What is Bitcoin?
Updated: Jul 1, 2021
This is the script for an animated video on the Bitcoin Stimulus YouTube Channel. Check out the video here.
By now, almost everyone has heard the name ‘Bitcoin.’ But that doesn’t mean most people know what it is. The lack of informed criticism coming from the mainstream is a reminder of just how new Bitcoin really is.
Being born in just 2009, it is understandable that most people struggle to grasp Bitcoin’s significance. Almost none of the groundbreaking technologies that we take for granted today were immediately embraced.
A short list of inventions and ideas that were misunderstood and ridiculed early on include: the telephone, the airplane, the computer, the TV, the internet, the automobile, and even the bicycle.
But history shows that “Nothing is more powerful than an idea whose time has come” -Victor Hugo
Bitcoin’s time has come.
Those who refuse to learn and adapt will be left behind. But those who invest the time to educate themselves will be rewarded.
Whether you are in charge of a corporation or small business; a leader of a city, state, or nation; or just an everyday person, an understanding of Bitcoin is one of the most valuable assets to have in the modern economy.
So back to the original question, what is Bitcoin? There are many different answers to this question, but the most basic is this: Bitcoin is money.
To understand what Bitcoin is, it is necessary to first understand what money is. Money is a useful technology that serves three basic functions.
It acts as a medium of exchange, a unit of account, and a store of value.
1. Medium of Exchange
As a medium of exchange, money acts as the bridge between buyers and sellers. A good medium of exchange enables economic growth by allowing trade to occur between buyers and sellers, regardless of the relationship between them.
2. Unit of Account
As a unit of account, money allows for easy calculation of prices in an economy. Without a standard unit of account, it would be necessary to engage in the time-consuming process of exchange rate conversions.
3. Store of Value
As a store of value, money allows people to defer the fruits of their labor into the future. The act of sacrificing immediate consumption for future consumption is what has enabled the construction of modern civilization. A good store of value incentivizes long-term thinking and investing.
As a medium of exchange, unit of account, and store of value, money provides benefits to both the individual and the economy as a whole. But not all money is created equal.
Throughout history, societies in different geographic locations used different goods for money, depending on what was available to them. Some examples of primitive money include Rai Stones from the Micronesian island of Yap, Aggry beads from western Africa, and seashells called Wampum from North America. While seemingly very different from one another, these three monies had one thing in common: scarcity. However, this scarcity was no match for modern technology. Once it became possible to mass produce them, the value of each money plummeted.
It is for this reason that over time gold emerged as the world’s dominant money. Increasing the supply of gold requires massive capital expenditure, keeping the inflation rate relatively low. Gold naturally outlasted primitive forms of money due to its superior qualities of durability, recognizability, divisibility, and most of all, scarcity.
As global trade expanded, it became advantageous for countries to converge on a common medium of exchange. By the end of the 19th century, gold was recognized as money in nearly every country in the world.
But gold wasn’t perfect. Over time, societies found it more efficient to exchange paper notes redeemable in gold. These notes were lighter, more easily divisible, and just an all-around more practical way of conducting business. At any time, someone could take their paper note to the bank and exchange it for gold.
Fast forward to 1944 at the Bretton Woods agreement, and the US Dollar became the world reserve currency. Now instead of backing their currencies with gold, countries backed their currencies with US Dollars, which were in turn, backed by gold.
With more dollars in circulation than gold in the vault, US president Richard Nixon officially ended the US dollar’s convertibility to gold. Since 1971, the entire world has been engaging in one of the greatest monetary experiments in history: completely unbacked ‘fiat’ money.
Fiat, a word of Latin origin, means ‘by decree.’ Fiat money, then, does not have value because it was chosen naturally by the market, but because it has been decreed to have value by a central authority.
On October 31st 2008, monetary history changed forever when a programmer by the name of Satoshi Nakamoto published the Bitcoin white paper.
The Bitcoin network went live in 2009 and went largely unnoticed for the first few years of its existence. But just over a decade into its life, it has grown into a global network used by hundreds of millions of people to store almost one trillion dollars’ worth of value.
Never before has a money been created or discovered that is more capable of fulfilling the three functions of money than Bitcoin.
As a unit of account, Bitcoin offers nearly infinite divisibility. With each coin being divisible into One hundred million units called ‘sats’, Bitcoin allows for prices to be denominated more precisely than any other form of money that has come before it.
As a medium of exchange, Bitcoin has the ability to connect buyers and sellers from anywhere on Earth. By speaking a common language, ideas are able to circulate and multiply spontaneously within a society, promoting innovation and prosperity. Money can be thought of as a form of nonverbal language which connects buyers and sellers through the mechanism of price. By speaking the same monetary language, goods and services are more easily circulated throughout an economy leading to a more prosperous society for all.
A common, open medium of exchange removes the barriers for trade between nations. By utilizing Bitcoin, a freelance graphic designer in Nigeria can offer his services to clients in New York or London without relying on any bank, and without incurring currency conversion fees.
Bitcoin also offers hope to many families in developing countries who rely on remittances. Today billions of dollars of remittances to the poorest countries are lost in fees due to middlemen and currency conversions. As an open global monetary network, Bitcoin fixes this.
It’s important to note that while Bitcoin’s base layer restricts its transaction capacity in exchange for security and decentralization, 2nd layer solutions are capable of scaling Bitcoin to millions of transactions per second.
One such example is the Lightning Network, a payment layer build on top of Bitcoin, which is already being used by thousands, and soon millions, of people in El Salvador as a medium of exchange.
As a store of value, Bitcoin offers what no other form of money can: absolute scarcity. A foundational aspect of Bitcoin is the fact that no more than 21 million bitcoins will ever exist. Unlike gold, the rate at which technology progresses has no ability to inflate the supply of Bitcoin beyond 21 million.
Not only does technological progress not have the power to debase Bitcoin, but neither do politicians or central bankers.
From the Roman Empire, to Weimar Germany, to present day Venezuela, history is littered with examples of governments debasing their currencies to the point of collapse. As of May 2021, there are over 20 countries with official annual price inflation rates of over 10%. Citizens of these countries are watching their savings disappear before their eyes. Bitcoin gives every person the opportunity to store their hard-earned wealth in a money that cannot be debased.
Even the strongest fiat currencies are not safe from debasement. Over the past 100 years, the US Dollar has lost 93% of its value. Trillions of dollars have entered circulation since just 2020. While dollars remain a convenient unit of account, and medium of exchange, dollars are quickly losing their ability to store value. This is why we counter-intuitively saw unprecedented booms in both the stock and real estate markets after government-imposed lockdowns of 2020 began: As more dollars entered circulation, people began to flee dollars in favor of alternative scarce stores of value.
Some people believe that when the fiat experiment ends, the world will return to a gold standard. This idea makes about as much sense as ditching cars and returning to the horse and buggy.
Gold was the premier monetary asset throughout history for the same reason that the horse and buggy was the primary mode of transportation throughout history: it was the best option available. Now that automobiles exist, despite a history spanning thousands of years, riding by horse is mostly a recreational activity in the modern world. And now that Bitcoin exists, despite its storied history, gold will take its place as an important, but now outdated, tool of civilization.
Because that’s all money is after all, a tool. Money by itself is not valuable. What is valuable is what money can do for the individual and for the economy. And never before in the history of civilization has a money offered more potential for both the sovereignty of the individual, and for the advancement of the economy, than Bitcoin.
Thanks for reading!
Click here to watch the animated video version
The Bitcoin Standard