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This post will be my attempt to condense my knowledge of bitcoin as much as possible for a nontechnical audience. I will explain why I believe bitcoin is a fundamental and world-changing innovation in the history of financial technology. And why I am so confident in the long-term value of bitcoin.

TL;DR

For those of you with short attention spans, let me summarize my essay in a few bullet points:

  • Humans invented money as an efficient means of trade
    • Gold has special properties that made it suitable for use as money
    • But because gold is physical, it can be centralized and controlled by institutions
  • Governments have monopolized money and replaced physical gold with fiat (paper) money
  • Bitcoin is a long-term, technological solution to government theft via inflation
    • Bitcoin is digital gold: immutable, fixed supply, verifiable, uncensorable
    • Bitcoin has advantages over gold: digital, instantly transferrable globally, decentralized
    • Bitcoin enables the transfer of value (money) on the internet, just as email enabled the transfer of information
  • Bitcoin has a bright future
    • Bitcoin has unique properties, and a network effect, that ensure it will be the only cryptocurrency to store value over the long term
    • There will only ever be 21 million bitcoin created. Price is set by supply and demand. Once the world fully realizes the value of this technology and the worthlessness of fiat, the price of bitcoin will be bid up dramatically
    • Bitcoin’s history shows price increasing by orders of magnitude as it is being rapidly adopted across the globe as a store of value
    • Tech pioneers have long been believers but now big money on Wall Street and large institutions are ready to start buying bitcoin

The Essay

Part 1 - History

Those who ignore the lessons of history are condemned to repeat it

In order to understand the significance of bitcoin today, we must first dive into the history of money. We use money every day, yet do you know exactly what it is? Money is a technology - it had to be discovered and invented. Human history began without money. Originally people bartered some goods for other goods - 1 chicken for 5 loafs of bread, 4 cows for an acre of land, etc. But this is very inefficient. There is no universal standard to measure value for how much a chicken or a cow or a loaf of bread is worth. And what if your trading partner does not have chickens or cows or bread to trade? Over time, certain goods became more useful for barter and became standardized. These goods acted as intermediates for exchange and are called money. Gold outcompeted all other commodities because it has certain qualities that are required for money:

  • Fungible: every piece of money acts the same; one bar of gold is indistinguishable from another bar
  • Durable: unlike cows or chickens, gold does not decay or die or otherwise transform to become less useful over time
  • Portable: gold can be carried around in coin form, or bars for large quantities
  • Divisibility: coins can be made with varying amounts of gold for different levels of value
  • Limited supply: gold is not easily created, it must be intensely mined and the rate of new gold supply added is extremely slow relative to other commodities
  • Acceptability: not everyone accepted chickens for payment, but almost everyone began to accept gold

It is important to realize that gold as money emerged organically from a market phenomenon. There was no person or entity that proclaimed “gold is hereby money”. The unique properties of gold as a metal made it suitable as money for a large portion of human history.

A final note on money itself: there are three main uses of main. Its utility comes from being:

  • a store of value (where people save their wealth)
  • a medium of exchange (what buyers and sellers use to transact)
  • a unit of account (what we denote prices with)

Part 2 - Fiat

There is a technical limitation with gold, however. Its portability is not perfect, because it is quite dense and difficult to transport, especially in large quantities. To ease this challenge, banks would hold depositor’s gold for them and provide them slips of paper that represented the gold. People could then trade these “gold IOUs” with each other and redeem them for gold whenever they wished. This overcame the portability limitation while retaining the other properties of gold. Governments issued paper currency (e.g. dollars) but citizens could always redeem those dollars for a particular amount of gold. This was called the “gold standard”.

Over time, however, governments removed their paper money from the gold standard. After 1971, specifically, dollars could no longer be redeemed for gold. This made the dollar a fiat currency.”Fiat” is a word that means “by decree”. Fiat money refers to government-created and government-enforced currencies. Through legal tender laws, merchants must accept fiat money imposed by the government. It is important to realize that fiat money was imposed on the market by the state.

What allowed the US government to impose its fiat money was the centralization of monetary policy through an institution called the Federal Reserve. Once gold itself had been replaced by paper, it was easy for the Federal Reserve control the supply of money by printing more dollars. While paper fiat money is certainly more portable than gold, a single institution had now complete control over the supply of money. Over time, the printing of more dollars has led to it losing 96% of its value in the last century.

All of this means that dollars are a bad place to save and store wealth, over the long term. With inflation, you are guaranteed that the dollars you have now will be worth some amount less in the future. Physical gold may be one way to escape monetary inflation, but is there a newer technological solution that can provide even better money?

Part 3 - Bitcoin

Bitcoin (abbreviated BTC) was invented in 2009 by a pseudonymous cryptography researcher named Satoshi Nakamoto. The technical details are not so important to the layman, but it is sufficient to summarize bitcoin as a computer network, like the internet. All the computers in this network run the same software, which secures the network, valides transactions sent by users, and creates new bitcoin on a set standard. The code is open sourced, meaning anyone can view it. The bitcoin network is designed to enable the sending of cryptocurrency across the internet. It is helpful to think of “the bitcoin network” and bitcoin as a “digital asset” as two separate concepts. The computer network lets you send the asset anywhere on the network.

Think of sending a bitcoin like sending an email. Instead of sending information over the internet, you are sending value (money). You may not understand the complex computer networks that deliver email, but you can still use an email app to send and receive emails. For bitcoin, that “app” that will let you send and receive BTC is called a “software wallet”. Also, to access your email you would need to provide a username and password to your email provider. For using bitcoin, you need to have what’s called a “private key” to send the bitcoin at your address. The private key is like your password - if someone else knows it, they can steal your bitcoin. If you lose your private key, you cannot access any of your bitcoin. Luckily, there are ways to prevent this from happening!

But let’s take a step back - why is bitcoin valuable at all? Isn’t it just 1’s and 0’s in a computer somewhere? To understand the value of bitcoin, let’s review the properties of money and see how bitcoin measures up:

  • Fungible: every bitcoin is identical and functions the same
  • Durable: BTC is as durable as the bitcoin network and the internet itself
  • Portable: any amount of BTC can be transmitted anywhere on the globe almost instantaneously
  • Divisibility: BTC is divisible up to 10^8 times; the smallest unit is called a “satoshi”
  • Limited supply: the BTC code includes a hard cap of 21 million, and this cannot be changed
  • Acceptability: BTC started as nearly unknown, but has rapidly grown to become a global phenomenon as adoption grows

Comparing these features to gold, we see that bitcoin retains the fundamental attributes of gold while improving several of them. Bitcoin is far more portable than either gold or fiat. Instead of waiting several days for fiat bank transfers or physical gold shipments, bitcoin can be sent online instantly. Divisibility is also improved and is nearly unlimited.

Finally, one of the most important features of bitcoin is that there will only ever be 21 million generated. We can predict the supply of bitcoin at any point in the future. Bitcoin does have an additional fundamental property: we can be extremely confident that its attributes will not change over time because of the unique design of the decentralized network. Changes to the protocol cannot be made unless consensus among all participants is achieved - a massive hurdle.

Part 4 - The Future

So far we have seen that (a) gold first emerged from the market as money, (b) the state monopolized currency by fiat, and (c) bitcoin is the next technological evolution of money outside the control of any state or other centralized entity. But we still use fiat money every day, why should we be confident that bitcoin will change the status quo?

A few facts to note here:

  1. A look at the brief 13-year history of bitcoin shows incredible growth, both in usage and price, by orders of magnitude.
  2. The world is becoming digitized. As more time and value is spent online, the benefits of cryptocurrency become apparent.
  3. The world is quickly coming online and connecting over the internet
  4. No other currency (fiat or crypto) has the unique properties and the size of the bitcoin network
  5. As mentioned before, the bitcoin network is incredibly hard to change, meaning we can be confident in its stability and supply over time, unlike banks and governments.

Of course, in the short term, bitcoin faces massive volatility in price as people speculate on the future of the economy, Federal Reserve actions, and the cryptocurrency industry broadly. But bitcoiners are fully aware of the short term uncertainty, and are willing to “HODL” through.

In the long term, though, trust in central governments abilities to manage their currencies prudently can lead to crises of confidence in fiat money. So when the next currency crisis happens, you can be sure that bitcoin will be there as a lifeline. Some have speculated that such a crisis will lead to the rapid adoption of bitcoin as a common currency.

Part 5 - Using Bitcoin

Hopefully I have convinced you of the utility and value of bitcoin. When you are ready, you may want to buy some bitcoin. There are a few reasons to consider doing so:

  • Investment in a fundamentally new technology with rapid adoption
  • Hedging against the (very high) risk of central bank or government currency mismanagement
  • Diversifying your investments
  • Experimenting with it
  • Paying for goods or services directly (peer-to-peer)
  • Lack of trust in banking institutions

If you do want to buy and hold bitcoin, there are two ways of going about it. You can either hold your private keys (essentially, your password) yourself, or you can use a 3rd party, like Coinbase. Going with a company like Coinbase is probably a good choice for beginners, and once you are comfortable enough you can transfer your bitcoin to a self-custody wallet. Importantly, any company that holds your private keys for you has control over your bitcoin. There is a saying in the bitcoin community - “not your keys, not your coins”. The idea of self-sovereignty means taking control over your funds and “being your own bank”. Of course, these approaches are not mutually exclusive - you could have some bitcoin on an exchange or crypto bank, and directly hold some bitcoin yourself.

If you choose to self-custody your bitcoin, there are a few terms to know. Holding your coins in a “hot wallet” means the coins are on a device connected to the internet. The software wallet app handles your private keys and enables instant sending of your bitcoin. Though most convenient, it is a bad idea to hold a lot of money here because if the device is hacked or compromised you could lose your money. Instead, use a “cold wallet” like Trezor (what I use) or Ledger. These devices hold your bitcoin private keys and never expose them to a device connected to the internet. When you want to send your bitcoin, you connect the device via USB to a computer and digitally “sign” the transaction.

Hopefully this gave you some ideas for getting started. All the best and HODL on!