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 open-source peer-to-peer (P2P) digital network that contains a list of transactions. It is controlled by no-one and open to everyone.
Bitcoin harnesses the power of blockchain technology, making it a truly decentralised, secure, transparent and immutable database.
Think of Bitcoin as an app that rests on the operating system Blockchain.
Rules Without Rulers
Bitcoin operates on a decentralized protocol with cryptographic rules that govern its functionality, such as transaction verification and the issuance of new coins.
Unlike traditional financial systems controlled by central authorities, Bitcoin’s rules are upheld by a distributed network of participants without a central governing entity, making it a system of “rules without rulers.”
Bitcoin Is Private Money
Bitcoin is considered private money because it is a decentralized digital currency that is not issued, regulated or controlled by any central authority. It operates on a peer-to-peer network where transactions are verified by network nodes through cryptography. Its value is determined by the free market without the influence.
Inflation
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 increases and as a consequence, the prices of goods and services also increases 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.
The Perfect Money
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.
- Divisibility ― Bitcoin is divisible up-to eight decimal points. 1 Bitcoin is equal to 100million satoshis.
- 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 thus be easily verified.
- Scarcity ― Bitcoin has a maximum supply of 21million.
Bitcoin embodies each of the six characteristics of money and thus perfectly performs the three functions of money ― Store Of Value, Medium Of Exchange and Unit Of Account.
In short, Bitcoin is the best money technology humanity has ever created. In fact, some may argue that Bitcoin is the perfect money.
The 5 Primary Benefits Of Bitcoin
Below we’ll unpack the 5 primary benefits of Bitcoin.
- Decentralization ― Bitcoin is a decentralized currency meaning it cannot be controlled by any central authority or government. This decentralized nature makes Bitcoin more resistant to censorship and manipulation.
- Financial inclusion ― Bitcoin can provide access to financial services for individuals who are either unbanked or underbanked. With a smartphone and internet access, anyone, anywhere can use Bitcoin.
- Fast & Cheap Transactions ― Bitcoin transactions can be processed within minutes and typically have lower fees compared to traditional banking transactions, particularly for cross-border transactions.
- Security ― Bitcoin transactions are secured through cryptography, making them difficult to hack or counterfeit. The security is further enhanced by its distributed ledger technology, which records every transaction on a public ledger that cannot be tampered with.
- Anonymity ― While Bitcoin transactions are recorded on a public ledger, the identity of the users involved is not revealed. This anonymity feature makes Bitcoin a preferred choice for people who value their privacy.
Bitcoin Is Truth
Modern fiat money is backed by the trust and confidence in a government and not by a physical commodity like gold. Its value is not tied to any objective source of truth, but rather subjective perceptions of worth and enforced legal status. Therefore, if faith in its governing body or economy wanes, the value of fiat money will fall or even collapse.
Bitcoin operates on a decentralized, transparent and immutable network where every transaction is recorded and verified by a network of computers. This makes Bitcoin’s transaction history and total supply verifiable and immutable.
In this context, Bitcoin can be seen as a source of “truth” in the modern digital monetary system.
Bitcoin’s Difficulty Adjustment
Bitcoin’s difficulty adjustment is a mechanism built into the network that ensures new blocks are added to the blockchain approximately every ten minutes. It operates by adjusting the complexity of the cryptographic puzzle miners must solve in order to add a new block to the network.
This process ensures that the cost of producing a Bitcoin correlates closely with its price. Nobody is able to produce Bitcoin significantly and persistently different from the market price, thus ensuring it remains hard money.
By ensuring a predictable and steady issuance of Bitcoin, the difficulty adjustment mechanism is crucial in maintaining the security and stability of the Bitcoin network.
How Bitcoin’s Difficulty Adjustment Incentivises Efficient Electricity
As more of people attempt to mine bitcoin, its difficulty adjustment rises. Thus reduces the expected return to bitcoin miners and erodes the profitability of miners mining at higher prices of electricity.
Miners who cannot find inexpensive electricity will start mining at a loss. As losses accumulate, these miners eventually go out of business, leaving behind only those with significantly lower costs of electricity.
As a result of this process, the entire bitcoin network collectively finds and rewards cheap, stable and efficient electricity.
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). Proof Of Work 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
Network Effects
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.
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 harder the money, the lower the time preference.
Privacy
Given that bitcoins are traceable on the blockchain, a particular bitcoin may become tainted by its use in illicit trade and either individuals or businesses may be compelled not to accept such coins.
Thus, improvements to the privacy of Bitcoin’s network protocol may be necessary in 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
Centralized governments arose 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.
Bitcoin & Darwinian Fitness
In a Darwinian world, adaptation is essential to survival. Bitcoin is a dynamic network that evolves to be faster, stronger, smarter and harder.
Bitcoin’s decentralized structure allows for continuous improvements and adjustments based on collective consensus. As technological advancements or challenges arise, proposals known as Bitcoin Improvement Proposals (BIPs) are introduced by members of the community. These proposals undergo rigorous scrutiny, testing and debate. Once a consensus is reached, the network can implement these changes, ensuring that Bitcoin remains secure, efficient and relevant.
This iterative process, driven by a global community, ensures that Bitcoin can evolve in response to both internal network demands and external environmental pressures.
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 Bitcoiners; “fix the money, fix the world.”
Summary
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. It is therefore effective for moving value across both space and time.
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.
