Why Bitcoin?
The following is a copy-paste of a message I just sent to a friend. He wanted to know the basics of the Bitcoin technology and market. Figured I’d share it here too, since it ended up being a (potentially useful) wall of text!
So, the technology aspect of Bitcoin is what really drew me in in the first place.
You can understand Bitcoin in an afternoon or so of reading; but generally speaking you can think of it as just a giant list, or ledger, of transactions. That idea is nothing new; but the crucial thing that nobody had ever successfully done before was to make that ledger totally decentralized, while also avoiding people sending or transacting with the same coins multiple times.
Without a central bank, or a central authority, that’s a really interesting (and difficult) problem to solve, and Bitcoin solves it in a really unique way. When you hear “bitcoin mining”, that’s essentially the problem they’re solving: preventing people sending the same coin to multiple people, by making it overwhelmingly computationally expensive to do so. So the more people mining bitcoin, the more secure the network becomes.
When you send a bitcoin, essentially you send a signed transaction to the network (you have a secret key, like a password, that nobody can guess or spoof, which you use to digitally sign transactions). That transaction joins a queue, eventually a miner picks it up, and that miner solves an extremely hard computation to create a new block with thousands of transactions bundled together as one block.
The miner then broadcasts that new block to the network, where it gets added to the list (or chain) of pre-existing blocks. The network only accepts the longest chain of blocks, and no single entity has enough computing power to create a rogue chain of blocks that is longer than the main chain. So there’s a single source of truth for which transactions actually “happened”, and everything else is ignored or discarded by the network.
So Bitcoin is a “do one thing, and do one thing well” network. Other cryptos try to add more complex features, but Bitcoin is all about just transferring a finite unit of value from A to B, nothing more, nothing less.
So the technology is clever, but the economic side of Bitcoin is what keeps you coming back for more.
The question of “what gives Bitcoin its value?” is a question that people have been trying to answer for the last decade. This is where you’ll find everyone has a slightly different opinion. It’s not a stock; there’s no company backing it that you’re getting a share of. It’s not a bond; there’s no creditor. It’s not really a currency, honestly: it’s not fast enough to use to buy a coffee, and it’s not likely to replace cash, even if some people will inevitably use it that way.
What it seems to be, potentially, is a store of value — something that can replace things like gold, and bonds, and even equities, but in a way that is decoupled from any notion of being “backed” by something, or having any “intrinsic value”, or so on. It has value, because:
a) The technology is rock solid, and allows transferring vast sums worldwide for extremely low fees, extremely fast compared to traditional currencies.
b) People and institutions are adopting it, and that has a huge snowballing network effect.
c) The monetary policy is totally immutable. There are a fixed number of coins that will ever be created, nobody can change that, and anyone can verify the number of coins currently on the network.
d) It is outside of the direct control of any one central body or government. It can be regulated, but not changed without a huge amount of international consensus from those on the network.
e) It is uncorrelated with all other assets.
Bitcoin’s price essentially rises as a function of its adoption, and its adoption increases as a function of all of the above factors.
When people hear “it isn’t backed by anything” they sometimes begin to worry. Bitcoiners either don’t worry about that, or see it as a positive thing. The argument can be made that nothing really has intrinsic value; even something like gold, which has some industrial and technological uses, spends most of its time sitting around in a vault. And being backed by a government or corporation often gives that entity the right to change the supply or monetary policy at will; like printing money or issuing new shares.
Right now Bitcoin is obviously way too volatile to be a stable store of value at this point in time. What most Bitcoiners are betting on is that once the market cap surpasses that of gold, that volatility will go way down. It could happen, it may not; so right now Bitcoin is more like a long-term call option on a store of value. Most people in for the long term buy it, and hold it, expecting to hold it for many years or decades. Pretty much everyone wishes they’d bought more years ago, even during previous market peaks.
That said there are a LOT of opinions about it and a LOT of noise to sift through. Some people see it as a ponzi scheme. Many libertarians have latched onto it because it represents a break-away from government control. Some people day-trade it, some people try to predict the future price based on mathematical price regressions. Some people have concerns about the energy consumption, others argue that it is necessary to secure the network, and is no worse than the massive amounts of energy used to power and protect fiat monetary networks. Some people release their own coins that are just forks of Bitcoin, others build actually potentially useful cryptocurrencies that have some novel or useful technology or use case.
So far nothing in the space has reached the adoption level of Bitcoin. Most of what you read is bullshit speculation, so take it all with a grain of salt, including what I’m writing here.
What is clear though, is: as adoption goes up, so does the price, and adoption is steadily climbing. There have been a bunch of bull-runs in the past, we’re in the middle of one right now, and this time the big guys have arrived. You probably saw Tesla recently added Bitcoin to their balance sheet, they’ll likely be one of the first of many.
And of course bull runs end, and the price crashes, so naturally if you’re buying it don’t spend more than you care to lose, or have a rock solid plan to hold it long term. Some Bitcoin holders basically plan to never sell, and use their coins as collateral to borrow against in future. Others have a plan to take some cash off the table as we approach market peaks.
Altcoins (or shitcoins) are a great way to make or lose some fast cash, with massive volatility. Mostly the big ones have prices that are 90% correlated with Bitcoin. Most are trash. A few could be the real deal. Stay away from anything that’s hyped up too much. I tend to trade a little with them and use the profits to stack more sats, and hold a few I think have potential for adoption in future.
Ultimately, I see Bitcoin as a kind of postmodern recognition that, at the end of the data, money isn’t “real”, it’s just data. Bitcoin levels the playing field, and gives everyone access to that network of data, in such a way that no single party has control. And the market has decided there’s real value to that.
Regardless of the current price and volatility, that’s insanely cool. And I don’t want to sit on the sidelines for it.
