a so-called tax event. In practice, this means that even if you bought coffee for Bitcoin, you have to deal with capital gains tax if its price has risen in the meantime. It is illogical and inefficient – but unfortunately, this is the reality in most states. This problem is not technical, however; it is legislative and may be resolved over time.
On the other hand, there are significant advantages to the daily use of Bitcoin. Regular transactions help build infrastructure. The more people use Bitcoin, the greater the demand for payments, and the greater the demand, the greater the motivation for merchants to introduce it as a payment option. This increases the acceptability of Bitcoin in practice and expands the chain of places where it can be used. In some cities or communities, entire bitcoin ecosystems are already being created where everything can be paid for – from groceries to coffee to rent.
One of the best-known examples is the coastal town of El Zonte in El Salvador. Thanks to the philanthropic project Bitcoin Beach, a fully functional local ecosystem was created here where residents pay with Bitcoin for coffee, food, school fees, the dentist, or gasoline. All residents have Lightning wallets on their mobiles and entrepreneurs accept Bitcoin as a regular currency. The project has been running for several years and became an inspiration for the introduction of Bitcoin as legal tender in all of El Salvador.
Another example is the City of Lugano in Switzerland, which, in cooperation with Tether (the issuer of USDT), launched the Plan ₿ initiative, under which it is possible to pay with Bitcoin and USDT for hundreds of services. Residents can pay property tax, municipal fees, or parking using cryptocurrencies. The goal is the gradual connection of the cryptocurrency economy with the traditional one. In countries like Nigeria, Venezuela, or Zimbabwe, Bitcoin is used as a practical tool for daily life. These countries suffer from hyperinflation and the devaluation of local currencies. Bitcoin and stablecoins allow them to store value and perform cross-border transactions without the need for banks.
Realistically, however, it must be admitted that economically it often makes more sense to spend less valuable assets, i.e., fiat currency that is devalued by inflation. Therefore, many people keep Bitcoin as a long-term reserve, similar to gold in a vault. Many Bitcoin enthusiasts set their own "psychological boundaries" at which they are willing to spend part of their satoshis – for example, to buy a dream car, a house, or travel. However, the majority still covers common daily payments for groceries or coffee with fiat money. Everyone must find their own answer. Many people believe in the idea of Bitcoin, try to earn it and spend it at every opportunity. On the other hand, there are people who save extremely and try to save as many satoshis as possible during their life. (If you own a car and furniture – you are shorting, i.e., betting on a decrease of Bitcoin.)
20. Will Bitcoin ever replace the euro or the dollar?
We often encounter the vision that in the future we will pay only with Bitcoin. Some Bitcoin fans present this almost as an inevitable fate. Bitcoin will replace current fiat currencies and become the only recognized payment method in the world. This idea sounds attractive. Bitcoin is not controlled by the state, offers us freedom, and meets all the basic properties of good money. Furthermore, there are serious economic models claiming that if Bitcoin became a global reserve currency, its price could rise to tens of millions of dollars per BTC.
Despite these arguments, I am rather a skeptic. Yes, I consider Bitcoin to be higher quality money than the euro or the dollar, and that is perhaps exactly the problem. Let's try to illustrate this with a simple example. Imagine you are on vacation in Thailand and you have a choice to pay for lunch either with Thai baht or US dollars. If you have both these currencies in your wallet, what will you pay with? Most people will pay with baht and keep the dollars – they are more universal and stable for them. Similarly, people in countries with high inflation behave – they get rid of the local currency and try to hold dollars or stablecoins.
When spending, we always use what we think has lower value – and save what is more valuable. According to Gresham's Law (named after the English financier Sir Thomas Gresham, who pointed out this phenomenon in the 16th century), bad money drives out good money from circulation. This means that if two forms of currency with the same nominal value but different intrinsic value circulate in an economy, people tend to hoard "good" (more valuable) money and spend "bad" (less valuable) money. Imagine you want to buy a car worth 100,000 euros. Will you pay with euros, whose value is constantly falling, or with bitcoin, where the assumption is that its price will rise and you will thus deprive yourself of potential further profit?
That doesn't mean at all that Bitcoin is useless. On the contrary. Bitcoin is a parallel financial tool that offers something today's financial system cannot: absolute control over one's own money, predictability, and resistance to devaluation. It is a great store of value, easily usable even in critical situations (for example, in case of war), very easily divisible, and incredibly fast (via its Lightning Network layer, we can send satoshis across the whole world in a few seconds). I don't think Bitcoin will completely replace the euro or the dollar. Rather, I believe its role will be increasingly significant as a reserve, as a way to store value, as insurance against the system, and at the same time as a tool with which we can operate completely outside classical financial infrastructure if necessary.
In the future, I can imagine a world where we will have more options. For everyday purchases, we will use fiat currency or stablecoins, but our savings, our reserves, and our Plan B will be stored in Bitcoin. And that is, in my opinion, a future I perceive as healthy diversification. Bitcoin will not be "all or nothing," but it will be an essential part of our economic system, just like gold, real estate, or stocks are today.
21. What happens to Bitcoin when I die and no one knows my seed?
It is currently estimated that approximately 3 million bitcoins are permanently lost. This is about 15% of the total number that will ever exist. Of course, these are only approximate estimates. But what does "permanently lost" mean? If you once lose access to your seed, there is no way to get to your bitcoins. Thus arises the question many ask all too late: What happens to my Bitcoin if something happens to me and no one knows my seed?
Unlike a common bank account, which your heirs can access after proving death and submitting documents, with Bitcoin there is no headquarters that could restore your password, reset the account, or send you new login data. If you once lose your seed, no one, not even the wallet manufacturer itself, nor the Bitcoin network, can restore it for you. The bitcoins will technically continue to exist in the network, but they will be permanently locked – no one will ever be able to spend them again. They simply disappear from economic circulation.
How to protect bitcoin from loss?
Just as you take care to protect your house, apartment, or other assets, think about your digital property as well. Simply put, you should think about the "back door." Even though it is a sensitive topic for many, you should have at least one trusted person who knows about your bitcoin savings. You don't necessarily have to tell them your seed; you can just indicate to them where it is located or how to get to it if something happens.
Another option is the so-called Shamir backup. This technology is supported, for example, by the hardware wallet Trezor Model T (or Trezor Safe 5). Thanks to this method, you can split your seed into multiple parts (e.g., 5 parts, of which you only need 3 to restore the wallet). You can thus spread the trust – give one part to your wife, the second to the children, the third, for example, store with a notary, and have the remaining two at home and with a friend. The advantage is that no one has independent access. This way you ensure that no single person has full access, but at the same time, it is possible to restore the wallet if necessary.
Be careful, don't overcomplicate it! In a crisis situation, it can be very difficult to coordinate all necessary parts, so your plan must be clear and practical. Some people keep the seed in a sealed envelope with a lawyer or notary, along with instructions. In the event of death, relatives can obtain it based on a pre-prepared document (e.g., a will). Bitcoin is increasingly becoming a part of personal wealth today – similar to real estate, stocks, or precious metals. Just as you should take care of inheritance matters in other areas, think about your digital assets too. If you have already saved something in bitcoin, ensure it doesn't disappear with you along with a forgotten piece of paper.