19 April 2020
What is Bitcoin?

Bitcoin - There’s more than what meets the eye

Bitcoin is a word most of us have heard thrown around over the last couple of years, usually when it goes on huge price surges resulting in spectacular fortunes for those lucky enough to “get in early”. We see news about Bitcoin getting hacked, various governments ‘banning’ Bitcoin and also the occasional Bitcoin based scam. You may have also overheard people talking about a strange new internet money which is just a “tulip mania”, and will only benefit those at the top.

So what exactly is it? Everybody who has been in the Bitcoin space long enough has their own definition of what it “is”, but we’ll get to some of those later (admittedly, they are quite good). To set the structure for the rest of this article we can define Bitcoin as the next evolution of money, built from a combination of years of mathematical and computational advancement, economic theory, and a little bit of luck.

Before we dive in, it’s important to remember that Bitcoin is a totally new form of money. As with most things we see that are like no other, one of our first instincts is to act cautious and maybe even become a little scared. Keeping an open mind is a good rule of thumb for approaching new advancements like this. A good example of people automatically is the anti electricity poster from 1889 shown below.

electricity 1889

Money Evolves

Evolution doesn’t just affect us, but also the tools and theories we use to move forwards as a civilization. Money is a prime example of this, as it has had many different forms over the course of our time here on earth. The earliest forms of transacting value were done through a barter economy, where people would trade goods and services for other goods and services without the use of a “money”. The problem with a barter economy is what's known as the “coincidence of wants”, which dictates that if two people want to trade then they have to both have an item which each other wants. Consider today’s society built around barter: things would be inefficient to transfer, and there would always be some sort of discrepancy between the true value of the items being traded.

photo 2020-04-15 13-55-37

So if barter is unfeasible for a large scale society, then we need some sort of standardized bearer asset which has a set market price that market participants all agree on: money. The earliest forms of money were simple objects such as seashells and glass beads, and were unique to the individual colonies or groups which adopted them. Although these objects may have worked while the colonies were isolated, eventually due to globalization their relative value was washed out by foreign groups flooding their respective markets with such money in order to gain control over them. A good example of this is outlined in Saifedean Ammous’s book The Bitcoin Standard, where he describes european settlers traveling to parts of Africa loaded with glass beads to gain an unfair advantage, resulting in the destruction of their financial systems.

How do we solve this problem? Hard money. Some civilizations and groups stumbled upon it earlier than others, but eventually the whole world converged on the divisible, transportable, durable, and scarce metal we all know as gold. Gold didn’t become the global standard of money by chance, it was all down to its aforementioned properties that people discovered over time that it was simply the best money. Having a global standard of money that is equally recognized around the world made commerce and trade more efficient than ever.

Punctuated with brief moments of various countries and nation states moving to their own individual centralized currencies, we eventually moved off gold as a global reserve. The series of events that lead to this is quite extensive and out of the scope of this article, so if you want to research further a good place to start is (INSERT). In August 1971, Nixon infamously unpegged the USD from gold, creating the first ever period where the global reserve currency was a completely floating “fiat” currency. So what does this mean for us? Essentially money is now controlled at the whim of centralized entities. We saw in 2008 just as we are seeing in 2020 that governments are literally creating or “printing” currencies out of nothing to try and control economic trends. Just like Germany in 1923 and Venezuela currently, the inflation due to printing money with the goal of economic stability only ended up turning into hyperinflation.

There are a lot of interesting adverse economic side effects of unpegging the global reserve currency to gold, and many are covered here (https://wtfhappenedin1971.com/).

Bitcoin to the Rescue

genblock

Now that we have a basic overview of the history of money and some of its inherent problems, we can start to discuss Bitcoin from the beginning. Bitcoin was born during the 2008-2009 global financial crisis on January 3 2009, and even displays the infamous phrase “Chancellor on brink of second bailout for banks” in the very first transaction (block). Satoshi, the “inventor” of Bitcoin, was a person (or group of people) who nobody has ever been able to verify the identity of, and has disappeared from the original chatrooms and forums since 2011. The lack of information surrounding Satoshi is one of the fundamental attributes of Bitcoin, as it is driven by no single entity or group, and has grown organically without a “CEO” or “marketing team” in the depths of the internet. Bitcoin has become extremely robust and resilient over the years simply because there is no single point of failure for Bitcoin and it relies on a decentralized network of people supporting it. So why do people support it? Bitcoin has the fundamental attributes of a good money-

  • Scarce: there are only 21,000,000 Bitcoin in existence

  • Divisible: each Bitcoin can be divided into equal smaller amounts called satoshis. Think of a satoshi as like a cent to the dollar, however there are 100,000,000 satoshis in every Bitcoin.

  • Portable: Bitcoin can be easily moved around. Comparing Bitcoin to physical currency or gold, we can see that it is much easier to send and store due to its digital nature.

  • Durable: Because there are only 21,000,000 Bitcoin and they are completely digital, there is no need to worry about Bitcoin deteriorating or corroding with time.

Bitcoin has all of the traits of a good money, plus one more: verifiable. This is something that was never possible before Bitcoin, and is a product of the distributed ledger which acts as the backbone of the Bitcoin network. What this means is that anyone with an internet connection can download and verify a register of all the transactions ever taken place, allowing them to see for themselves that their Bitcoin is theirs. This fundamental principal has been embraced by the Bitcoin community in the now popular phrase: don’t trust, verify.

In short, Bitcoin allows you to take control over your own money. Current day fiat money is the exact opposite, as you are always trusting someone. A few examples of this are:

  • In Cyprus 2013, people who trusted their banks to give them money were disappointed when ATM’s stopped working and there were mass bail-ins where banks take depositors money to finance themselves.

  • You trust banks to settle the money for you, and not stop any transactions when making payments (it is a permission based system).

  • You trust your government to not debase (increase the supply of) the money, decreasing the value of it (inflation).

  • You trust banks to keep your information private and not pass it on to any third parties.

Bitcoin: Gold for the Digital World

Bitcoin is often called “digital gold”, as its economic model and properties align it very similarly with the Gold Standard which the world was based on for many years. Like gold, Bitcoin cannot be replicated or “printed” by governments, which makes it inherently valuable and more likely to be saved than spent. This is where the Austrian Economic model comes in to play, which outlines the idea that a society based on saving is better off in the long run than a society that is based around consuming. Currently we live in a debt-based economy where people are naturally incentivised to take out debt and spend to keep the economic machine going, rather than prioritizing the future by saving.

Comparing and contrasting Bitcoin with gold, we can see some very distinct advantages as well as disadvantages. Firstly, Bitcoin completely outweighs gold with regard to it’s portability. Bitcoin can be sent anywhere in the word in less than 10 minutes on the blockchain, and less than a second if you are using the “Lightning Network”. Secondly, you can always verify that there will be 21,000,000 Bitcoin available. The main arguments for gold are that it is already a mature form of money, and that it has “intrinsic” value in the form of industrial uses. One prominent Bitcoiner wrote Bitcoin has no Intrinsic Value - and That's Great which outlines Bitcoin’s lack of “intrinsic” value and how that actually enables it to focus on the one thing it was designed to be: hard money. Connor also argues that because gold is being used for industrial purposes as well as money, the industrial price is driven up due to “captured utility”.

So then, What is Bitcoin?

The simple answer is- it differs from person to person. Bitcoin is different things to different people, whether you're using it to balance out an investment portfolio, escaping a hyperinflationary currency, or whatever situation you find yourself in. Bitcoin has proven to be the most resilient and “antifragile” piece of technology/money in the last decade, and continues to grow exponentially. If you would like to know more about Bitcoin’s security, a good article is (insert can bitcoin be hacked).

“Bitcoin is an insurance policy against an Orwellian future” - Nassim Taleb (Author: Antifragile, Skin in the Game, etc.)

“Bitcoin is a technological Tour De France” - Bill Gates (Microsoft Founder)

“Bitcoin is the solution, not anti-bailout political whining.” Pierre Rochard (Bitcoin writer)

“Bitcoin is the only $100B+ asset with 24/7 markets, no close of business, no weekends, no circuit breakers.” - “Plan B” (Quantitative Analyst)

“Bitcoin is, and that is enough” - Beautyon (Bitcoin writer)

“Bitcoin is the money of the people” - Robert Kiyosaki (Rich Dad Poor Dad)

“Bitcoin is freedom” - Tyler Winklevoss (Founder of Gemini, disputed founder of Facebook)

“Bitcoin is the hardest money ever invented: growth in its value cannot possibly increase its supply; it can only make the network more secure and immune to attack.” - Saifedean Ammous (Author - The Bitcoin Standard)

“Bitcoin is pieces of super-gold flying inside an unstoppable PayPal” - Murad Mahmudov (Bitcoin writer)

If you’re looking to buy Bitcoin in Australia, Binance Lite provides a secure and reliable cash-to-bitcoin service, through internet banking transfer or a network of 1300+ supported newsagents across Australia.