What is Bitcoin?
This is a question that is likely to continue being asked for the next century. If the world blows up or we get a series of years like 2020, then that might scratch that idea, but if life continues on the current trajectory, sooner than later you are going to be putting in that Google search for “bitcoin”. The answers are as varied and confusing as the technology itself. I, Gordon Freeman, am going to attempt to fix that today!
Perhaps a better name for an introduction to bitcoin article would be: “Does Anyone Actually Know What A Bitcoin Is?”.
By the way:
I’ve also made this swell podcast you can listen to! The first episode is about this same topic:
There are two main errors that people make when trying to describe bitcoin. The first mistake is trying to make it too simple. People usually hear the words, but still have no idea how to apply them to an understanding of exactly what bitcoin is. The second mistake is trying to explain what bitcoin is from a purely technical angle, giving an accurate description that is inclusive and factual, to which you lose a person completely.
There are few things in life a person will have so much trouble describing, especially the more they actually know about the answer. The quest to understand, let alone teach, bitcoin to others has caused computer geeks, programmers, and even rocket scientists and M.I.T. multi-millionaire geniuses to lose sleep, lose weight, and perhaps go slightly nuts. But of course, as a crypto super hero (or pseudonym-wrapped 3D cartoon) I think I got this one covered. But, I’m not foolish enough to go it alone. At the end of the article check a list of sources, and just let me tell you, this does not come close to covering all bases. There will likely be years of in-depth lessons to continue the education.
The Bitcoin Basics
Let’s start with a few things most people will be able to understand or relate to before digging in to the tougher stuff. Bitcoin can be described as internet money. One could also say it is network money. It is also accurate to say it is electronic money. Digital, internet, network… keeping it simple means equating bitcoin with being online. Without the internet, there is no bitcoin.
The internet operates like an enormous number of individual computers ‘programmed’ to operate within a massive network. Bitcoin is a simpler version of this. Using a software program, people sync together into the bitcoin network where they can allow their computers to operate bitcoin’s code in unison.
If you know what money is, and you’ve used the internet, then you’re probably still with me. But, there are many who understand bitcoin deeply who would dispute the idea of bitcoin as money.
Is Cryptocurrency Actually Money At All?
By the very definition of “currency” we should assume that crypto ‘currency’ is money, but the truth of the matter is that when new technologies are created, they may actually be a new form of familiar things, but may not perfectly fit the mold. Since bitcoin is the largest and most well-known cryptocurrency (crypto for short), it is the apex example of new technology that cannot be properly pigeon-holed simply as electronic money. For the sake of starting at the start, let’s call bitcoin a digital currency and go from there.
Bitcoin was designed to be a better form of money; a prime goal defining “better” was that it would eliminate the need for a middle-man in transacting money online. “Peer-to-peer” is the term used, meaning the goal of bitcoin is to make it possible for anybody anywhere to send or receive money without going through a bank, through online payment services, using a credit card or anything else that requires an intermediary service. As a result, understanding bitcoin also means understanding the idea of self custody. If there isn’t an intermediary in sending payments, it means every person is responsible for their own bitcoins. We consider the software for the self storage of bitcoin a “bitcoin wallet”.
It probably won’t take you long to start asking the right questions, and thus the rabbit trail begins. You might be asking yourself how you can have a wallet with imaginary money, or you might ask how that can be safe, what you do if you forget how to get into your wallet, where is it stored… HOW is it stored, and now you’re ‘there’ on the bitcoin journey. Honestly, most people don’t get much further than that. They will ask themselves “why on earth anyone would place so much time or faith in imaginary money they have to nurse for themselves?”. Yep… we’re just now gettin’ started.
One of the reasons understanding bitcoin can be so challenging, is because in many ways, it is money, but in other ways, it only appears to satisfy certain characteristics of electronic money, and in other terms bitcoin is defined or classified by the governments that ultimately allow, or disallow it to be used. If enough governments got together and decided bitcoin is money, then the way we are allowed to use it suddenly becomes very different than if they allow it to exist more as a technical tool, a way to store value, or even more clever of those in charge, they may wish to separate the ledger technology of bitcoin, or the blockchain, from bitcoin, only accepting a part rather than a whole.
Ironically, then, learning that cryptocurrency is digital money and bitcoin is the most popular cryptocurrency, doesn’t even help the layman’s version!
Who Created Bitcoin
You’re thinking to yourself “oh good, now we’re going to start making sense”. Well, what if I told you that we know exactly who created bitcoin, but the answer is that they’re an anonymous online character named Satoshi Nakamoto, and though we attribute bitcoin’s creation to their publishing the bitcoin whitepaper in 2009, nobody knows who they are, and whether they’re one person or many. So, the best thing to be said about bitcoin’s creator, is that they had a deep understanding of the forms of digital money that had been attempted in the past, and the problems these sought to solve, and what was still lacking. By knowing and attributing the benefits of their work, Satoshi had resolved issues of security and faking payments so peer-to-peer could become a reality.
Blockchain Is Money Decentralized
We continue the irony of bitcoin by understanding that blockchain is the technology descriptor for how bitcoin operates. Blockchain is the method by which bitcoin’s software is designed to work. It is a ledger system that uses the entire bitcoin network to seek out, timestamp, verify, validate and confirm transactions, passing along the transactions that are deemed to be correct for approval, and denying anything that suggests a transaction to be a forgery.
Data is finalized in blocks that have verified the proper order of events and saved that data permanently to the ledger, which is an open ledger that anyone can search. It requires the entire bitcoin network to sync up with an updated version of all transactions written, and it also protects the privacy of the information for those who actually sent or received transactions. In this manner, it is cryoptographically secure, but anyone can take a look at the public side of things to see where bitcoins came and went, without having access to the bitcoins or knowing the identity of the users. This means it is private and secure, transacts quickly, fees can remain cheap, and users do not feel beholden to any centralized entity in order to take part.
Just a few peaks into the deeper truths of Bitcoin, and we will find the beautiful mysteries of its irony continuously unfold. We like to believe bitcoin is decentralized, but in truth, there is no such thing. In many other articles I will take a look at ways in which centralization is necessary in order to protect the perceived benefits of decentralization. If you like a puzzle, it’s quite fun!
Why Would Anyone Want A Bitcoin?
Most people, once they ‘get’ that a bitcoin is virtual currency, digital money, electronic cash, or some weird thing in that category, the next item they usually wonder is why anyone would want it instead of “real” money? We have a computer network running its software, we have blockchain technology allowing for a public ledger that is shared with anyone who wishes to view it, and we have the benefits of decentralization for the idea that it can be protected from the impurities of banks and governments. But, what gives it any kind of value?
If you can trust me that bitcoin is valuable because it works, we’re going to get along splendidly!
I’ve heard some wonderfully brilliant folks in crypto express their discovery of bitcoin and their light bulb moments. To combine and condense this a little bit, lets think of bitcoin from the angle of value, or investability, as opposed to daily use as a currency. The best time for a person to acquire something of true value, is when there is the most of it available, for the lowest price, and most people still don’t understand or appreciate it. As an investment and also as a technology, bitcoin has been around long enough to prove the stability of its model, and is well on the way to becoming the world’s most trusted storage of value. 2021 is, in fact, the year that die-hard gold and silver investors are recommending people go equally into bitcoin, with the expectation that bitcoin will surpass gold’s performance in a massive way.
We’re talking about bitcoin at a time where it has peaked at over $64,000. That comes a few months after the world-wide pandemic panic dropped the stock market substantially and bitcoin had seen a low of under $4000. Even though there is a limited permanent supply of bitcoin (which we’ll discuss in a moment), it is still relatively easy to acquire them if you’d like. The only limit is how much money you have.
Think Of Bitcoin As A Valuable Asset: A Store Of Value
As to the actual value in bitcoin, most novices make the mistake of thinking that because it isn’t ‘real’, that bitcoin doesn’t have any intrinsic value. It is understandable, since the history of ‘stuff’ tends to focus on material things that store value. ‘Real’ money became government issued currency backed by gold, until it wasn’t, at which point we’re left trusting in funds mainly because we are told to do so. We have cars, paintings, relics, statues, rare stamps and coins, prized furniture, precious metals, jewels and other items that are physical stores of value that can be tested, appraised, collected and sold for large amounts of money. So in comparison, bitcoin seems to be imaginary.
But now lets add the real value of bitcoin back in. The truth is that if people accept a standard, then a standard can be used. There is nothing preventing a person from using the same computing power that spawned DOS for PC, the first Apple programming language, Macintosh, Windows or Linux, to write their own new operating system software, but the fact that Windows, Mac OS and Linux are so widely used, means that billions of people have accepted the value of these platforms and agreed to interact through them. The same is now true for iPhone and Android. It seems like some aspects of the world will always come down to Coke or Pepsi, Ford or Chevrolet, Mac or PC.
In this case, the idea of bitcoin means overcoming technical hurdles, but also contemplating the actual value of “value”. This is where the delicate but intricate genius of bitcoin comes into being. If an idea can be something that liberates a society, brings betterment to civilization, or perhaps makes it harder for bad elements to limit freedom, then that idea simply needs the opportunity to be proven valid in order for people to discover its value.
If you think that email has a tangible, measurable value, then you at least partly can understand bitcoin. If you find the internet useful, then you are on the path to undersatnding bitcoin’s value offering.
I don’t know that anyone has truly expressed bitcoin’s true intrinsic value very well, but I believe the best place to start is to say that it is an idea that simply needed to prove it could work, and from there it had the potential to catch on. The best way to describe bitcoin’s value now, is to point to the fact that it has been running for nearly 12 years at the time of this post. The longer it does what is was designed to do, the more we know the model works. If something fails miserably in the future, we’ll know which parts of the model to fix, but it won’t diminish what the last decade has already brought to us. Again, looking at email or the internet; we’ve had to learn to avoid email scams and spam advertising, just as we’ve had to deal with internet protective upgrades with the advent of viruses and ransomware. bitcoin is designed to protect itself from network attacks, but if new issues arise, the programmers are there to resolve the issue.
Anyone who knows bitcoin well, will find irony in my referencing the Wright brothers, since one of the biggest contentions in the bitcoin world is a man named Craig Wright who lays (false) claim to being the true Satoshi.
Taking that risk, when the Wright brothers “taught the world to fly”, they did not invent the 747, but they proved a 747 could exist. The greatest value that bitcoin brings to the table, is a working model of a network running blockchain, with an economic principle that secures the meaningfulness of the network.
It is the idea of value who’s time has come.
Satoshi Thought Of Everything
I’m sure there will come a time where “almost” should be inserted, but many people including myself, are of the belief that the more you learn about bitcoin, the more you appreciate how well it resolves what it was designed to tackle, and how many of these things are proving theory for the very first time. I’m sure Satoshi didn’t think of everything, but 11 years is an awfully long time for people to try attacking a network, an idea, a market, and for that asset to still be the top item in its field.
There are various schools of economic thought. Austrian and Keynesian are the two most popular debating macro-views regarding how money works. Bitcoin is the dream experiment, though you might argue that it simply proves that economists like politicians, will never actually agree with one another regardless of what history speaks. In this case, the model of scarcity is built into bitcoin’s design, so there will never be more than 21 million bitcoin ever. If the Bitcoin core developer team ever chose to change the code and unleash the cap on total coins, myself and many others would consider it a death blow to the entire industry. Anything is possible, but it is exponentially less likely the programmed scarcity of bitcoin will ever be changed, than the certain devaluation of the dollar.
In addition to scarcity, the economic model of bitcoin also makes it more difficult to acquire bitcoins over time. The beauty if the design is that the literal is married to the theoretical. Since the software for bitcoin runs on a huge network of computers, each of them has to have a certain minimal processing power, meaning that the real physical world is engaged in the limitations of economic theory. This is something that has never been done before either in cryptographic software or in monetary policy, and again, it has worked exactly as designed for over a decade.
As more computers join the bitcoin network, and processing power becomes more challenging, time ticks on and bitcoins are released into the network as a reward for all of this processing. The computers that are working to process transactions are called “miners” because they are essentially mining for digital gold. The trade for electricity and computational power is rewarded in bitcoin. In coordination with economic scarcity, the mining rewards reduce over time as well. After a certain number of blocks, typically around 4 years apart, there is a “halving” event, what we call in crypto a bitcoin halvening, where the number of bitcoins rewarded to miners is cut in half.
There’s Still Enough for Everyone
So, the difficulty goes up, the reward is reduced, and the value of the coin is based on free market supply/demand principles, where there will never be more than 21 million bitcoins ever. There’s one more important element of the equation to learn, and that is the divisibility of bitcoin.
There’s a popular saying (well actually a lot of ’em) in crypto: “you’re still early”. When people watch the price of bitcoin rise and fall, when we see governments manipulate markets with scare tactics, when world events like wars or Covid affect markets, a lot of fear can enter in. Did I buy too high, did I sell too low, should I have bought more, is the price too high for me to get in now? One thing in any market like stocks or cryptocurrencies, is that nobody can predict the future, and volatility is going to be a part of the game at some point. In crypto many consider volatile pricing as a feature and not an adverse side effect. The goal, when you believe in an asset, is to acquire more, and if you can get a good price then that makes it even better.
Many people start to do the mental gymnastics of an asset with only 21 million ever to exist, and 8 billion people on planet earth. They start to worry that the best reason to avoid bitcoin is there’s no way everyone can afford one. what happens when there aren’t any available? I’m glad you asked! Remember “Satoshi thought of everything”? With our current dollar-based fiat system, the smallest unit of a dollar is a penny. A penny is 1/100th of a dollar. Likewise, a “sat”, short for Satoshi, is the smallest unit of a bitcoin. You can buy a fraction of a bitcoin. In fact, most people do. It is expected to operate down to a very small portion of a bitcoin in order to be useful for trade, payment for debt etc. But, because flexibility, liquidity and divisibility of value are all dependent on the attainability of smaller units, Satoshi gave us 8 digits of divisibility with a bitcoin. Count ’em, 8! That means a single sat is equal to 0.00000001 BTC (BTC being the ticker for bitcoin). Technically, you can own one one-hundred-millionth of a bitcoin, meaning that literally, a bitcoin can be worth millions of dollars and still be divisible as the penny is to a dollar. It was designed to succeed and to scale, to control its own worth, and to balance the actual physical limitations of future hardware upgrades to manage a network that protects its real world value.
With Club 21M I’m going to share a lot of practical tactics for people interested in acquiring bitcoin and other cryptocurrencies as they choose. No one knows exactly what comes next. But, the more we can be informed, the more it is possible to make educated guesses to support a winning strategy in longer term investments. There’s a reason smart people, and occasionally crypto super heroes, take something like bitcoin seriously. It has ventured beyond the “is it really valuable… is there really a case for bitcoin… isn’t it just for radical libertarian nerds?” type stuff. Now, it is a matter of how much ducking, bobbing and weaving the governments provide before they completely change their tune and actually advocate for everyone to buy in.
I hope you found this a useful and eye-opening intro to bitcoin. Maybe it erred on the side of being too basic? Perhaps it erred on the side of being too technical? Perhaps there is no way to truly discount the intricate marvel of this monetary invention, but I do hope you’ve learned something and you can feel empowered that you know more about bitcoin than you did before.
And on that note, for now, crypto Gordon Freeman… out.
Resources
https://www.investopedia.com/terms/b/bitcoin.asp#what-is-bitcoin
https://www.investopedia.com/terms/b/bitcoin-mining.asp
https://www.investopedia.com/articles/investing/042015/bitcoin-vs-litecoin-whats-difference.asp
https://www.investopedia.com/bitcoin-halving-4843769
https://www.investopedia.com/news/how-bitcoin-works/
https://www.investopedia.com/tech/how-does-bitcoin-mining-work/
https://www.investopedia.com/tech/history-bitcoin-hard-forks/
https://www.investopedia.com/terms/b/bitcoin.asp
https://www.bbc.co.uk/newsround/25622442
