What is Bitcoin?
Here’s a simple collection of starting points to understand Bitcoin better. Unfortunately, mainstream media does a terrible job of educating people on this topic, which is why you may have come across some of the following narratives.
- “Bitcoin is anonymous money for drug dealers (and blackmailers).”
- “It has no intrinsic value.”
- “It’s a bubble (tulip mania) and will go to zero.”
- “It consumes more energy than entire countries and destroys our planet.”
- “It’s not backed by any governments – and they will ban it soon.”
- “It‘s a get-rich-quick scheme for online gamblers – highly speculative and you can lose all your money.”
These are just some of the most common assumptions about Bitcoin. Interestingly enough, all of these statements contain a grain of truth, but understanding the real story takes more time and effort than we’re used to in the age of headlines. So let’s reverse gears and do the opposite. Here are the alternatives – or rather, here’s what Bitcoin really is.
1. Bitcoin is the Internet of Money
Bitcoin is open-protocol, peer-to-peer money. It’s not a company or a centrally organized institution but a network of interconnected nodes. Bitcoin coordinates consensus in the network regarding transactions, and rewards work done with newly created coins. By decentralizing everything, Bitcoin reinvents money from the ground up. It does to money what the internet has done to information. Central authorities or gatekeepers are replaced by intelligent mathematics and secure cyber walls. Individuals can use it at low costs to send and receive money just by using a piece of software. The Bitcoin network is the world’s strongest computer network. It has never been hacked and has less downtime than Amazon or Facebook.
2. Bitcoin is the Separation of Money and State
Bitcoin separates money and state. This separation was a natural state for money hundreds and thousands of years ago. Because it isn’t controlled by governments or any other group or institution, it is open to everyone. As a result, no one can interfere in transactions or seize funds. This takes away control and power from governments and gives it back to the people. Also, in Bitcoin, governments cannot produce more money, which is crucial. Newly created money always dilutes the monetary base and leads to inflation. Bitcoin grows its purchasing power compared to inflationary currencies.
3. Bitcoin is Freedom Money (a.k.a. “Fuck You Money”)
With Bitcoin, millions of people around the world can have access to a digital monetary system. Money can be sent across space in a frictionless manner. Users are sovereign – no one can seize their Bitcoin and thereby confiscate their wealth. In addition, no one can reverse a transaction that has taken place – there’s no censorship. Bitcoin turns money into something neutral and free. You own a piece of Bitcoin just like you own a piece of gold. Bitcoin is considered to be the first instance of digital property rights. It is basically information, it cannot be destroyed or seized.
4. Bitcoin is Money Based on Extrinsic Value
Bitcoins aren’t created out of thin air. They are given as a reward for “miners” who verify transactions. In order to do this, participants have to guess a very large number with their computer. This affords energy. This energy investment prevents fraudulent behavior because it would take incredible amounts of energy to rewrite the history of the Blockchain. The energy invested also serves as a base for the price of a Bitcoin. Relatively higher Bitcoin prices correlate with more energy. Bitcoin is “hard money” – it’s hard to make. Therefore, it’s true to say that it has no “intrinsic value”, just like a 100 dollar bill, but it has extrinsic value. That provides a measuring stick to money.
5. Bitcoin is “Number Go Up” Technology
Unlike the “fiat” money system created by governments (our “normal” money today), Bitcoin doesn’t lose purchasing power over time. In fact, Bitcoin increases its purchasing power steadily. Despite short-term volatility, the price has always increased over longer periods. The 200-week moving average, which only measures the long-term value, has never gone down in the history of Bitcoin. This is not accidental. The supply of Bitcoin is fixed at 21 million and the number of new coins coming on the market is reduced every four years in a so-called “halving cycle”. This creates properties similar to gold: The existing “stock” of Bitcoin compared to the “flow” of newly created coins is high. Bitcoin is rightfully called “digital gold”, and it also improves on many properties of the precious metal.
6. Bitcoin is a Medium of Exchange (just not everywhere yet)
Money has three general functions that go back to Aristotle: store of value, medium of exchange and unit of account. In the history of money, things first become a store of value because this is the most fundamental function. Right now, Bitcoin is primarily an emerging store of value. Because it’s new, it’s volatile and can fluctuate in price. However, over the years, it has appreciated more than any other investment in history. You can argue that it serves the “SoV” function so well that it isn’t used as a medium of exchange on a global scale yet. But Bitcoin is a grass-roots movement that’s slowly growing. Also, technological solutions like Lightning, which enables fast and almost free payments on a second layer of Bitcoin are being developed. Bitcoin, after all, is programmable money and will do many things we can’t imagine today.