Introduction

Some view Bitcoin is a once-in-a-generation investment opportunity, while others see it as a technological revolution leading to decentralised governance and greater freedom. But to a pre-coiner (someone who hasn’t yet bought bitcoin), this doesn’t necessarily answer the question of “why Bitcoin?”. In a perfect world, this could be a summed up in a single sentence, however Parker Lewis of Unchained Capital eloquently notes that:

“…practically everyone is unequipped to evaluate bitcoin because it does not fit any prior mental framework… To make it even more difficult, bitcoin is so abstract an application and so far from a tangible phenomenon, that it is like staring into the abyss. Bitcoin is both difficult to see and impossible to unsee once discovered”.

To help you see and then struggle to “unsee” Bitcoin and understand its “why”, we need to start in the beginning. In this first of three-part series, we explore Bitcoin from first principles. Let’s get started.

Money

In order to understand Bitcoin, you need to understand money. And in order to understand money, you need to understand the history of money and how we arrived at our modern understanding of it.

Here’s a question - what makes money valuable and who gets to determine that? Difficult to answer, isn’t it? It’s not something most of us have thought about. The history of money and its evolution may help you understand how we got to where we are. It’s a complex story with a lot of twists of turns. In the interests of keeping things simple, we’ll avoid the minutiae and focus on the big picture themes.

Thousands of years ago, our ancestors roamed the earth in small tribes and bartered with each other for goods and services. Over time, they learnt that bartering was inefficient, mostly because you didn’t always want or need what the other person had to offer. Soon, they introduced something that both parties viewed as valuable – a medium of exchange, which varied in different societies around the world and included seashells, flint, stones, cattle, salt or anything else that was rare and had symbolic value.

Even within societies, not everyone agreed on the medium of exchange and soon, a game developed whereby people began to speculate as to which medium of exchange (or “money”) would become widely accepted. The earlier you were able to accurately predict which would be widely adopted, the more you could acquire of it cheaply. Over time, as demand and adoption grew for the good, so did its value. This created a feedback loop resulting in societies adopting it as a singular store of value where all participants’ interests are aligned.

Over hundreds of years, as technology advanced and trade routes developed, different societies had to decide whether to store their wealth in theirs or the other party’s store of value. Eventually, the world converged on a bimetal standard where gold was the single store of value and silver was used for every day transactions.

Gold was chosen because it possessed the qualities of a good store of value - something that preserves its purchasing power over time:

1. Durable – not easily perishable/destroyed
2. Portable – easy to transport and store
3. Fungible – interchangeable with another of equal quantity
4. Verifiable – quick and easy to identify, difficult to forge
5. Divisible – easy to sub-divide
6. Scarce – probably the most important and defining attribute

Over time, the downsides of gold became clear as it was expensive to store and difficult and dangerous to transport in big quantities, especially across continents. And so, a convenient solution was conceived – paper money, backed by gold giving the holder the right to claim gold. This was the introduction of the “gold standard”. The paper money was “sound” in the sense that its quantity could not be arbitrarily increased without a proportionate increase in gold. The gold standard proved to be good for trade and eradicated a lot of the logistical and security challenges associated with having gold as money.

History however has shown that human beings in control of the supply of money have always sought ways to increase its supply to pursue their own interests - from Roman emperors who devalued gold coins by watering it down with other metals to modern governments who print money to finance wars. The gold standard has not always popular with leaders as it imposed fiscal discipline on them - that is they couldn’t simply increase the supply of money to pursue their own interests.

The story is complex, but the simple version is that following World War 2, the US dollar was selected as the global reserve currency, pegged to the value of gold. Recognising that the country was running into financial difficulties, the US’ allies starting asking to redeem their dollars for gold. President Richard Nixon then broke the gold standard in 1971. US dollars could no longer be redeemed for gold. And so, the fiat currency era arrived.

Read more: How to Buy Bitcoin on Bitaroo

The value of money was therefore no longer based on a mutually agreed upon store of value (gold), but rather, by fiat (or decree). Put differently, the money was now valuable because the government said so. This is where we find ourselves today. Governments (more accurately, central banks) can increase the supply of money without the constraint of having to have it backed by gold. This invariably leads holders of the currency to experience a loss of purchasing power.

Enter Bitcoin

This lies at the heart of the problem that Bitcoin aims to solve. For as long as we’ve had money, those in control of its supply have inevitably succumbed to the temptation to make more of it and in the process, impoverish their citizens through inflation – from the Roman empire through to modern-day Venezuela.

Bitcoin fixes this. In the original 2009 whitepaper, Bitcoin’s anonymous founder Satoshi Nakamoto highlighted that:

“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust”.

Bitcoin is the hardest, most sound money ever invented. You can think of it as gold, but a pharmaceutical-grade synthetic version that does everything gold does, but better. Like gold, it has no central authority controlling its supply. Its supply is pre-programmed and fixed. It does not require trust, it is trustless. As Jason Williams says, Bitcoin is hard money you can’t f*ck with. That is its why.

Continue reading - “Why Bitcoin?” (Part 2)