Bitcoin — From a Non-nerd
Hip, hip, hooray!! Bitcoin is back over 10k. Yes, the price excites me, but the potential of bitcoin is even more exciting. Why? How? What? I’ll briefly try to answer these questions that makes sense to a non silicon valley person like myself and explore the possibility of bitcoin.
What is Money?
Aristotle philosophized about money and came up with four absolutes that money must satisfy:
- Durable — the medium of exchange must not weather, fall apart, or become unusable. It must be able to stand the test of time. - Bitcoin lives on the internet on thousands of computers and your piece of the bitcoin is recorded by these computers.
- Portable- relative to its size, it must be easily moveable and hold a large amount of universal value relative to its size. — Bitcoin lives on the internet on thousands of computers.
- Divisible- should be relatively easy to separate and put back together without ruining its basic characteristics. Instead of dollars and cents ($35.12) Bitcoin can be broken down into 8 decimals (35.00000012).
- Intrinsically Valuable- should be valuable in of itself, and its value should be totally independent of any other object. Essentially, the item must be rare. Bitcoin is scarce. There will be only 21 million mined. Bitcoin advocate Andreas Antonopolous does not like the term intrinsically valuable. It does not have intrinsic value such as barley which is the first recorded money used in history. One cannot eat a bitcoin, but it does have intrinsic utility as this protocol allows for global commerce.
As we all know, we’ve been off the gold standard for quite some time, so what is the world reserve currency United States Dollar (USD) actually worth? Well whatever we believe it to be worth. Money is a psychological concept and according to Sapiens author Yuval Noah Harari, “trust is the raw material from which all types of money are minted”. So right now, we trust the USD. Why? Because your neighbor and your neighbor’s neighbor, and your neighbor’s neighbor’s neighbor trusts it etc.
The beautiful thing about bitcoin is that it removes the barrier of human trust needed for a transaction. It lets us trust the computer science/math of the protocol. It enables us to transact peer to peer. The protocol is maintained through consensus of the thousands of computers validating the system and keeping it honest. Anyways, I’ll try to explain blockchain, Satoshi Nakamoto’s grand computer science breakthrough that eliminates human trust.
Bitcoin’s Primary Breakthrough
Some of the first forms of “writing” came in the form of ledgers. People keeping track of transactions and money flow.
A blockchain is the modern ledger and has provided a better way to do accounting.
Single Entry Accounting — Some of the oldest manuscripts and tablets feature this form of accounting. Debits and credits were kept on one form (a tablet). This tablet is much better than the human memory of who owed what to whom, and therefore allowed civilizations to develop.
Double Entry Accounting — Enter today’s system. Enter everything twice. This system is good, not great and it’s been in use for around 700 years. Plenty confusing. I just read about it for a while, and I’m still confused even though it’s very simple. It’s been keeping accountants in business for years. There are plenty of loopholes and potential for bad acting, which keeps the auditors very busy. However, there still exists the double entry problem to some extent.
Blockchain Solution as a Triple Entry Accounting— Okay so here’s what happens when you transact on the bitcoin network. (Better explained here.)
Instead of each institution keeping track of all of their transactions, everybody involved in the bitcoin ecosystem will be keeping track transactions. Example: Walmart buys chairs from China. China invoices Walmart and then Walmart sends bitcoins to China for the chairs. The transaction is validated and then cryptographically secured in the blockchain using the voodoo science. This transaction will be available to see publicly and be able to prove the valid transaction. The blockchain basically offers a receipt of the transaction and it’s like the fly trapped in amber seen above. If Walmart did not have a sufficient amount of bitcoin to buy the chairs, the computers that validate the system would not have accepted the transaction.
As time goes on, this transaction gains more layers of amber as more blocks are formed (every ten minutes). All transactions are chained together and become increasingly difficult to disprove. How does it do this? Super crazy cryptographic breakthrough.
** Nerds offer a much better explanation. This is just how I see it now. (AGAIN, Better explained here.)
Bullish or BS
We saw the price of bitcoin jump drastically in the winter of 2017 as it gained mainstream media attention. The price jumped simply out of FOMO (fear of missing out). People thought the whole world might start using bitcoin and they wanted their piece of the pie. Bitcoin works on supply and demand, and for a second there, nobody wanted to sell their bitcoin so the price ‘mooned’. Again, money is a psychological concept, right? If everybody simply decided to think bitcoin has value then it will. We think it is worth 10k today, therefore it is.
Bitcoin has been referred to as “magical internet money”. Simply put.. It is. But the internet deserves its own native currency. Bitcoin is the first attempt at this and now there are thousands upon thousands of coins out there. Many of which were scams and people made and lost millions. Bitcoin is software, meaning that it is able to be updated. Some of the smartest minds in the world are working on such updates, with the goal of it being able to be massively adapted.
Coolest Features
Bitcoin allows for monetary sovereignty. Trace Mayer talks about this extensively, but here’s my view. This is my favorite feature of bitcoin, yet the most scary. We have control of our money!
When you put money in the bank, what happens? The bank takes your money and loans it out for interest among many other things I have no clue about. We trust these banks to be good actors and for them to let us have access to our money when we need it. We have been programmed to trust 3rd parties for security. It’s quite difficult to actually be in control of your own wealth. Security measures will need to be taken if you truly want to own bitcoin and thought will need to put in to how you store your coins (everything you need to know in this link). If you leave your coins on the exchange, then you’re somewhat missing the point of bitcoin. If you’ve heard of bitcoin being hacked, it’s not true. Nobody has ever peeled back those layers of amber and reversed a transaction. The exchange is what was hacked or coins were lost due to user error. “Trusted third parties are security loopholes” -Nick Szabo
Furthermore, bitcoin enables for seamless global commerce. Bitcoin or crypto of some sort have the ability to level the global economic playing field. There are still many countries that are primarily cash based and do not have accessed to first world banking systems. These systems and perhaps all “fiat” (inconvertable paper money) systems may be doomed one day. Look at what just happened in Venezuela and Zimbabwe with their currency crisis. The power games that we are able to play with such a system are unfair. I’m not the guy to talk about global economics, but what would a world look like with a global reserve currency that every body had access to? Saifedean Ammous wrote a book on such a possibility.
“Inflation is taxation without representation”- Trace Mayer
Anyways, I’ve been researching and writing off and on all day. And I definitely had more tabs open than you see above. This is probably a multi-day post in the works but it felt good to get what I got out. It’s a complicated subject and there are many, many smart people who are working on this. CEO of Twitter Jack Dorsey, and the Winklevoss twins are some of the main actors creating the bitcoin infrastructure. Every day bitcoin lives, it is getting stronger.
My advice to you? Keep an open mind. Learn. Get some skin in the game and play around with the stuff. It’s easy to criticize from the outside, but owning some may change your psychology. None of this really makes sense until you touch it. No, you’ll never be able to physically touch a bitcoin, but you can send money where you want, when you want. There’s no limit to how much you can send. It’s awesome. Also, very scary when the “money” is floating around cyberspace. So to learn, go ahead and touch it. Buy a smidge, why not. Blockchains are not going anywhere. Bitcoin is forever evolving. What’s gonna happen? Nobody knows.
And oh ya, THIS IS NOT INVESTMENT ADVICE.
