Bitcoin has gone through bull and bear market hype cycles in its 11-year history. That it doesn’t just die and go away might be puzzling to casual observers.
What is bitcoin anyway? It’s a parallel, open financial system with a new money that is strictly limited to no more than 21 million bitcoins (each divisible to 100 million satoshis or ‘sats’).
More specifically, bitcoin is two things: a monetary token, and an open source payment network. The open source part means the code for bitcoin is out in the public for anyone to read, discuss, or contribute.
Before explaining bitcoin further, it’s important to understand more about the history of money. Because most people haven’t thought deeply about what money is, for them, simply having more money is better, and that’s as far as it goes. But if you really stop and analyse it more deeply, you can see that some monies are better than others.
Money is something that arises spontaneously on the market, as we all seek to find a better indirect medium of exchange. Over time, goods compete with each other on how ‘marketable’ they are, to be the best indirect medium of exchange, and in this process, there are generally one or two ‘winners’. Historically, this was gold and silver.
Private coinage came first, however over time, governments intervened and changed the system with legal tender laws, central banking, and other interventions. Gold’s ability to be used freely as money became neutered due to the tendency for it to be stored in centralised vaults. These vaults were presented an easier target for confiscation and control. In this way, gold was co-opted and is not commonly used directly as money today.
This leads us into why bitcoin was designed in the way it was. Bitcoin as “Digital gold” is an imperfect analogy, but useful to consider. See this forum post by the pseudonymous creator of bitcoin, Satoshi, wrote in August 2010:
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
* Boring grey in colour
* Not a good conductor of electricity
* Not particularly strong, but not ductile or easily malleable either
* Not useful for any practical or ornamental purpose
and one special, magical property:
* Can be transported over a communications channel
If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.
Bitcoin can be thought of as a savings technology that is extremely hard to debase or confiscate. This means when you accumulate it (usually by buying it, or earning it), you can have more confidence that you are truly accumulating something that is scarce. In a world where government fiat money is continually losing purchasing power over time, holding bitcoin is one way to counter that long term trend.
Where there is volatility in short term cycles, there is long term appreciation in real purchasing power terms for those who steadily accumulate bitcoin. One common refrain amongst bitcoiners is: “When in doubt, zoom out”. See below a price chart showing bitcoin since the early days going through bubble cycles, with the new floor being higher than the previous cycle’s ceiling.
An important point made by the late Julian Simon in The Ultimate Resource is that for anything humans desire, we can either make more of it, or economise on our use of it, or find a substitute. But one special thing about bitcoin is that we simply cannot make more of it — there is a programmed limit to the supply, as it is released on a set schedule that essentially can’t be changed.
So at other times in history when something became valuable, there would be a rush to either find or create more of it, or use a substitute good. Proponents of a ‘stock to flow’ view (the existing stock, vs the incoming flow every year), argue that this was actually one of the historical reasons that gold was a better money than others. It was that gold resisted the ability of humans to mine more of it. But now that the technological breakthrough of digital scarcity has been created, it’s like we have a type of ‘super scarce’ digital gold now.
Over time, more and more people will realise the incredible scarcity of bitcoin relative to the inflation rate of other candidate monies, such as USD or gold. Bitcoin’s money supply growth rate will go below that of USD or of gold (approximately 1.5 per cent per year), over the next few years. Those people with a longer time horizon may see the way the winds are blowing and acquire bitcoins now in anticipation of further adoption.
Calling back to the Satoshi forum post from 2010, that ability for bitcoin to instantly teleport anywhere in the world gives it a competitive advantage over gold. In this way, bitcoin is not just savings technology, it is also an incredible payments technology because participants can make payments that are almost impossible to stop. Compare this with today’s world of fiat controlled banking with all manner of chokepoints that may censor or delay your transactions.
In times of government overreach and inflation, governments may impose blockades on moving funds out of the country, such as capital controls. Or some governments may impose blockades on transactions with other countries, such as sanctions laws. These laws often harm innocent individuals, who are otherwise doing no ‘crime’ than to live in a sanctioned country.
Bitcoin has been designed in a way that is fundamentally hard to censor. Bitcoin transaction speeds are being extended even further with the Lightning Network (to the millions of transactions per second), which will enable virtually instant settlement of value across the world. This dramatically improves the experience for individuals making payments. Additionally, with further development, these bitcoin lightning transactions also have the potential to be more private.
Bitcoin uses this structure referred to as a ‘blockchain’. This may seem esoteric and unnecessary though, so why is there this fancy blockchain technology? Well, it turns out that the blockchain technology isn’t there to be more efficient. It is there so bitcoin users can have confidence in the rules of the system not being broken – with no central party adjudicating the rules. The bitcoin nodes on the network determine the rules, in a decentralised way.
What about ‘Crypto’ and other cryptocurrencies?
Bitcoin alone has been designed and operated in a way that is genuinely without a central leader or dictator. This matters because if push comes to shove, if there is a person in charge that can have pressure applied to them, it should be assumed that this can happen. Those who can print money, will.
Other cryptocurrencies are often marketed to newcomers as though they are ‘cheaper and faster’, but the reality is that many of them make a trade-off in a way that is not apparent to beginners. The other hard reality is that bitcoin has the best liquidity of the cryptocurrencies, and that we should anticipate a tendency of coalescence towards the best. Money is a winner takes all game, and at the very least, it is a winner takes most game.
Bitcoin is fundamentally a technology designed to resist any centralised control by a person, business, or government.
Where do I learn more?
Some recommended resources for learning:
- The Little Bitcoin Book – a concise and easy to digest book about bitcoin
- The Bitcoin Standard – the must read book to understand the economics of bitcoin
- Bitcoin Podcasts: Stephan Livera Podcast, Tales From The Crypt, Noded Podcast
- Attend your local bitcoin meet up
Why doesn’t it die?
So why doesn’t bitcoin die? Because many people around the world continually run the software, develop tools to interact with bitcoin, contribute code to bitcoin’s software, safeguard the network with bitcoin mining, and use it for transactions. In doing so, they upgrade bitcoin and make it more resilient to shut down or co-opting.
Bitcoin was fundamentally created in answer to the problems of central banking and government manipulation of the financial system. It is an effort to create a parallel financial system where users truly have the power.
Bitcoin isn’t dying, because Bitcoin is an idea whose time has come.
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