In this post, we’ll unpack all you need to know about Bitcoin, defining exactly what it is, its relation to gold, fiat money, inflation, blockchain, violence and more.
What Is Bitcoin?
Bitcoin is a decentralised peer-to-peer (P2P) digital network that contains a list of transactions. It was created by “Satoshi Nakamoto” whose motivation for its creation was the economic crisis of 2008-2009.
You can think of Bitcoin as a decentralised bank in cyberspace (the cloud) controlled by no-one and open to everyone. It’s the definition of “the people’s bank.”
Gold has been the best money technology for millennia. In fact, no monetary good has a history as long as gold. This has been primarily because of its scarce supply.
Historically, under a gold standard, governments were forced to rely on their own treasuries to sustain their war efforts. With the suspension of the gold standard, governments had the ability to print an unlimited amount of their own currency in order to maintain their war agenda.
While gold is used as a medium of exchange in some parts of the world, it mostly functions as a store of value.
Gold’s physicality is what makes it vulnerable to centralisation, confiscation and state attack. Thus, gold is effective at moving value across time but not space.
Fiat money is a national currency that is not backed by a physical commodity. It derives its value from its issuing government.
Historically, the most successful fiat currencies which have been most widely used have been those whose annual supply is lower than those that have been unsuccessful.
However, in a study of 775 fiat currencies, the average lifespan was 27 years. Thus, fiat currency is effective at moving value across space but not time.
As fiat money is not capped, governments are licensed to print unlimited amounts as a way to manipulate the economy. Unsurprisingly then, the rate at which money is being printed has only increased over time.
However, the effects of this constant printing of money has only gained mass attention within the last decade or so ― specifically since the 2008 financial crisis. One major effect being inflation.
Inflation is where the supply of money is increased and as a consequence, the prices of goods and services also increase while value of the money decreases. Inflation itself isn’t necessarily bad, it is the rate of inflation that can be detrimental.
In developed countries, the rate of inflation is usually around 1-2% per year. Typically however, wages also increase by the same amount and so rising costs are counterbalanced by rising wages. The problem occurs when the rate of inflation outpaces the rate of wage increases, which is what is happening today. As a result, people are having to work exponentially harder for a currency growing exponentially weaker.
Furthermore, during the 2008 crisis, banks were bailed out while ordinary people were left stranded.
In short, the current financial system works in favour of the rich minority rather than the majority. Knowing all of this, many believe a new monetary system is necessary. That system looks set to be Bitcoin.
Bitcoin – The Perfect Money
As mentioned earlier, money has 6 primary properties; acceptability, divisibility, durability, portability, recognisability and scarcity. Below we’ll look at how Bitcoin fairs in each of these properties.
- Acceptability ― Bitcoin’s rate of adoption is increasing on a daily basis meaning it is becoming more acceptable.
- Divisibility ― Bitcoin is divisible up to eight decimal points. 1 Bitcoin is equal to 100million satoshis or “sats.”
- Durability ― Bitcoin is immutable. It cannot be destroyed ― it can only be lost or stolen.
- Portability ― Bitcoin can be transferred within seconds wirelessly with an internet connection.
- Recognisability ― All transactions are stored on the Bitcoin network and can therefore be easily verified.
- Scarcity ― Bitcoin has a maximum supply of 21million Bitcoin.
Bitcoin embodies each of the characteristics of money and thus perfectly performs the three functions of money.
In short, Bitcoin is the best money technology than anything that has come before it. In fact, one could argue that Bitcoin is money, perfected.
Bitcoin & Blockchain
As humans, we find ways to lower uncertainty about one another so that we can exchange value. Institutions fulfil this dynamic by ensuring both parties in a transaction trade fairly.
However, we now have technology that can play the role of institutions, at near-zero cost: blockchain.
Blockchain is a decentralised network that stores a registry of assets and transactions within a peer-to-peer network. In short, it is a public registry of who owns what and who transacts what.
The transactions are secured via cryptography which get stored in blocks which are linked together and secured.
Bitcoin harnesses the power of blockchain technology, making it a transparent, immutable truly decentralised database. Bitcoin is the ultimate offshore bank behind an impenetrable wall of encrypted technology.
The Byzantine Generals Problem
The Byzantine Generals Problem is a game theory problem which describes the difficulty decentralized parties have in arriving at consensus without relying on a trusted central party.
Bitcoin solves the Byzantine Generals Problem by employing Proof Of Work (PoW), a consensus mechanism that helps secure the Blockchain network and maintain its integrity by synchronising data and validating transactions. Blocks are deemed valid by all members of the network only if they contain a valid Proof Of Work in the form of a valid hash.
“The root problem with conventional currency is all the trust that’s required to make it work.” ― Satoshi Nakamoto
In economics, the network effect is a phenomenon that describes how as the number of individuals on a network increases, so too does the value of the network.
For example, the more people use mobile phones, the more they can communicate with each other, the more valuable the network of mobile phones becomes.
As Saifedean Ammous writes in his book The Bitcoin Standard: “The more nations officially adopted the gold standard, the more marketable gold became and the larger the incentive became for other nations to join.”
Similarly, the more individuals that adopt Bitcoin as an asset, the greater the value of the network and the greater the incentives for miners to secure the network and maintain its integrity. New users benefit from the value they create via price appreciation which in turn drives more user growth.
Bitcoin & Time Preference
Time preference refers to the ratio at which an individual values the present compared to the future.
A low time preference refers to someone who places more value on the future ― they tend to engage in delayed gratification. A high time preference refers to someone who places more value on the present ― they tend to engage in instant gratification.
It is only through valuing one’s future more than the present ― in other words, lowering one’s time preference ― that one can appreciate investing long-term and therefore build wealth.
Due to their mechanics, fiat currency incentivises short-term thinking while Bitcoin incentivises long-term thinking. Fiat currency orients people’s behaviour towards the present. Bitcoin orients people’s behaviour towards the future.
The Digital Revolution
The twenty-first century has been the age of digital. In other words, anything that can be digitalised, will be digitalised.
Facebook dematerialised human relationships ― it is a social network that channelled social energy on a digital network.
Apple dematerialised mobile devices ― it is a mobile network that channelled mobile energy on a digital network.
Google dematerialised information ― it is an information network that channelled information energy on a digital network.
Amazon dematerialised retail ― it is a retail distribution network that channelled distribution energy on a digital network.
Bitcoin is dematerialising money ― it is a monetary network that is channelling monetary energy on a digital network.
Bitcoin & Violence
Few people today are aware that centralized governments arose simply as a natural monopoly on violence.
When the technology of agriculture created the ability for surplus, it introduced the ability to steal, which created the element of crime. This created the problem of how to protect surplus (money, goods etc), which created the need for protection, which created the need for a protector. The protector ultimately become the local state or government. To this day, this process continues to play out on different scales as a result of new technology.
Violence is a useful strategy for achieving desired outcomes. In modern society, the supreme specialist in violence over a given territory is what we know to be government.
However, encrypted technology creates impenetrable defense for individuals at near-zero cost. Consequently, Bitcoin completely negates the need for violence by incentivizing trade and peaceful cooperation.
The same way the printing press destroyed the Church’s monopoly on information, Bitcoin will destroy the government’s monopoly on violence.
Fix The Money, Fix The World
When a person’s basic physiological needs (food, water, shelter and sex etc) are met, only then can they focus on more profound and meaningful aspects of life.
One cannot do that if the local state is devaluing its country’s currency, forcing people to work exponentially harder for a currency that is getting exponentially weaker.
Hence Bitcoin. Hence a common maxim amongst Bitcoiner’s; “fix the money, fix the world.”
Bitcoin is a decentralised digital monetary network that contains a list of transactions.
Bitcoin combines fiat currency’s effectiveness for moving value across space and gold’s effectiveness for moving value across time. Therefore, Bitcoin is effective for moving value across both space and time. It is also the hardest money because it is impossible to increase its supply which is capped at 21million. Furthermore, under the monetary system of Bitcoin, crime and thus violence, no longer pays.
While Bitcoin’s ultimate success remains unknown, what is certain is that it is one of the best forms of money technology that has been invented to date.