Bitcoin: A Five Minute Introduction

Your Money is a Bad Investment

Your money — all of it, including the dollars in your bank and the coins in your couch — is losing value every second because of something called inflation (when more paper currency is printed, it takes more dollars to buy the same amount of goods). By the end of this sentence your money will be worth even less. This one, too.

Gold

There is a reason that gold, throughout history and around the world, has been recognized as a store of value. Gold has some very special properties that make it a great fit as a savings utility:

  1. Resilience against decay. It is chemically stable and will last forever.
  2. Unforgeable. You can’t create or print more of it.
  3. Limited quantity; Scarcity. This is gold’s most important property. There is only so much of it in the world and you can’t print more of it. This means that as value is created it is divided by roughly the same number of units of gold (ounces or kilos).
  1. Physical. While in some ways this is a positive property because you can actually hold gold in your hands, it also makes it difficult to deal with. Because of its high value, one must take extra care to store it. And if one wanted to transfer it to someone else, they would either have to move the metal themselves or rely on a third party.
  2. Middlemen. The gold market requires an army of middlemen to run it: storage facilities, shipping companies, mints, refiners, dealers, auditors, appraisers, insurers. At each step of the way fees are extracted.
  3. Counterfeits. While pure gold cannot be created, counterfeits can be. One must either test the metal or trust that what they have is pure.
  4. Units. While Nature allows gold to be subdivided into single atoms, if someone wanted to sell a portion of their gold, it is practically impossible for them to, say, break off an 11.2 gram piece from their one kilo bar.

Bitcoin

Bitcoin is a breakthrough technology and completely new kind of money. It is a borderless, decentralized, monetary system that allows anyone with a cell phone or internet to access its network. It fixes the problems associated with the printing of dollar bills, builds on the properties of gold, and ultimately surpasses both dollars and gold in utility as a store of value with a promise of becoming a globally recognized medium of exchange.

  1. Absolute scarcity. While gold is relatively scarce, new gold veins can be discovered, and gold is even found on asteroids that contain many Earth’s worth of gold. Bitcoin’s computer code limits the number of units strictly to 21 million — there will only ever been 21 million bitcoins. If these were evenly distributed to everyone in the world, each person would receive only about 0.0027 bitcoins.
  2. Digital conveyance of wealth. This is the first time in history that value can be directly and immediately transferred remotely from one person to another, just as if they were handing over a bar of gold. (Meditate on this one for a while because this is extremely significant, powerful, and mind blowing.)
  3. Proof of Work. Gold is valued because it takes a lot of work to excavate it and refine it, and because there is a limited supply of it. Bitcoin follows this exact same model. In order to “mine” bitcoin, you have to show “proof of work.” This means expending a large amount of energy by running computer hardware. Thus, every bitcoin in existence is “backed” by this energy expenditure. This mining process does double duty and secures the network: anyone wishing to “hack” Bitcoin can only do so by expending more energy than has already been invested into the network. The more energy expended, the more secure the network, the more impossible to hack, the more valuable bitcoin becomes.
  4. Decentralized network. The bitcoin protocol is run by millions of people around the world with no single person or authority in control. There is no single point of failure or corruption.
  5. Peer to peer. Bitcoin obviates the need for middlemen (a bank or credit card or broker), reducing transaction times and saving costs.
  6. Easy to enter. You don’t need a driver’s license. You don’t need to be a citizen of any particular country. You don’t need to pay an entry fee. You don’t need to meet anyone; hell, you don’t even need to be anyone. You only need internet access.
  7. Permanent, incorruptible, immutable public record. Once you send or receive your bitcoins, it is done forever; the transaction cannot be stopped or changed.

Don’t Just Take My Word For It

Do your own research. There is a good chance if you give Bitcoin slightly more than a passing thought you’ll find yourself in the rabbit whole along with the following characters:

  • Nassim Taleb, author of Antifragile and The Black Swan.
  • Tyler and Cameron Winklevoss, cofounders of Facebook and now Bitcoin billionaires.
  • Paul Tudor Jones, billionaire hedge fund manager.
  • Hester Pierce, Commissioner at the U.S. SEC.
  • Jack Dorsey, CEO at Twitter and Square.
  • Peter Thiel, Cofounder of PayPal.
  • And well-known entities like Bakkt (owned under a New York Stock Exchange subsidiary), Fidelity, the country of Germany, and the State of Wyoming.

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Paul Knight

Paul Knight

21 Followers

Architectural and urban designer at Historical Concepts. Executive Director at the Doug Allen Institute for the Study of Cities.