When people ask me a seemingly simple question like “What is Bitcoin?” I often struggle to find words succinct and accurate enough to describe Bitcoin in its’ entirety. Language seems to fall short of capturing all the facets of this once in a millennia invention. I truly believe that is not a hyperbolic statement to make; Bitcoin is a unique force that has lasting effects on the way human beings think and interact with the world around them. It is this revolutionary effect that makes Bitcoin better than any existing socioeconomic construct we have.
This writing assumes you are either new to the Bitcoin space or just generally curious about it. I also assume you are approaching the topic with an open mind; please leave aside any Bitcoin opinions you’ve heard in the media whether positive or negative. You don’t need to be an expert in computer science, cryptography, economics, finance, psychology, or philosophy to understand Bitcoin. Though through exploring what Bitcoin “is”, you will discover that it has enormous impacts on each of those areas (and more) and it will deepen your understanding of those things at the same time.
So what is Bitcoin?
In the simplest terms it is a new form of money, however this simple description does not even begin to scratch the surface of its’ value or implications. Language falls short here much in the way someone from the late 1800s who was familiar with the concept of electricity would struggle to describe the invention’s implications to someone unfamiliar. Bulbs that emit light eliminating the need for oil lamps or wires that would carry electrical current to widely distribute electricity and other future inventions? Most would receive that with skepticism. In 1880 Henry Morton, a prominent mind of the time, said anyone familiar with Edison’s invention could only conclude that it would be a failure. In that same vein economist Paul Krugman famously quipped in 1998 that the internet’s effect on the economy would be about as significant as the fax machine. Many new breakthroughs fail to successfully seed in our minds because we often cannot fathom the effects of groundbreaking inventions since we do not have an existing framework in our minds to understand the manifest potential. This is the same pitfall with describing Bitcoin; there simply has never been anything that existed in human history that would provide us a reference point from which to describe it. With this in mind let’s explore the philosophical, financial, and technological implications of this remarkable invention.
Bitcoin is a better money philosophy.
To appreciate Bitcoin’s disruption to our collective understanding of money we have to start with a question: what is money? Have you ever critically considered what those digital numbers are that directly deposit into your bank account? Is cash money? These are tough questions when you consider their depth. The story of what money “is” is a bit complex. Since ancient history gold and other precious metals and materials served as money because they were collectively agreed upon by societies at large that they hold intrinsic value. Once these things are assigned value they can be used as mediums of exchange and stores of value. Gold is an example of this type of commodity still used today.
Over time new forms of money emerged into concepts we are more familiar with today such as cash and coins. This evolution was mostly the result of making commerce easier — it is more efficient to transact in cash, notes, or dollars than lugging gold around everywhere. But regardless of the implementation all of these different forms of money had one thing in common. Each type held value because it carried with it a guarantee to a valuable underlying asset. For example, in the early twentieth century US dollars were backed by the promise to receive a set amount of gold in return for those dollars. This concept is outlined exceptionally well in the book Layered Money by Nik Bhatia.
The US dollar we know today has a long history that involves many changes driven by our approach to central banking and the actions of the Federal Reserve. Throughout the twentieth century there were various economic drivers that made gold convertibility for dollars a problem, eventually leading to suspension of this convertibility by the US government in 1971. What we are left with today is essentially a US dollar that functions as a reserve currency in itself; there is no underlying layer of asset or commodity of higher value.
Why is this a problem? The Federal Reserve exists as a safety net in times of crisis. When the banking system is in crisis (see 2008) the Fed needs to be able to withstand the storm, but without sufficient real reserve assets, there is nothing left to do but implement what we have come to know as Quantitative Easing (QE). As Bhatia points out in his book this is a fancy way of saying “creating more money”. The financial crisis of 2008 and subsequent instability that we are still experiencing demonstrates that the financial system as we know it cannot continue to survive without continuing quantitative easing policies.
Finally, this process of injecting money into the system in perpetuity creates a problem that Bitcoin solves: inflation. When more US dollars are created, our purchasing power is weakened. That means average people with savings accounts like you and me are able to obtain less for the money we’ve worked to save. Purchasing power of the USD you hold has recently reached record lows. This is because more dollars being created means diluted value. Things like gold are valuable precisely because they are scarce and not easily obtained, not because they can easily be created by governments.
There will only ever be 21 million Bitcoin produced. It is inherently deflationary thus securing its status as a store of value while also ensuring price appreciation over time as less and less Bitcoin are available. There is no central authority that can decide to change this. Saving and holding Bitcoin instead of US Dollars guarantees the fruits of your labor will not deteriorate over time due to the whims of public policy and central bank planning.
Bitcoin is better for personal finance.
You do not need to be a billionaire to purchase Bitcoin. In fact you can purchase fractions of a Bitcoin much in the same way that a US dollar is divisible into cents. With recent price action, institutional buying from entities like Goldman Sachs, or celebrities getting involved its easy to be duped into thinking Bitcoin is only for the wealthy or “too expensive”. There is a reason more of the “elite” in our society are getting involved in Bitcoin, but the same reasons that they seek Bitcoin exposure are the same reasons that work for you even if its on a smaller scale. Bitcoin is an asset that protects your wealth no matter your income level.
Bitcoin is programmed scarcity for the digital age. Supply will never exceed 21 million as mentioned previously. This works in your favor as we can never be certain how much supply of the US Dollar will be produced; it is unknown, not up to us, and could be infinite. While there are fluctuations in Bitcoin price it is important to remember that these are temporary based on non-permanent swings in supply and demand cycles, but the lack of supply is a permanent truth. The big picture is that Bitcoin steadily marches higher over the years as people begin to understand this new asset. Bitcoin is still discovering new valuations as humans begin to grasp it and day to day fluctuations are distractions from the longer term picture. My argument is that Bitcoin will serve the average person better over the long term; this is not a “get rich quick” opportunity that you may have heard about in cryptocurrency. It is a sound asset that is specifically designed to store value. It is prudent to save money in an asset that has predetermined fixed scarcity versus a government currency subject to uncertain amounts of manipulation and a seemingly steady rate of increased quantity and subsequent dilution.
Bitcoin is better technology.
How can Bitcoin actually provide the benefits listed above in a secure way? The answer is blockchain. Bitcoin is a first of its kind application of blockchain technology. Blockchain technology allows for a chronological record of transactions to be recorded through a computational proof of work concept. Hashing ensures that it is nearly impossible for bad actors to reverse transactions or generate fraudulent transactions. In order to change transactions, someone would need modify all preceding blocks in the chain which would be computationally impractical. This system allows for secure and trusted financial transactions to occur without the need of a third party to verify authenticity. This ability of Bitcoin lays the groundwork for a global decentralized financial system.
In other words Bitcoin allows for a real time, global, and immutable record of transactions all without the need for a bank or a federal reserve system. The complex computation performed by miners negates the risk of fraud and the ability of anyone to keep a copy of the blockchain (via running a node) ensures accurate transaction records are available 24 hours per day. This ledger is like a digital chain that keeps growing every few minutes with a perfect record of all transactions in each individual block since Bitcoin started.
If you’re still not convinced or want a deeper technical dive, consult the original Bitcoin whitepaper authored by Satoshi Nakamoto. The author outlines an example of how an illegitimate “attacker chain” could not surpass the building of an honest chain. The author draws an analogy to the Gambler’s ruin problem. An attacker would need to “catch up” to an honest blockchain’s work and surpass it in order to produce fraudulent transactions. By calculating the probability of this occurring, Nakamoto demonstrates it is nearly impossible for an attack to be successful. The probability of an attacker modifying his own transactions or reversing spend is extremely low. In fact, the Bitcoin blockchain itself has never experienced a security breach in more than a decade of existence.
The TL;DR is that Bitcoin is a one of a kind asset that provides a better form money in comparison to traditional models, is a better form of savings for the average person, and is a better form of technology compared to the legacy centralized systems that we use today. Bitcoin is better for so many more reasons too; this was merely a high level review of three of the points I believe to be most valuable. Hopefully this encourages you to explore more and start your own journey of exploring Bitcoin. It is still early and never too late to get involved. Don’t believe everything you hear about Bitcoin without doing your own research.
Great places to start your journey:
