This is the third chapter of “The Gift of Bitcoin” – a world-class bitcoin education sent to recipients of bitcoin gifts sent with GiveBitcoin.
Congratulations on receiving your GiveBitcoin gift! Someone who cares about you gifted you some Bitcoin (BTC) and it’s our job to help you learn about it.
Here are the chapters currently available:
- Bitcoin is like electronic cash. It’s a peer-to-peer digital currency that can be transferred instantly and securely between any two people in the world.
- After the start of the financial crisis of 2008, Satoshi Nakamoto released Bitcoin as a decentralized technology to help escape a broken financial system.
- People around the world run Bitcoin on their computers, verify transactions and maintain the Bitcoin network.
- Bitcoin doesn’t require a credit card company, bank, or other intermediaries to confirm transactions. The lack of middlemen opens up a friction-free, single currency, global economy that enables greater cooperation and stamps out authoritarianism.
- Bitcoin separates money and state. No one can access your Bitcoin unless you give them the key; you control your own financial freedom.
- Beware of “experts” who are biased towards the status quo power structure/financial system.
- Eventually, enough people will be using Bitcoin that you’ll need it to participate in the economy.
In the previous chapter, you learned about the origins of money and the problems with our current monetary system. In this chapter, we’ll explain how Bitcoin is better money that fixes these problems. 🙂
The lesson only takes ~15 minutes to read. You can also listen to the lesson if you prefer audio content.
Chapter 3: The Problems with Money
What is Bitcoin?
It’s decentralized digital currency that can be transferred instantly and securely, making it an alternative to the existing financial system. The supply of Bitcoin is fixed, it’s secure, and it can be accessed by anyone, anywhere, at any time. Many people believe it will eventually replace gold as the preferred store of value for savings. Why? Compared to gold, it has the advantages of being 1) decentralized, 2) scarcer, 3) easier to transport, and 4) easier to store. It’s basically the most powerful money known to man.
“Bitcoin is money you store in a wallet and you can run that wallet on your mobile phone or desktop. It’s a new type of monetary system that is censorship resistant that’s going to help safeguard us against a financial crisis like what’s happened in Venezuela or the Soviet Union. It prevents totalitarian states from having an undue influence over their citizens.”
Where did Bitcoin come from?
Just after the US government authorized a $700 billion bank bailout in October 2008, Satoshi Nakamoto released a technical whitepaper outlining a new electronic payment system and dubbed it Bitcoin.
Who is Satoshi Nakamoto?
No one knows! That’s one of the mysteries behind Bitcoin. It could be one person, it could be a group. We’re just not sure.
So what was the result of this paper?
It basically invented digital money that does not rely on a central authority. The motivation for the system created by Satoshi was that 1) banks had been rescued at the expense of the people, 2) the system was broken, and 3) Bitcoin’s decentralized technology was the way out.
So that’s when Bitcoin was invented?
Well, Bitcoin has been evolving for decades. Blockchain and cryptography were the building blocks needed for Bitcoin to come along. The time was ripe when Satoshi came along and created something that was similar to open-source software in how it’s been taken on by the community and is run by Bitcoin developers around the world.
What was the problem that Satoshi solved?
For years, people have dreamed of digital currency. The idea that you could send value over the internet has been around since its launch. The very earliest creators and users of the internet created space for it in the base layer protocol; they just didn’t know how to solve the problem back then.
Satoshi invented the first form of digital scarcity by creating a system that prevented the same digital money from being spent multiple times, without anyone overseeing it.
To understand this, think about sending a photo over email. I don’t actually send you the photo, I just make a copy of it, and then we both have a copy. It’s a copy-and-paste scenario. Before Bitcoin, it was impossible to send something digital where you have proof – mathematical, unalterable, immutable proof – that I no longer have the thing I sent to you.
Proof of work blockchain-enabled this for the first time and gave absolute 100% mathematical proof so you can be sure that I actually sent you some value over the internet and that I no longer have it; it’s not in your account balance, it’s in mine – and it’s instantaneous and free for me to confirm that. That was a major innovation!
So we can just make money from nothing? How are Bitcoins created?
In the Bitcoin network, the production of new Bitcoins occurs through a global competition where participants search for rare numbers. The result is a currency that is decentralized, digital, and scarce in a way that was impossible before Bitcoin.
How it works: People around the world run Bitcoin software on their computers, verify transactions and maintain the Bitcoin network. These people are called miners, and the Bitcoin protocol automatically rewards them with new Bitcoins.
Bitcoin mining is performed by high-powered computers that solve complex computational math problems. The luck and work required by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground — while digging in a sandbox. When computers solve these complex math problems on the Bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold from the ground. By solving computational math problems, bitcoin miners make the Bitcoin payment network trustworthy and secure, by verifying its transaction information. (source)
The total supply of all Bitcoins is capped at 21 million (FYI more than 18 million are already in circulation). The rest will be released as rewards for miners in smaller and smaller chunks.
Could this cap of 21 million go up in the future?
Nope. Unlike the current, hazy system of central banking, where things are constantly changing, Bitcoin’s monetary policy is transparent and set in stone. The rate at which new Bitcoins are mined and rewarded is reduced by half every four years until the total supply reaches 21 million Bitcoins (that will be around 2140). Because Bitcoin was designed and programmed in such a way to limit its supply, it’s a digital good that is also scarce.
“Bitcoin’s supply is strictly limited. There will only ever be 21 million Bitcoins. And the code that controls the issuing of the Bitcoins is decentralized among tens of thousands of nodes that operate the Bitcoin software. And if it were to change, it would need the majority agreement of everybody involved…The monetary policy of Bitcoin is immutable, it isn’t going to change, and since the supply is strictly limited and the network is distributed and nobody can control it, we might just have the digital equivalent of gold.”
How does Bitcoin compare to gold and fiat money?
It’s much more expensive to move gold around the world than it is to move Bitcoin. (It takes weeks to move gold, but a fraction of that to move Bitcoin.) As for moving fiat money internationally, that’s subject to all kinds of sanctions and government laws. Meanwhile, Bitcoin can be sent by whoever holds the private keys.
So how do Bitcoin payments work?
First, let’s look at how a traditional payment works: We have a payment from point A to point B which happens via a third party: a “regular” bank, PayPal, Apple Pay, etc. All these things are effectively databases. We tell the bank to move money from account A to B. The bank then debits one account and credits another. These banks are secure because they have security guards, both human and digital ones (the latter check the databases, perform audits, and detect intruders).
Bitcoin takes this “glorified database with some guards around it” model and reproduces it through a decentralized ledger that is distributed to everybody. Anybody can download a copy of the Bitcoin ledger. To move Bitcoin from point A to point B, you must tell everybody who’s connected to the Bitcoin machine: “We’re moving money from point A to point B. My name is Alice and I am moving money from my account to Bob’s account.” It’s a system where everybody has the ledger and can write to it.
What if there were no banks?
“A lot of people are familiar with banks or mobile payments or something like that, but they don’t really think about what actually happens when you send a payment from one phone to another. What’s actually happening is they’re moving some numbers in a database somewhere and that database is kept by your bank. So once you understand that, I think the next thing to ask is what if there wasn’t any bank? That’s Bitcoin. With Bitcoin, we democratize that process of moving those numbers around instead of it happening in one place. Anybody can participate.”
So there are no bank accounts involved?
With Bitcoin, there aren’t bank accounts in the traditional sense. There is no one to contact; you don’t have to register with a third party; anyone can generate an account with a Bitcoin address and conduct transactions. You don’t have to reveal who you are and you can do it all on your computer or phone. Instead of an account, you have a wallet where your Bitcoin is stored. You store your keys, which are, in effect, the right to move that Bitcoin.
“Your keys, your Bitcoin. Not your keys, not your Bitcoin.”
-Andreas Antonopoulos, Bitcoin and security entrepreneur (source)
With Bitcoin, you don’t need a credit card company, bank, or any other intermediary to confirm the delivery of money. Cryptocurrency takes the concept of money and makes it native to computers so there’s no validation required by external institutions or trusted third parties. The result: Transactions without middlemen that open up a friction-free, single currency, global economy which enables greater cooperation and stamps out authoritarianism.
Say goodbye to third parties
“Eliminating third parties lowers transaction costs, speeds up settlement of payments, and reduces the possibilities of theft, fraud, or technical failure. It also makes the transacting parties less vulnerable to surveillance, confiscation, and bans by political authorities.”
-Saifedean Ammous in The Bitcoin Standard
If everybody’s writing to this Bitcoin ledger, how do we know it’s accurate?
Mining creates the equivalent of a competitive lottery that makes it very difficult for anyone to consecutively add new blocks of transactions into the blockchain. The network remains neutral because individuals are unable to block, replace, or roll back transactions.
The innovation of Bitcoin is that instead of having a central authority that you buy these lottery tickets from in order to participate, you “buy” the tickets by burning energy. So when you burn a bit of energy, that’s a lottery ticket. That’s proof to the rest of the network that you have expended some costs in order to play the lottery. This requires a bit of funky math called hashing.
Bitcoin uses energy because it is a scarce resource in the universe; you can’t just make it out of thin air. Since you have to convert energy into Bitcoin, there’s a cost to produce Bitcoins and ledger entries. That makes it very difficult to cheat because if one were to produce something that doesn’t follow the rules of Bitcoin, everybody else on the network will refuse that person’s lottery number. They will have burned energy and spent resources without receiving anything of value.
You need to produce something that’s valid by the rules of Bitcoin, something within the 21 million supply limit, and that follows all the other rules of Bitcoin. Then, and only then, will everybody else take your entry and write it into the database.
Everyone validates everything
“The reason Bitcoin is so powerful and not easily controlled is because it’s decentralized. And the way it’s kept decentralized is by using this model of ‘everyone validates everything’ which is highly costly in some sense.”
-Stephan Livera, Bitcoin podcast host
So Bitcoin is independent of government control?
Bitcoin separates money and state. There’s no longer a third party required to secure your money. No one can access your Bitcoin unless you give them the key. So you control your own financial freedom.
Outside Government Control
“The most important thing that Bitcoin offers is a new form of sound money outside the control of any authority or government in the world. And that is something very, very important for the world economy.”
If I don’t need to move money or gold around, do I really need to care about all this?
Yes, since all this impacts you in ways that may not seem obvious. Think about interbank and central bank settlements; for them, moving actual physical gold from one place to another is expensive, involves a lot of security risk, and there’s also a risk the money could get confiscated by the government.
Bitcoin works around these issues. One can send $100 million USD in Bitcoin across the world and it’ll confirm in 30-40 minutes for a small transaction fee ($2-3). For a massive transaction, that’s a real game-changer.
“I need long term financial stability, irrespective of what governments decide. I need a financial system that sets rules, enforces them, and sticks to it for long periods of time. That system to me, is Bitcoin. I need to be able to plan a life ahead without worrying about what someone else decides is in my best interests financially. This is sovereignty. This is freedom.”
-Ketan Gulabdas, Author at Ministry of Nodes (source)
What type of people need Bitcoin? Is it for criminals?
There are all kinds of reasons to want Bitcoin that have nothing to do with shady or illegal activity. Under our current financial system, key monetary decisions (e.g. interest rates, quantitative easing, financial surveillance, and capital controls) are being changed all the time, leaving many feeling powerless. Bitcoin provides an alternative to this. Also, traditional transactions are tracked, monitored, and sold which means we face perpetual risk that our money could be confiscated with no recourse.
An effective off-ramp
“As economics 101 holds, busting a monopoly (governments are effectively local monopolists in the market for money) by introducing competitors should make the market fairer for consumers. Faced with no alternative, citizens were previously forced to save in their local currency and tolerate inflation. Now with an effective off-ramp, citizens have the choice to exit the local monetary regime, at significant cost to the central bank (selling their local currency increases the velocity of money and worsens inflation). So the mere existence of Bitcoin instills monetary discipline on a central bank which might otherwise pursue a ruinous level of debasement.”
-Nic Carter, founding partner of Castle Island Ventures (source)
If the current financial system is so scary, why don’t I hear about these concerns more from experts or the media?
The problem is many traditional “experts” and the media are biased towards the status quo power structure (and sometimes funded by it). Thus, it’s rare to get the truth about our financial system from them. The pundit class and the press often serve as a mouthpiece for the financial establishment.
Critics with benefits
“No surprise at all that Bitcoin’s most hysterical critics overwhelmingly benefit from their proximity to or membership in the Beltway bureaucracy or the overseas equivalent. Academics, the beneficiaries of a rampant government-guaranteed student loan bubble; politicians and ex-politicians, who time and time again manage to turn their political clout into personal wealth (how curious!); journalists, reduced to meekly passing on State messaging in a futile effort to build a moat against insurgent media startups and Youtubers with 1000x their clout; economists, forced to peddle Keynesian narratives for grants and tenure.”
-Nic Carter, founding partner of Castle Island Ventures (source)
Can’t I wait until Bitcoin takes off more before getting involved with it?
It’s already on its way. For perspective, think about email at the beginning. People probably thought, “Why should I get onto email when so few people use it? I’m fine using fax machines, phones, and snail-mail.” But then it hit a point when enough people had email that it became a necessity. The same thing is happening with Bitcoin.
Eventually, enough people will be using Bitcoin that you’ll need to have it in order to participate in the economy they’ve built. If you could have bought stock in email back in the day, imagine the returns you would have seen. Now think about what’s happening with Bitcoin and think about whether you’d rather get in now or later.
Just like mobile phones back in the day
“To be sure, Bitcoin is still a nascent technology and doesn’t offer cutting-edge usability, speed, or privacy. But engineers are constantly working to bring those attributes to Bitcoin by building better apps and on-ramps, upgrading the base protocol, and creating new second-layer technologies like the Lightning Network, which could eventually mask and dramatically scale the number of possible Bitcoin transactions per second. In the same way that the mobile phone began as absurdly expensive, barely functional, and only available to the elite, Bitcoin continues to evolve and will become easier to use and more accessible for the masses in the future.”
-Alex Gladstein, Chief Strategy Officer at the Human Rights Foundation (source)
The Little Bitcoin Book: Why Bitcoin Matters for Your Freedom, Finances, and Future by Bitcoin Collective
Money, blockchains, and social scalability by Nick Szabo
A most peaceful revolution by Nic Carter
Bitcoin FAQ (wiki)
Video explanation of Byzantine fault tolerance from Numb3rs
Let’s wrap up
That concludes Chapter 3: where we discussed why Bitcoin is the best form of money we’ve ever seen.
In Chapter 4 we’ll discuss Bitcoin and Time Preference.
Comment below with ONE thing you learned from today’s lesson, or one question you’d like answered. We’d love to hear from you!