By Richard Martin
Introduction
Bitcoin is a monetary and financial revolution on an international scale. Ready or not, it is affecting individuals and countries around the world. It’s therefore wise to understand how it works and what the most relevant use cases are.
Launched with little fanfare in January 2009 and first used in a commercial transaction in 2010, Bitcoin trades at around US$24,000 as I write this in late February 2023, having peaked at over US$60,000 in 2021.
The price of Bitcoin is volatile, but growing numbers of individuals, institutions, companies and even countries are looking to profit from the exponential growth and adoption of the Bitcoin network. In June 2021, the Salvadorean parliament passed a law granting Bitcoin legal tender status in the country, on an equal footing with the US dollar. Since then, there have been indications that other governments in Latin America and Africa are considering El Salvador’s example with a view to similar policy changes.
Bitcoin belongs to a class of assets known as “cryptocurrencies,” or “crypto.” In fact, bitcoin is the original cryptocurrency, invented and launched before all others. The thousands of other cryptocurrencies are just derivatives or pale imitations of the original. In other words, there is bitcoin and there is everything else, referred to as “alt-coins” or, less gloriously, “shit-coins”. The focus of this article will be on Bitcoin only as I believe it is the only serious contender to compete as a new world currency.
I’ll begin with a bit of history. I will then outline the functioning of the Bitcoin network and its monetary unit, bitcoin (BTC).[1] A brief analysis of Bitcoin’s monetary and economic characteristics follows. We will then look at some promising applications of the Bitcoin network and the BTC currency in Africa. We will show how Africans can use it to make fast, easy, and virtually free financial and commercial transactions at global and local levels, as well as to harness off-grid electrical power to benefit local populations.
Bitcoin presents an unprecedented opportunity for Africans to become rich and prosperous by leveraging alternative, yet legitimate, financial, and monetary rails to those of the current international financial system made up of the IMF, World Bank, BIS, SWIFT, and other structures.
Some History
Bitcoin represents the first opportunity to save and transact internationally in hard currency since the gold standard fell in 1914. Hard money is money that cannot be increased in quantity at will. In other words, hard money exists in limited quantities and cannot be increased without considerable effort and investment in capital and financial and human resources.
Before the modern era, which began in the sixteenth century, trade and wealth accumulation were based on material goods such as livestock, minerals, furs, wheat, seashells, and various other valuable goods. Precious metals, especially gold and silver, became the most valuable currencies over time. This is what economists call commodity money, with gold and silver being the currencies used as the standard for all trade, savings, and investment in capital goods.
Silver is scarce compared to other metals. But it is also very useful in industrial processes and is used in many products. As a “people’s currency,” there has always been enough silver. Gold, on the other hand, is rare and difficult to mine. It is the most durable, beautiful, and malleable metal. It is therefore the most suitable for making art objects, jewellery, coins, scepters, and crowns.
Precious metals are very difficult to produce, requiring the search for rich deposits and veins at the far reaches of the planet, advanced industrial processes for refining and high-capacity processing, and considerable investment. The annual amount of silver produced and used in industrial applications is significant. The value of silver is higher than that of the more commonly used metals, such as copper and nickel. Gold, on the other hand, is very scarce, with average annual production amounting to only about 2% of existing above-ground stocks. Experts estimate that almost all the gold produced since the dawn of civilization is still in existence. Most of it is in the form of stored bullion, used as long-term collateral and reserves by the world’s major central banks. Gold therefore maintains its value at a relatively high level and is still a basic investment for the wealthy.
Archaeological excavations have unearthed caches and tombs filled with seashells, gemstones, jewellery, weapons, and precious metals, first copper and silver, then gold. Gold has always and everywhere been the ultimate store of value, symbolising power, beauty, authority, and life itself. Therefore, if silver was considered the currency of the people, gold was the currency of kings and other magnates.
In contrast, the current international monetary system is based entirely on a pyramid of fiat currencies with the US dollar at the top. A fiat currency is a currency that has no commodity value. Its use and legal tender are entirely dependent on government decrees and laws. Governments can also create unlimited amounts of fiat currencies through central banks and other means of economic control. History has repeatedly shown that this can lead to hyperinflation and economic devastation, with all their negative consequences.
How Bitcoin Works
Bitcoin is a system consisting of two distinct but related elements. The first is a worldwide network of computers that is decentralised, robust, and resilient. The other element is the monetary unit produced and traded on the Bitcoin network, known as bitcoin. Its symbol is BTC. We will deal with both elements in parallel, as one cannot exist without the other. When we want to talk about Bitcoin, capitalised, as a computer network, we will specify that we are talking about the “Bitcoin network.” We will refer to it as bitcoin or BTC when referring to bitcoin as a monetary unit or currency.
I will not discuss the technical aspects of the Bitcoin network and BTC currency unit. There are already very thorough treatments that will give the reader an idea of the mechanics of the network and its technical operation (Ammous, Saifedean, The Bitcoin Standard: The Decentralized Alternative to Central Banking, Wiley, 2018). Instead, to highlight the characteristics that distinguish the Bitcoin network and BTC from other existing monetary systems and financial networks, I will limit myself to a functional description of the Bitcoin network and BTC.
The Bitcoin network was announced on October 31st, 2008, by an individual or a group – no one knows for sure – under the pseudonym Satoshi Nakamoto. The first bitcoin (BTC) was mined by Nakamoto on January 3rd, 2009. Since then, thousands of miners around the world have been producing BTCs with the help of Nakamoto’s software.[3] The first transaction using BTC as a currency took place in May 2010. A man in Florida bought two pizzas for 10,000 BTC. The network’s software and protocol have been under development and refinement ever since.
There is no single entity in control of the Bitcoin network, be it an individual, a group, a company or even a state. Despite this, there have been several attempts to gain control of the network or change the way it operates, but all have been thwarted. Some states, notably China with its ban on bitcoin exchanges and miners in China, have tried or are trying to interfere with the operation and scope of the Bitcoin network. The Bitcoin network absorbs the impact, but the protocol and software governing its operation have resisted these attacks by adapting automatically without human intervention.
The key to this resilience can be attributed to several factors, including the network’s inherent decentralisation and near-total automation. In fact, the only way the bitcoin network can function is in a decentralised and automated manner. The network automatically reacts and adapts as soon as any individual or group, no matter how powerful, attempts to influence or change the protocol, software, or rules of operation. Even the smallest elements in the Bitcoin network can resist change in the face of concerted campaigns by the larger players. In summary, the Bitcoin network requires almost total unanimity among node operators and miners for any change in its operation.
The best comparison for Bitcoin is the Internet. Since its inception in the late 1960s, the Internet has become increasingly resilient, robust, and powerful. It has penetrated all areas of commerce, politics, society, and technology on a global scale. The most powerful states in the world try to influence and control the Internet, but save for a few exceptions, they have not been able to impose total censorship on a permanent or even complete basis. Internet nodes still manage to survive and resist these attacks, and communication and data transfer channels override state-imposed restrictions. Consider the famous VPN software and the Tor network, which allow users to hide their location to access officially banned websites and services. The Internet and the Web are a bit like the Wild West, and that’s the way most users like it.
Even China, who built its Great Firewall to limit the free flow of information internally and externally hasn’t entirely succeeded. Internet data flows must go through terrestrial channels, i.e., fibre-optic cables. But what will happen when satellite communications go global and terrestrial networks become obsolete or supplemented? It is a safe bet that the Internet will continue to function and will continue to spread. Since the Bitcoin network is the “Internet of money,” we can expect that it will survive any attack or attempt at influence for a long time.
Bitcoin consists of three elements: “miners,” “node operators,” and the Bitcoin “blockchain.” “Miners” are companies that use specialised, ultra-powerful computers to generate millions of random numbers per second, which vary in difficulty depending on the overall capacity of the network. As the number of miners and the number of transactions on the network increase, the level of mathematical difficulty increases in a parallel fashion. A decrease in the number of miners or transactions results in a decrease in the level of difficulty. A miner quickly propagates his solution to the Bitcoin network when he announces that he has generated the correct random number, regardless of its difficulty. Node operators must then confirm that the transactions are valid for the winning miner’s block to be added to the blockchain.
The Bitcoin blockchain provides a permanent and immutable record of all validated and confirmed transactions. A new block of validated transactions is added to the blockchain at an average rate of once every 10 minutes. The blockchain is archived by all full nodes in the network, including the miners. As a result, there can be no fraudulent transactions (e.g., spending the same amount of money on two different purchases), and the blockchain is completely public and visible to anyone who wants to see it. The blockchain permanently records all transactions and can be viewed by anyone who wishes to verify its contents. With the Bitcoin network’s blockchain, there is no real possibility of accounting fraud, as it would have to be done in full view of the node operators and miners. This would result in fraudulent transactions being rejected almost immediately.
Bitcoin’s Monetary and Economic Features
The 10-minute validation of transactions is considered by some critics of Bitcoin to be far too slow. However, transactions on the Bitcoin network should be compared to traditional international money transfers, which can take several days and incur significant fees, rather than to bank cards and other credit instruments. We will come back to this point when we look at how the Bitcoin network compares to more traditional financial channels.
We have already mentioned that “miners” are those who search for a random number and group transactions on the bitcoin network into blocks for addition to the blockchain. Miners need to use specially designed and very powerful computers to find the random number by brute force. This requires an ever-increasing investment in computing equipment. In addition, all these computers consume electricity to power application specific integrated circuit microprocessors (ASICs) and cooling systems.
Miners need to be compensated for these expenses and investments. Therefore, the Bitcoin network is designed to “reward” the miner who comes up with the correct random number every 10 minutes and has all the transactions in its block accepted as valid. When the winning block is validated by the Bitcoin network nodes, it is added to the blockchain and the miner who created it receives a predetermined number of bitcoins (called the coin base transaction) and the transaction fees paid by those whose transactions are included in the block.
When the Bitcoin network was first launched in 2009, all that was needed to find the necessary random number was an ordinary computer. But as more miners and nodes joined the network and the number of BTC transactions grew exponentially, competition intensified. A miner now needs thousands of hyper-specialised, ultra-powerful computers to have a reasonable chance of finding the random number that validates their transaction blocks. Miners that are too small to deploy enough computing power independently are forced to shut down or join miner pools. They hope to get a share of a block reward from time to time when their pool is successful in finding the random number and having their block of transactions validated and added to the blockchain.
A bitcoin miner’s life isn’t easy. Competition is fierce and capital requirements are significant and rising. The reason there are so many miners is that the return on investment can be enormous, especially during turbulent times, such as the reduced computing power brought about by the Chinese government’s bitcoin mining ban in 2021. Miners who can access reliable and inexpensive power will benefit in the short to medium term, especially in times of chaos.
So far, we have said very little about the monetary unit of the Bitcoin network, bitcoin token (abbreviated BTC). The reason is simple. Talking about bitcoin as a currency doesn’t really make sense without first describing the whole network and the systems that make it possible. It is like talking about the US dollar without mentioning the US Treasury, the Federal Reserve, the IMF, or the World Bank. The same goes for all other national currencies: the pound sterling, euro, Chinese yuan, Swiss franc, and even the world’s lesser currencies (Canadian dollar, rouble, etc.).
The most important monetary feature of the Bitcoin network is this: There is a fixed number of bitcoins. No matter how active the Bitcoin network becomes, the maximum number of bitcoins that will ever be “mined” is 21 million, no more, no less. Since the creation of the first Bitcoin block in January 2009 (known as the “genesis block”), the Bitcoin network has been producing bitcoins like clockwork, even in the face of concerted efforts by several individuals and miners to lift the limit. Moreover, every four years or so, the coin base transaction, the miners’ basic payment, is halved. For the first four years, the coin base payout was 50 BTC every 10 minutes. But on 28 November 2012, after its first four year, the coin base payout automatically reduced to 25 BTC every 10 minutes. In 2016, the payout to winning miners was reduced to 12.5 BTC, and in 2020 to 6.25 BTC every 10 minutes. The next halving will probably occur during April 2024, whether anyone likes it or not, and will therefore be 3.125 BTC every 10 minutes for the following four years.
According to experts, the last satoshis will be mined in 2140. The growth of the BTC money supply will therefore be asymptotic. At the beginning of 2023, more than 19 million bitcoins have been generated, leaving less than 2 million to be mined over a period of 120 years! This fact is of great importance for the Bitcoin network, as there will never be more than 21 million BTC in circulation. The Bitcoin currency cannot be devalued by inflation; it can only increase in value, not only in relation to existing national currencies (USD, GBP, CHF, JPY, EUR, CAD, AUD, etc.), but also in relation to the goods and services that can be purchased with bitcoins and satoshis now and in the future.
In other words, if BTC becomes a common currency, it will only increase in value in real terms. While most economists are still sceptical, an increasing number of are of the opinion that the network can effectively replace not only national currencies, especially the US dollar, as the international reserve currency, but even gold, the longest-lived store of value.
There are many current applications that are of vital interest to Africa and Africans, regardless of whether the Bitcoin network or currency becomes the monetary standard of the future. These will be the subject of the final part of this article.
How Africans Can Benefit from Bitcoin Now
There are two applications that have great potential for Africa and Africans. The first is to use the Bitcoin network to conduct commercial and financial transactions globally, bypassing central banks and centralised channels such as the SWIFT network or companies such as Western Union. The second is to use bitcoin mining to invest profitably and sustainably in hydro, wind, or solar power for off-grid electricity generation.
The Bitcoin Network as an Alternative Financial and Monetary System
The current international financial and monetary system consists of a network of central banks (with the US Federal Reserve at the apex), international financial institutions (IMF, WB, BIS), communication protocols (SWIFT) and financial and banking companies around the world. This system was set up in the decades following the Second World War. It has been refined ever since to facilitate international financial and trade exchanges. The world has benefited greatly from it, but there are growing shortcomings that undermine the potential for economic and commercial growth and investment in less developed countries, particularly in sub-Saharan Africa.
It’s beyond the scope of this article to describe these shortcomings in detail. But one example illustrates the limitations of the current system of international payments. Case in point: Western Union. First, the parties to the transaction must provide a great deal of confidential information, including the reason for the money transfer. Second, there is a fee, which can be a significant proportion of the transferred amount. Second, the recipient may have to travel to a Western Union office, which may be a considerable distance away. In addition to the transaction and exchange fees, there may also be personal security risks and travel costs associated with this.
Western Union offers several ways to send money electronically. However, it is also important to note that a significant proportion of the population in sub-Saharan Africa remains unbanked. This makes sending and receiving electronic money difficult. Only about 55% of the population in sub-Saharan Africa had a bank account in 2021, according to the World Bank. However, 33 per cent had a mobile phone account, the highest proportion in the world. But there are still obstacles. And they are costly to overcome.
There is therefore huge potential and opportunity for any business to reduce transaction costs, speed up transactions, limit personal risk and reduce obstacles and interference from international, governmental, and commercial authorities. The Bitcoin network is a more than viable option in this regard. Moreover, there are already companies using its economic and financial potential to transfer large sums of money globally at negligible or very low cost. One example is the service enabling money transfers between individuals in the US and Nigeria, Kenya, and Ghana, provided by the US company Strike (strike.me) and its African partner Bitnob. The cost is virtually zero (although there are always exchange costs) and the transfers are made directly between individuals in local currencies at the speed of light. There is no need to go to a bank branch or disclose too much sensitive information and data.
Other companies are beginning to develop innovative services that allow Africans not only to acquire a virtual bank account, but also local and international transactions, minimising the impact and risk of distance, reducing costs, and minimizing surveillance and unwanted intrusions. Examples include Bitcoin Ekasi in South Africa, which aims to build a community around local use of the Bitcoin network, and Bitcoin Manchankura, which enables mobile phone transactions using bitcoins and satoshis.
It should be noted that the latter companies are based in South Africa. Their target markets are mainly English-speaking countries in Africa. So far, there do not seem to be any companies offering similar services in the French-speaking parts of Africa. This is an opportunity to be seized, particularly in CFA franc zone countries.
Leveraging the Bitcoin Network to Boost Off-Grid Electrification
Africa’s hydro, wind and solar potential is vast but remains untapped, not least because of a lack of capital to invest in infrastructure and a lack of confidence among investors and operators that they will be able to recoup their investments and cover their operating costs. In the Democratic Republic of Congo alone, the hydropower potential is estimated at over 100,000 MW. This would require the construction of hundreds, if not thousands, of mini and micro hydropower plants.
This is where the Bitcoin network comes in with an innovative solution for small-scale hydropower in sub-Saharan Africa. How, might you ask? The logic is simple, but powerful, and can be illustrated by the US company Gridless, which seeks to invest in micro-hydro in Africa to provide local electricity without the need to invest billions in building large-scale infrastructure, requiring decades of financing with massive financial, economic, environmental, and political risks and costs.
Access to a reliable and affordable source of electricity is essential for bitcoin miners. To this end, many miners, either alone or in partnership with other users, are connecting to unused hydroelectric plants or other unconventional energy sources in more developed countries. Some use non-marketable natural gas to power mini-turbines near wellheads, to generate relatively inexpensive electricity. Others are turning scrap tires into fuel that can be used to power generators that in turn can power their computers. Meanwhile, a nuclear power plant in the US has started mining bitcoin with excess electricity at times of low market demand.
The biggest challenge for small-scall power generation in sub-Saharan Africa is finding the capital to build and connect to regional or national grids. Then, to maximise sustainable, profitable operation, there must be a minimum assured demand for the operator. Bitcoin mining provides an assured buyer for the electricity generated. This can fund a significant portion of the initial investment and provide operating revenue until local demand ramps up over time. Bitcoin mining thus provides a means of generating revenue until the local electricity market is sufficiently attractive to justify longer-term investment and operation. In this way, electrification in Africa can be driven by local electricity supply and demand combined with the long-term development of the Bitcoin network.
This model of electricity investment and operation alone will not solve Sub-Saharan Africa’s electrification problem, but it is an interesting way forward among a range of options and tools. Compared to the financial and monetary services described in the previous section, this is still a very uncharted and underdeveloped area. However, the potential is there, and all options should be considered and explored.
Conclusion
This is a long article, but we’ve only begun to scratch the surface of the possibilities offered by the Bitcoin network and its native currency, bitcoins/satoshis. We have explored the economic, technical, and monetary workings of the Bitcoin network. This was only preliminary to describing the two most important ways in which Bitcoin can be used in Africa.
We described Bitcoin’s potential to facilitate financial, commercial, and monetary transactions. Several examples of innovation and success have been identified, but it is important to recognise that the commercial potential for companies and entrepreneurs who seize the opportunity to better serve Africans from all walks of life are abundant.
The huge potential for electrification through the Bitcoin network and the mining of bitcoin has also been highlighted. The trend is still in its infancy. It will be interesting to see the development of the few projects that are under way, especially those of Gridless. Anyone can invest, innovate, and take advantage of Bitcoin’s financial, commercial, technical, and economic leverage.
As mentioned, the Bitcoin revolution is underway. Bitcoin offers Africans an unprecedented opportunity to become richer and more fulfilled by taking control of their own destiny through cutting-edge, decentralised, and empowering technology.
[1] Each bitcoin is divisible into 100,000,000 satoshis, named in honour of the pseudonymous inventor of the Bitcoin network. Satoshis, or sats, can be further subdivided into microsats, i.e., .001 sat.
[3] The original and most frequently used implementation of the Bitcoin software is known as Bitcoin Core, and has been improved many times since its first publication on github.