Bitcoin has rallied 20% this month amid a global wave of bank failures. The effects have been great — shares of Silvergate Bank have declined 88% this month. Switzerland organized a bailout of the largest failed bank in world history, Credit Suisse, for 98% less than its peak valuation. Last weekend, Signature Bank and Silicon Valley Bank collapsed to near-insolvency before the Federal Deposit Insurance Corporation (FDIC) assumed control.
Bitcoin was born out of a similar banking crisis. In 2009, a staggering 140 US banks failed. Bitcoin creator Satoshi Nakamoto mined the genesis block of Bitcoin that year, writing extensively about the perils of banks and their vision for a new financial system. Lest anyone doubt Bitcoin’s intention, Satoshi inscribed one message into that block: a newspaper headline about bank bailouts.
Satoshi Nakamoto built Bitcoin to disintermediate third parties from digital cash transactions. Using the Bitcoin network, no one need trust any bank nor government to confirm payment.
Don’t trust, verify
Bitcoin solved the Byzantine Generals Problem, long thought to be an unsolvable paradox. Imagine several Byzantine generals approaching an enemy city. Separated by great distances and unable to hear or see one another, they must communicate via messengers. A paradox arises in how these generals achieve consensus on how to attack the city given unreliable communication, time delays, and the possibilities of lies and traitors.
Prior to Bitcoin, there was no solution to a mathematical representation of this problem that specified tolerances of message randomness and time delays. By 2009, Satoshi Nakamoto had circulated a whitepaper that solved the paradox through a combination of cryptography and distributed computing.
Specifically, Bitcoin allows parties to use a universally verifiable measure of work, electricity consumption, to prove which transactions are valid. Despite imperfect knowledge of the state of the network, a few simple rules such as no double-spending, 21 million supply limit, and most-proof-of-work-wins, allow any full node to validate any transaction since Bitcoin’s genesis in 2009.
Knowing you’ve been paid — without a trusted third party
In other words, Bitcoin’s messaging network allows parties to validate the truthfulness of delayed messages without requiring trust in any particular intermediary. If the message follows consensus rules and has the most electricity consumption backing its claims, it’s valid.
As it applies to financial transactions, Bitcoin allows anyone to know that they have been paid without trusting anyone else. Indeed, it was early Bitcoiner Paul Storcz who popularized the definition of money as “knowing you’ve been paid.”
In a conventional US dollar cash transaction, parties know they have been paid because they trust the US Mint to have printed a trustworthy paper note and law enforcement to have deterred counterfeiting.
Bitcoin, in contrast, is a new form of money that does not ask a trusted third party — not even a bank or mint — to validate a payment. It allows anyone to know they have been paid, using their own node, without trusting any intermediary.
Bitcoin succeeds despite bank failures
Bitcoin’s decentralized operation has shown resilience during a string of crypto and bank failures.
- The multi-billion dollar Celsius Network declared bankruptcy on July 13, 2022. Celsius’ slogan was “unbank yourself.”
- FTX declared bankruptcy in November 2022 and Alameda Research followed soon after. Evidence that senior employees at FTX and Alameda Research defrauded FTX’s customers is mounting.
- The US government bailed out Silicon Valley Bank and Signature Bank. The Swiss government orchestrated a bailout of Credit Suisse by UBS.
Despite the collapse of these banks and the increasing difficulty in accessing fiat onramps to purchase bitcoin, its price has continued to rally this year.
Bitcoin works without banks and has continued adding blocks of transactions on schedule, as planned. Over 17,000 full nodes are online at any moment with a complete copy of Bitcoin’s blockchain.
Banks centralize trust in transaction validation, and they require public trust to avoid bank runs. To this day, Bitcoin does not require trust in anyone, and least of all banks, as Satoshi inscribed at inception.