This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
One innovative feature of the Bitcoin network is the public ledger. The public ledger is one of the features that allows the Bitcoin network to operate without a trusted third party. The public ledger has recorded every single transaction that has occurred on the Bitcoin blockchain since Bitcoin’s inception!
The Bitcoin network ushered in a new accounting system known as triple entry accounting. Under the traditional accounting system, two book entries are required for every transaction a person or business makes, one debit and one credit, hence the name double entry accounting. Bitcoin’s ledger creates a third place an entry is placed which provides proof to everyone that the transaction has occurred. As a result, the Bitcoin ledger is constantly performing an audit as it validates each block approximately every 10 minutes. This is an astonishing accomplishment as it allows the parties to know with absolute certainty how much bitcoin is contained in each wallet.
Two recent events have displayed the value of Bitcoin’s public ledger. The collapse of FTX in late 2022 illustrated the value of Bitcoin’s public ledger. After a thorough examination of the FTX assets, bankruptcy documents revealed that FTX held $6 million worth of bitcoin while it owed its clients $1.6 billion in bitcoin. FTX created $1.594 billion in paper bitcoin. Paper bitcoin is a phrase used by the bitcoin community to signify bitcoin IOUs. The risk of purchasing and holding bitcoin on any exchange is the exchange may not hold the bitcoin it says it does for the customers. This became painfully real for FTX customers who thought they had their bitcoin safely secured by a trusted third party.
Bitcoin’s public ledger allows an individual who holds bitcoin to not have to rely on a trusted third party’s books which they are unable to access. Instead, a bitcoin user who self-custodies his/her bitcoin on the Bitcoin blockchain can verify the amount of bitcoin he/she owns by searching his/her wallet on the public blockchain. This is Bitcoin’s free audit service it provides to the public!
More recently Silicon Valley Bank (SVB) collapsed and was taken over by the Federal Deposit Insurance Corporation (FDIC). Unfortunately, individuals and businesses that banked with SVB will only have $250,000 insured by FDIC. Any amount above $250,000 is at risk for the individual or business and will become an unsecured credit. While admittedly the price of bitcoin can be extremely volatile, any bitcoin held by a user through the use of Bitcoin’s private keys, public keys, and public addresses and verified by the ledger is fully secured.
If a user has 1,000 bitcoin held in a wallet, the ledger fully guarantees the user has 1,000 bitcoin so long as the user has control of the private key. At the current price of $22,000 per bitcoin, the 1,000 bitcoin would be worth $22,000,000. If instead a person or business held $22,000,000 in United States dollars at an FDIC insured bank, the person or business would be guaranteed $250,000 and the remaining $21,750,000 the person or business would hold as an unsecured creditor should the bank fail like SVB. It should be noted that the FDIC along with the Federal Reserve and the Department of Treasury stepped in to fully insure all deposits at SVB. At least this time, businesses and individuals who had deposits greater than $250,000 will be safe. Who knows what will happen next time.
Bitcoin’s ledger is decentralized and controlled by the nodes that, collectively, verify the transactions that occur on the Bitcoin blockchain. Bitcoin’s ledger is open, transparent, and immutable. By holding a private key any individual or business can be its own bank and guarantee the ownership of its bitcoin without any reliance on a trusted third party or government.
