In order to participate in Bitcoin, it requires conviction. Conviction requires understanding. Bitaroo wants to help you on your Bitcoin journey, getting you to a point where Bitcoin goes from counter-intuitive to hyper-intuitive.
This is the second part of a three-part series entitled “Why Bitcoin?”. In the first part, we examined the question of money, specifically what it is and its history. This is crucial to developing a sound understanding of Bitcoin and we recommend you read it first, before diving into this article.
As Part 1 outlined, in the past, we had the gold standard where the value of money was intrinsically linked to a quantity of gold. Issuers of money were therefore constrained in their ability to create more money by having to have it backed by gold. Fiat currency, by contrast, has no such constraints as its value is based entirely on trust and by decree, meaning its supply is easy to increase, the effect of which is that it tends to debase over time.
The Problem of Currency Debasement
Inflation is tax without legislation. Margaret Thatcher called it “the parent of unemployment and the unseen robber of those who have saved”.
As free human beings, we have finite time on earth available to exchange our limited resources (time and energy) for monetary goods.
We want to store our time and energy in monetary goods that preserve purchasing power over time. Fiat currency is inflationary by design. By debasing your savings, inflation serves to undermine the time and energy you spent acquiring such goods. It fundamentally undermines your endeavours and prevents you from storing and retaining wealth into the future.
This is the key problem that Bitcoin fundamentally aims to solve.
Let’s Talk About Bitcoin
Bitcoin was established by Satoshi Nakamoto (“Satoshi”) in 2009 in the wake of the 2008 GFC. Satoshi provided an alternative solution to the centralised, debt-based fiat monetary system and the moral hazard posed by quantitative easing (to the layperson “money printing”) and currency debasement. Through a combination of cryptography, mathematics and blockchain technology, he created the world’s hardest, soundest and fully decentralised monetary asset, Bitcoin.
Confusingly, “Bitcoin” (capitalised “B”) refers to the decentralised peer-to-peer network or protocol, whilst “bitcoin" (small “b”) is the underlying currency or digital asset that can transferred on the network.
Bitcoin is the antithesis to the mechanics of the existing financial system where central banks control monetary policy, commercial banks custody assets and payment processors facilitate consumer transactions.
Unlike fiat currency, Bitcoin has no central bank or single administrator, and bitcoins (or fractions thereof, known as “Satoshis”) can be sent peer-to-peer on the network without the need for intermediaries.
Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger (the blockchain). The network remains secure through a process known as mining, where transactions are validated and in exchange, “miners” are rewarded with newly minted bitcoins at a predetermined rate.
Compared to the current financial system, Bitcoin has no centralised authority with the ability to influence the supply as the software is written to provide that there only ever will be 21 million bitcoins. Each bitcoin comprises of 100,000 million Satoshis (or “Sats”). Bitcoin’s inflation rate is currently just under 2%, however this will reduce dramatically in time until the last bitcoin is mined in around 2140. Bitcoin’s supply curve (or monetary policy) is entirely predictable as is baked into the code.
With a fixed supply and a predictable monetary policy, Bitcoin’s value cannot be inflated away through increased supply. This is perhaps its best quality and one that makes it arguably the best form of money created to date – an innately scarce, divisible, transferable, verifiable and fungible form of money incapable of centralised debasement or confiscation.
Another key differentiating feature of the Bitcoin network is its decentralised nature which allows for both self-custody of digital assets (eliminating banks) and the facilitation of swift, securely encrypted transfer of value (bitcoins) directly, peer-to-peer, across jurisdictions, eliminating the need for third party payment processors. Its decentralised nature means that it cannot be inflated away or confiscated, because no one person, company, or government controls it.
In short, Bitcoin seeks to cure the ills imposed by the modern debt-based fiat financial system – inflation, rent-seeking intermediaries and censorship. Inflation is wealth destruction and Bitcoin is its kryptonite.
In Part 3, we’ll dive into the investment case for Bitcoin, specifically why everyone should at least consider having a small portion of their wealth stored in Bitcoin.
Dale is a reformed solicitor and Bitcoin writer, editor and consultant known as the Bitcoin Shepherd. He loves to orange pill normies and help people understand, buy and securely store their own bitcoin. You can follow his musings on Twitter.