What problems does Bitcoin solve?

Understanding Bitcoin's utility 🧰

  • The Bitcoin blockchain is decentralized, permissionless, and reliable.

  • Bitcoin increases access to basic financial services and facilitates cross-border payments.

  • The Bitcoin blockchain is open and transparent. Every transaction on the network can be traced.

  • Bitcoin's creator, Satoshi Nakamoto, imposed a hard-capped supply of 21 million BTC, creating a provably-scarce asset.

Since Satoshi Nakamoto published the Bitcoin whitepaper in 2008, people worldwide have wanted to know what problems this novel technology tries to solve.

As new users adopt the cryptocurrency to store wealth and transact online, the relevance of the question grows.

At its core, Bitcoin addresses several inherent problems with traditional finance and banking.

Many people may not even be aware of these issues, and it's understandable why. Traditional banking processes purposefully lack transparency and basic financial education is seldom taught in schools.

As a result, most individuals remain unaware of the alternatives available to them and the potential benefits that decentralized digital currencies like Bitcoin can offer.

crypto staking image

btcBitcoin Price

+2,20 %

Bitcoin decentralizes financial transactions 🔄

Most people around the world rely on centralized payment services to facilitate online transactions. PayPal, Mastercard, Visa, Google Pay, and Apple Pay are just a few popular examples.

We entrust these intermediaries to handle our money and data, and in return, they charge fees for their services.

However, these services come with specific problems related to their centralized design.

To understand these problems, consider that traditional fiat rails are "permissioned," meaning they are controlled by a central party, unlike permissionless systems that are completely independent.

With each purchase made through a centralized financial network, various banks and third-party intermediaries are often required to transfer funds between the consumer and the merchant. At each step, approval is needed to clear the payment.

These intermediaries act as de facto gatekeepers between you and your money. Every time you initiate a purchase through a centralized service, you are effectively asking for permission to spend your funds.

In contrast, transactions made on the Bitcoin network are fully decentralized and permissionless.

This means there is no owner or governing body that can interfere with the payment process or block transactions. With Bitcoin, anyone can make peer-to-peer transactions without seeking approval from any authority.

Bitcoin is reliable

Centralized services can also be prone to reliability issues due to their inherent single points of failure, often leading to widespread disruptions.

For example, when a bank's server is down, its smartphone application undergoes maintenance, or a local ATM is out of service, conducting transactions can quickly become problematic—especially if you're short on physical cash.

In contrast, Bitcoin is accessible 24/7 from anywhere in the world with a stable internet connection.

This is because Bitcoin relies on a decentralized network of computers operating independently across the globe to verify transactions and secure the network. The Bitcoin network runs continuously thanks to its distributed community of nodes and miners.

Using free online tools, anyone can view the Bitcoin network's uptime—the measure of an online system's reliability—since its launch, showcasing its impressive consistency and resilience.

Bitcoin increases access to financial services 🌍

Bitcoin's reliability is especially valuable in areas underserved by traditional financial services.

In many developing regions, the availability of financial services is limited. It is estimated that over a billion people worldwide remain unbanked.

Several factors contribute to this situation: the costs associated with opening an account, the distance required to access banking services, and a general distrust of financial institutions.

Additionally, maintaining a brick-and-mortar establishment may be unprofitable for banks in poor and rural areas, further restricting access.

The Bitcoin network offers the world's unbanked population the ability to send and receive funds electronically without relying on traditional financial services. This decentralized system provides a potential alternative for those excluded from conventional banking, promoting greater financial inclusion.

Facilitating cross-border payments

Facilitating global remittance payments is a popular use case for Bitcoin, particularly for individuals with limited access to traditional financial services.

For many families, the ability to efficiently send and receive money across international borders is crucial. For instance, many migrant workers in the United States frequently send money back to their home countries. Unfortunately, when these payments are made via traditional banking services, they can be expensive or difficult for recipients to access.

Bitcoin provides a solution by enabling users to send money anywhere quickly and at a relatively low cost. Thanks to its cryptographic properties, anyone with an internet connection can securely receive BTC.

Bitcoin is traceable 🔎

All units of bitcoin exist as digital entries on the Bitcoin blockchain. The Bitcoin blockchain consists of a fully-transparent database that maintains a complete record of all transactions sent over the network.

Unlike cash, which anyone can easily transact in secret, all bitcoin payments are processed and permanently recorded on the blockchain, making it nigh on impossible to disguise payments.

According to research, criminals looking to hide illicit transactions continue to use fiat over cryptocurrencies like Bitcoin for this reason.

The data associated with BTC transactions essentially creates a highly-accessible forensic trail for investigators to follow, should any suspicious activity pique their interest. In this way, bitcoin's built-in traceability ensures that criminals transacting via the bitcoin blockchain can't hide behind anonymity.

How are bitcoin transactions traced?

Anyone can trace bitcoin transactions using blockchain explorers — free online tools that allow users to browse all blockchain payments. No crypto wallet or experience is needed to use these tools. It's completely open to anyone, and available 24/7—much like the rest of the crypto market.

For more information, check out our Kraken Learn Center guide, What makes crypto 24/7/365?

Bitcoin explorers map all network activity, and provide detailed information related to each transaction, including:

  • The senders and recipient's public Bitcoin wallet addresses.

  • The amount of BTC transacted

  • A timestamp of exactly when the transaction took place.

  • The associated transaction ID—a unique identifier associated with each transaction.

Using this tool, it's possible to trace every unit of bitcoin back to its coinbase transaction — the block where each unit originated from.

When trading Bitcoin on centralized exchanges like Kraken, tracing transactions becomes much easier.

Using Know Your Customer (KYC) measures employed by trading platforms requires customers to verify their identification before making transactions. This automatically links transactions made on these platforms directly to an individual.

In 2022, the U.S. Department of Justice successfully seized $3.6 billion worth of Bitcoin from two individuals involved in hacking the Bitfinex virtual currency exchange. The seizure, considered to be the agency's largest at the time, was only possible thanks to bitcoin's unparalleled network transparency.


Bitcoin as a store of value 🥇

During economic downturns, central banks around the world have the ability to inflate the circulating supplies of their national currencies. Known as quantitative easing (QE), the process involves injecting new cash into the economy to help stimulate growth and recovery.

Printing large sums of money in this way, however, is a two-edged sword. The greater the monetary supply, the greater the currency debasement. This means the purchasing power of a fiat currency declines as its circulating supply increases.

You may have noticed how the money in your pocket buys you substantially less than it did 20 years ago. That's because fiat currencies have no fixed supply and are no longer pegged to gold.

To offset the reduction in purchasing power, the cost of goods and services tends to rise. This is known broadly as "inflation," and can lead to further economic issues down the road.

Bitcoin offers an alternative digital currency system. One that has a provably scarce supply of 21 million coins that any government, company or billionaire cannot increase at will. This feature has led some to view BTC as a useful store of value.

Over the last decade, Bitcoin's price has significantly outpaced any fiat currency. And while opinions remain mixed on its efficacy as an inflation hedge asset, research suggests it has offered a lifeline to citizens in countries experiencing hyperinflation.

In summary, Bitcoin represents a significant innovation in the realm of finance, addressing several critical issues inherent in traditional banking and payment systems

Bitcoin's blockchain ensures transaction traceability, deterring illicit activities, while its fixed supply of 21 million BTC offers a potential hedge against inflation and currency debasement.

If adoption grows, Bitcoin's transformative potential in reshaping global financial systems could become increasingly evident.

Ready to get started with Bitcoin?

Now that you understand what problems Bitcoin attempts to solve, why not start your crypto journey today and get started with as little as $10?

Kraken allows users to easily purchase bitcoin (BTC) using a range of fiat and crypto payment options.

Sign up for your free account today!