Bitcoin: A Five Minute Introduction
Let’s say you work an eight-hour day, you’re paid $400, and you decide to save that money. A year later, should that money be worth more, the same, or less?
Would you be disappointed if I told you that it would be worth less? If so, read on.
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.
Monetary inflation is not some natural law of the Universe; it is the result of policy set by governments. The government doesn’t have to make money the way you and I do with hard work or entrepreneurship; instead, it can print whatever money it needs. And my oh my have they used their printing press! The problem is, the more dollars they print the less value each dollar holds (i.e., the same net value is divided by more dollars). Sometimes this happens so slowly you can barely notice one year to the next, but overtime it can seriously devalue your savings.
Sometimes, the rate of printing can happen rapidly. That $1,200 you just received in your bank account for Covid-19 relief? That’s not from the government’s savings; it was literally created out of thin air.
People are starting to catch on. If the Fed can just print more money, why do we even pay taxes?
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:
- Resilience against decay. It is chemically stable and will last forever.
- Unforgeable. You can’t create or print more of it.
- 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).
While the government can simply print more money, it cannot print more gold. Gold is a cross-cultural abstraction of value, wealth, and work. If you have gold, you either worked for it or you sacrificed something for it (your time or other valuables).
You may have heard that gold is a “hedge against inflation.” This means that gold’s value tends to follow (very generally) a currency’s rate of inflation. It’s a hard asset that exists irrespective of inflation and government printing presses. In other words, 1 oz. of gold will always equal 1 oz. of gold. And because the amount of gold mined each year is so small compared to the total amount of gold available (a little more than 1%), the relative value of each unit of gold does not change very much.
All that said, gold has some critical limitations:
- 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.
- 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.
- Counterfeits. While pure gold cannot be created, counterfeits can be. One must either test the metal or trust that what they have is pure.
- 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.
If only there was something — some new kind of money — that couldn’t be manipulated or devalued like paper currencies and had all the good properties of gold with none of its limitations.
Oh, hello 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.
Now that you know a bit about currency manipulation and gold’s value proposition, you’ll have a greater appreciation for Bitcoin’s many breakthroughs, which include:
- 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.
- 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.)
- 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.
- 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.
- Peer to peer. Bitcoin obviates the need for middlemen (a bank or credit card or broker), reducing transaction times and saving costs.
- 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.
- Permanent, incorruptible, immutable public record. Once you send or receive your bitcoins, it is done forever; the transaction cannot be stopped or changed.
Historically, money begins its life as a store of value before becoming a medium of exchange. Bitcoin is following this adoption schedule. If it succeeds, Bitcoin could be one of the most significant technologies in history, opening up a financial system to everyone on the planet.
In markets, as the saying goes, “people vote with their pocket books.” If you are tired of the government manipulating your savings, consider casting your ballot for a fair and free monetary policy by learning more and acquiring some bitcoin.
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.