(Money and Payment systems of tomorrow)
Bitcoin rise with crypto industry story
Table Of Contents [C]
Tap if like the text [Likes counter: N]
– The following text (small eBook, big research) will discuss money systems of the past, existing ones in present, but also discover future perspective and possibilities. In a futuristic context, first word to mention is Bitcoin, or short BTC (₿). To explain it, there is a phrase saying: “It’s an Answer, and let’s see now what the Question is”. For better understanding we need first to grasp the history of money and current monetary systems.
– Discussion is lengthy as is the nature of topic, so it’s divided into segments for easier comprehension. Do not be discouraged if material seems foreign. Since it is abundant with various information, recommendation is to read it across multiple days and sleep over it. After first reading a lot of questions will pop up. Many terms and events are linked directly to articles, blogs forums and YT channels / podcasts. That way you can read even more about certain subject, and also leave a comment or question at the bottom.
– What’s important is to get the idea and fundamentals, and how to engage with it. For those who want to know it deeply some estimate is that minimum 100 Hours of Study (100 h. learning) is needed to dive into this thing.
And the more you know the more you want to find out, so-called: Falling ‘Down the (Bitcoin) Rabbit Hole’ (metaphor for adventure into the unknown from Alice in Wonderland). It will make you think but simultaneously broaden your horizons.
One comedian even said:
“It’s everything you don’t understand about money combined with everything you don’t understand about computers”.
But as you start to learn it, subsequently you will gain knowledge about economics, computer science, math, philosophy, politics, history, and even physics.
Some final touch formatting and refactoring still in progress.
1.1 Beginning of Money [C]
– When people switched from hunter-gatherers to agriculture and farming around 10,000 years ago, it led to specialization in work, higher productivity and accumulation of surplus products. This enabled creation of bigger settlements, cities and eventually states. It also meant people could exchange (barter) excess things they got or made, for example grains or animals but it was not easy to determine the value of each item nor to split it. Credit, as a promise, was probably the oldest means of trade and will remain with us, with bartering transactions being later developed. Also larger communities meant you need to trade with strangers and some base for trust was needed (Dunbar’s number - one can only maintain about 150 close relationships). They needed a system which would make trade easier. That’s why money was invented and how it came into being.
– In the early days numerous things were used like special looking seashells, rare stones, etc. There is an interesting story about African trade glass beads (hyper-inflation misuse for slave trade) and another one about large stones of Yap people. Stones were primitive credit system. Later came metals and metal coins, from bronze, silver or gold. If one is wondering why these materials were chosen, it’s best first to define features of money (The money Project) since it is an abstract concept:
|1. Medium of Exchange||accepted method of payment for goods and services|
|2. Unit of Account||measure of value|
|3. Store of Value||to hold value for long period of time|
Examples of Function:
1. Society uses certain item like pearl to trade for other goods
2. Housing prices in Japan can be compared using Jen as a unit of account
3. An ounce of gold could buy toga in Roman times, yet it can still buy a nice suit today
|1. Durable||able to withstand repeated use|
|2. Divisible||can divide into smaller units|
|3. Portable||easily carried and transported|
|4. Acceptable||universally recognizable|
|5. Limited supply||being rare (scarcity) keeps stable value|
|6. Uniform||units capable of mutual substitution, interchangeable (fungible)|
– Obviously Gold had qualities to fulfill most of these roles, but it is not perfect, only best at that time, or the least bad. Some of the disadvantages were: not so easy to carry - expensive transport (low Portability), hard to Divide (need to melt), and danger of theft and robbery.
– Because of that some merchants, later private banks and then central banks started holding gold for people and gave them certificates of how much gold they have. People then used those certificates, as Claim on items, for trade. That’s how paper money also called banknotes (promissory notes - IOU acronym of ‘I owe you’) or colloquially cash came in existence. But bad side was introduction of intermediaries one needs to trust. And history is full of examples were that confidence was exploited for all kind of reasons, usually by creating more notes than there was gold to back it. It led to bankruptcy of private banks or hyperinflation by central banks, both resulted in the same outcome, people losing their savings and purchase power. Banks can be with Full reserves or with Fractional reserves. One of the first central banks was Bank of Amsterdam (‘Amsterdamsche Wisselbank’) that was established back in 1609. Eventually most countries seized full monetary control and further development of money came to a halt.
– Money is language, a linguistic and social construct, used as means of communicating value to each other. It is also collective and somewhat fictional narrative about value, with consent of majority. So, it is not inherently valuable, we (subjectively) decide to give it merit. Human labor is still typically measured by working hours, so Money is also proxy for Time, the most valuable currency (one second lost cannot be bought back). Another way of framing it, Money is claims on wealth.
– According to Information Theory of Money prices and the market are intricately intertwined. Prices reflect information while Money is the measuring stick, and Information is Decentralized. So centralized systems have an unsolvable data problem because of lack of all the necessary knowledge entire time, which results in huge capital misallocation.
1.2 Recent History [C]
– Until 19th century Silver coins were mostly utilized for local Currency, while Gold was used only for high value or international transactions. Definition of Currency: Measure in a specific time and place, medium of exchange and legal tender (must be accepted for deferred payment of debt) with strong network effect. Around 1870 switch to Gold was made because silver became abundant, and when it’s not Rare it cannot be good money. That’s how the so-called ‘Gold Standard’ was created in which paper notes were backed by physical gold. That was one of most stable and prosperous periods.
– It was temporarily suspended during WW1 when countries, to fund the war efforts, needed to print more money then allowed. Also, there were exceptions from it during the Great Depression. It’s worth remarking here that the USA (United States of America) in 1933 seized all gold bullion and coins from its citizens and forced them to sell it below market price. Again, during WW2 money was overprinted and Gold Standard dropped. Then in 1944, shortly before the end of the war, there was the Bretton Woods Agreement where 44 allied countries agreed to use US Dollar (USD - $) as world’s Reserve Currency and for international trading and settlement. Reason it was the US dollar is that the USA was the dominant power at the time, both economically and militarily, which meant it had the greatest influence on the world. It also had biggest reserve of gold, of their own and of allied countries that was shipped there during WW2 for safekeeping.
– Later the US slipped into a huge budget deficit, caused by excessive domestic spending and by Vietnam war, so the easiest solution was to print more money than there was gold to back it. That finally led to 1971 when the US government with Richard Nixon as president decided to abandon the Gold Standard, meaning dollars were not redeemable for gold from US reserves. After that in 1975 the USA made deal with major Oil producing countries, Saudi Arabia deal in the first place, that they sell primary energy commodity in US dollars. In return US will give them military protection and make sure sea routes are safe for tankers, with the help of navy. That’s how the term Petrodollars came, an unofficial system or simply a global practice where dollars were desirable since one could exchange them easily for much needed barrels of petroleum. Some would say dollars were backed by crude oil, most important resource of 20th century. In the following decades USA was exporting inflation to the rest of the world while importing real goods.
1.3 Modern age [C]
– In the modern age money has become more digital, essentially just numbers in computers of private and central banks, as well as in World bank and IMF (International Monetary Fund). First thing is that (Credit theory of money - Credit creation). Essentially whenever someone gets a loan from the bank for a car or house or whatever, the bank just types that amount into a computer and new money is created while the entire money supply increases. Still when the debt is repaid that money gets destroyed or in a sense deleted.
– So in theory this could be stable, so that the economic output of a country is mapped to credit demand while Money Supply gets balanced the right way. However, in practice it is never like this, instead artificial push of loans, money markets, government agendas, etc. make it unstable and prone to corruption and crises with only solution always to inflate/increase the money supply. Temptation to use money printer is just irresistible.
– Even in Roman times gold and silver coins were, on demand from emperors, occasionally debased by melting them and leaving smaller quantity of precious metal. Eventually coins became totally worthless, and financial decadence was one the reasons the empire toppled. Also, coins were sometimes cut and scratched by thieves. To prevent clipping modern coins usually have Reeded edges (grooved lines that encircles perimeter), a counter-counterfeiting practice devised by Isaac Newton who was at a time Warden of the Royal Mint.
Examples of Crises:
1. The Recent event that triggered an overprint was the which was partly created by banks who gave too many risky credits for real estate backed only by mortgages. And when it all collapsed the government just printed more money to cover it. Excuse was that letting all those banks fail would collapse entire economy both the US and the rest of the world. But still all people paid for the bank misbehavior while managers of those banks at the same time got huge bonuses. Wall Street corruption was exposed with Payment for Order Flow under the counter and with gray area of Short Selling - Short and Distort (Hedge Funds under investigation).
There are some interesting movies about this subject and link with Wall Street such as: The Big Short and Margin Call. They explain Derivatives like CDO (Collateralized Debt Obligation) and Synthetic ones, complex structured finance product, with bonds of subprime mortgage (risky loans to individuals with poor or no credit history) that were used for betting.
2. Another even bigger example was during 2020/2021 that resulted in printing new additional 40 % of all the money in existence. As a result we now face threat of Stagflation, inflation rate goes up, while economic growth and employment go down.
– In essence there are 2 types of money: commodity-based and credit based. Fiduciary Media is money issued by third party, for example by some Bank, and it’s a form of credit.
– Almost all money today is FIAT, declared by a government decree and not supported by physical commodity. It is determined by authority, made to be legal-tender (taxes as type of debt are paid with it), and imposed by force (Political -> Policy -> Police). Based on Trust that is often betrayed and backed only by promise it is sometimes referred as Fiat Fraud or colloquially Fiat Fuckery. Fiat is artificial ‘checkbook’ money that also constraints real production (Joyless economy). Fiat forces capital misprice, that leads to misallocation. Because of that a lot of money gets wasted that could otherwise be used for more productive things and investments. Fiat also artificially manipulates people time preference.
– Some consider Money printing (‘fiat mining’) to be UBI (Universal Basic Income) but for the rich. Since new money is routinely first available for people close to those in power (Cantillon effect) and to ones that already have it as they can take big credits and own assets other than cash that are more inflation proof.
– The way a country can get more money for budget spending is that the Treasury issues Bonds and the Central Bank (CB) prints that amount of money and buys those bonds. In the US case it’s the FED (Federal Reserve System - history), whose foundation were laid by Alexandar Hamilton. Today most money is not in the form of paper cash but is digital. Creating new money is simply typing digits on the computers of banks that are saved to a database.
– Also monetary tools and systems are made very complex. Some would argue deliberately in order to obfuscate it and make it less transparent and more obscure so that fewer people would object to the system itself. One of the printing mechanisms is QE-Quantitative Easing, where banks have the right to issue credits, meaning to print money as already explained, based on deposits they have, in ratio 1:10 or even more (Fractional Reserve Banking). Opposite policy is known as Quantitative Tightening. While CB’s Fiat system creates massive extended credit with horrible consequences, Fractional Banking is distinct and not necessarily bad. Next to define term base point that is 1/100 part of percent or 0.01 %, since it is often used when stating CB interest rates.
– It is not just central bank that prints money but also commercial ones all around the world. Let’s now introduce the notion of Eurodollar - dollar deposits at foreign banks or American banks branches outside of US (mostly in Europe). They deserve notice because they are not subject to regulation nor reserve requirements. In this regard it is hard to even know exactly the total supply of money in existence (all-of-the-worlds-money).
– In addition, there are different layers of money:
-M1 = base money (currency in circulation, checking and savings accounts, checks)
-M2 = M1 + money market funds
-M3 = M2 + other financial instruments
is a confident relationship with the unknown, a social glue that bridges the gap:
Known <—> TRUST <—>
It’s a currency of interactions.
The way to build more trust is to be more transparent and in time you become trustworthy (have reputation capital).
Lately we could observe breach of trust (as explained by Rachel Botsman) in many areas like:
1. News International phone hacking
2. Global Financial Crisis resulted with only 1 banker jailed
3. Volkswagen emissions scandal
4. Panama papers showing powerful politicians exploiting offshore tax regime
5. Corona Covid-19 Pandemic vaccine and lockdown policy
Evidently institutional trust (legacy system) is no longer working, because it was not designed for digital age.
1.4 Sum it so far [C]
– Countries have the complete control of money and can inflate it for various reasons with several economic tools. That power is then often misused by political elites and corporations while chasing profits (somewhat greedy), that results in high inflation or in some cases even hyperinflation. This sort of inflation’s Moral Hazard is practically an additional hidden (regressive) Tax on population that nobody voted for. One could argue it’s theft in a sense or financial robbery since it dilutes person savings. It is slowly siphoning wealth from the average person to the politically well-connected. And while prices of all goods just increase, salaries do not always grow to keep up, instead workers have to explicitly asks it from employers. So small wage raise does not mean more purchase power, it’s just to keep up with inflation.
(“Inflation is the one form of taxation that can be imposed without legislation” - M. Friedman)
– State Institutions ordinarily measure Inflation as scalar, just 1 number, CPI (Consumer Price Index) that includes only basket of basic goods. However, it is actually a vector because not everybody buys, needs, and wants the same things, so essentially index is mostly fake. Besides just surviving in real world people also desire real estate, traveling, stocks, arts, etc. Instead of just targeted 2 percent according to CPI, true inflation was around 6 to 7 %. And lately even by CPI is 10 % or more. It’s good to learn the Percentage and Interest calculation, in line with quote: “Compound Interest is the eighth wonder of the world He who understands it, earns it, he who doesn’t, pays it.”, that is often attributed to Albert Einstein but no evidence he said it. In the entire history of interest rates during 6 centuries, it fluctuated from 0 to 15 %, with domination first of Dutch, then British, and eventually Americans.
– Until recently stock markets were one way to hedge against inflation, but that was also just for small minority (only around 10 % of people have significant saving in stock). Currently Crypto Coins - digital tokens, BTC more precisely, are seen as another way of protection (antidote to inflation), and better in certain aspects. Also, it is time consuming to follow all information regarding stock markets and regular people can hardly keep up with various financial instrument used by professional investors.
– Gold was another safe haven, and some are still proponents of it, so called ‘gold bugs’, despite its imperfect characteristics. In the 2000s there were even electronic gold systems, like ‘e-gold’ but they were centralized and eventually banned by the government. That’s why BTC is considered to be Digital Gold or Gold 2.0 as it has many good features of Gold but at the same time fixes the bad ones. Metaphorically speaking it is like teleporter for Gold. Therefore, Bitcoin was how to have Hard or Sound money that cannot be overprinted and is also practical to use. Has speed of Fiat but still keeps scarcity of Gold and was programmed to mimic gold’s stable inflation rate. Just like gold does not change much the network should also run the same for several decades.
– Acknowledged Austrian economist Ludwig von Mises in his book “The Theory of Money and Credit” (1912) argued that Sound money is: “an instrument for the protection of civil liberties and a means of limiting government power. It is also a commonly used medium of exchange and a method for obstructing the government’s propensity to meddle with the currency system.” More detailed explanation can be found in the article Bitcoin and the Theory of Money.
– Another issue is the censorship that governments and banks can enforce. We could observe this happened in some Autocratic or Authoritarian countries for opposition but also in democratic ones. For example Canadian truckers whose bank accounts were frozen for protesting against pandemic lockdown, a ‘PC’ (Political Correct) way to silence the opposition. Cryptocurrency solves this one as well since it can work without intermediary (trustless) and does not require a trusted party (Money should Not be weaponized, ever!). Additionally, it allows seamless transactions across borders. With Liberal world view and partly Libertarian philosophy (eliminate state coercion) part of its mission is separation of money and state. We shall never have decent money before we take monopoly of it away from government (make government smaller and people bigger). Also main function of state should be preservation of life, liberty and property.
– Fiat enabled countries to wage war until they run out of all citizens wealth. Prior to paper currencies, governments would soon run out of fighting capability because population would rebel against tax for unpopular wars. There are those who hold opinion that reasons “a small war in Central Europe” in 1914 was able to explode into “the first global war in human history” were partly monetary rather than only geopolitical (From Fiat to Crypto).
– All in all management of Money and Interventions by the state in most cases was done the wrong way.
Even those with good intentions often had bad results:
-Attempt to do good, imperfectly, and often creates more damage than good in pursuit of it
(“The Government solution to a problem is usually as bad as the problem” - M. Friedman)
-When pay for it with inflation it unintentionally collapses the currency
-Mismeasure the extent of monetary policy while underestimate the cost
2.1 How it all started [C]
– With the beginning of the Internet, information sharing via forums and mails also enabled global spread of ideas. Important movement in this regard was Crypto-anarchism as a political ideology (ideological origin) focusing on protection of privacy, political and economic freedom.
– ‘The Crypto Anarchist Manifesto’ was one of the first written papers that articulated this idea, written by Timothy C. May in 1988 and shared at a Crypto conference (‘Arise, you have nothing to lose..’). Document introduced the basic principles of crypto-anarchism, encrypted exchanges ensuring total anonymity, absolute freedom of speech, and full freedom to trade. Another similar work at the time was ‘A Cypherpunk’s Manifesto’ for privacy by mathematician Eric Hughes (‘cypher’ derived from CYber and ciPHER). Later in 1992 a specific mail group called ‘Cypherpunks Mailing List’ was started and by 1994 had around 1000 subscribers. They were considering using cryptography to make digital (virtual) Decentralized money.
– US Intelligence services like NSA (National Security Agency), because of their spying programs, even tried to limit use and export of cryptographic tools. Those attempts were known as Crypto Wars, that privacy advocates opposed with Free speech rights.
NSA still has systems like PRISM (prism-break), a worldwide surveillance program, that was exposed by whistleblower Edward Snowden. Even Julian Assange, the WikiLeaks founder, previously warned about such monitoring. And both of them had become most-wanted whistleblowers by the US government.
– Just like there were torrent (data stream) networks for P2P Peer-to-Peer file sharing (music, films e.g. Napster, BitTorrent) this was imagined to be a network for digital value. Leading Big Tech companies are networks as well: Google - information; Facebook - social; There is also browser for privacy called TOR abbreviation from The Onion Router.
– Two remarkable economists, both Nobel laureate, even predicted the rise of Bitcoin:
1. Friedrich A. Hayek in his Book ‘The Denationalization of Money’ (1976) argued for the end of the government’s monopoly on currency, and in one interview (first 3 min) in 1984 said:
“Govs mostly abuse money and have stop its improvement, also Monetary policy has done only harm. We can’t take it violently out of the hands of government. All we can do is by some sly, roundabout way introduce something they can’t stop.”
-He was proponent of Austrian School of economic thought (more free market, less government control).
-On the opposing pole was John Maynard Keynes who was flag bearer of vigorous government intervention in the markets. His view was widely followed throughout the 20th century by many countries (Keynesian economy).
2. Milton Friedman in 1999 stated:
“Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, that will soon be developed, is the reliable e-cache”.
– One of the pioneers in the field and outstanding cryptographer is David Chaum, called the godfather of crypto. He was first to propose a blockchain-like protocol in his 1982 dissertation ‘Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups’. In 1995 his company DigiCash created the first electronic ‘eCash’ system. DigiCash eventually failed because it entered the market before e-commerce was fully integrated within the Internet. Still some consider it partial predecessor of cryptocurrencies.
– Relevant person to mention here is Nick Szabo, a bright computer engineer and legal scholar. In 1998 he designed a mechanism for a decentralized digital currency he called ‘BitGold’. It was never implemented but has been called ‘a direct precursor to the Bitcoin architecture’ since it was one of the earliest attempts at creating a decentralized virtual currency. In the Bit Gold architecture, a participant would dedicate computer power to solving cryptographic puzzles. He is also credited with pioneering the concept of Smart Contracts.
– Near the end of 2008 an anonymous person under the pseudonym of Satoshi Nakamoto published a marvelous White Paper named: BITCOIN: A Peer-To-Peer E-Cache System he designed. Definition of term White Paper: a report or guide that informs readers concisely about a complex issue and presents the issuing body’s philosophy on the matter. This Paper itself references several other amazing works written in decades before it, and it was first sent to the cypher mailing list.
– At the same time domain ‘bitcoin.org’ was registered through ‘anonymousspeech.com’ using a prepaid card that can be bought with cash at any local store so it is untraceable. Decision to use an alias and hide his identity was done in order to be unknown to the government but also probably to keep the network decentralized, meaning there is no single founder. Majority of people involved consider not having a father figure to be a feature, not a bug, since the main purpose of the network is to be decentralized.
–In 2009 a post on the P2P foundation forum was written with additional explanation of the system. In the same year an Open Source implementation of the protocol was made, written in C++ programming language, and source code is currently hosted on GitHub code repository. These events unfolded just after the 2008 Economic Crisis, which seems to be the trigger. In first/genesis block there is encoded reference to London Times magazine article:
“The Times 03/Jan/2009 - Chancellor on brink of second bailout for banks”.
– Receiver of the first BTC transaction and early contributor to the network was a computer scientist named Hal Finney. He was an American developer who worked for PGP (Pretty Good Privacy) - first free implementations of public-private key encryption for (email) communication. He also ran the first cryptographically based anonymous remailer and was involved with the cypherpunks mailing list. Among notable cryptographers and programmers whose work was cited in the BTC paper were Wei Dai (B-money) and British Adam Back (Hashcash) who today is CEO of Blockstream. All of them were part of The Cypherpunks community and movement and noteworthy members of the mail list, but also early contributors to the Bitcoin project.
– So Satoshi could be any of them or someone else, maybe even more than one person, small team. It might always remain a mystery but in the end it doesn’t matter, the important thing is the result and the network itself. Initial improvements to the first website were done by Martti Malmi, a student from Finland. In the following years several persons were incorrectly suspected or falsely claimed to be Satoshi.
– Creator of BTC Satoshi, at the end of 2010, made the last post that stated: There is more work to be done…. and since then, he has not made any known contact. The deployment of project was executed masterfully and not exposing himself by sitting on many coins without spending them. Nonetheless he become the legend, an elusive figure. Today we see that the project continued, and it became a game-changing product on a global scale. In the meanwhile, contributor Gavin Andresen became the lead developer till 2014 when Wladimir van der Laan from Amsterdam took over.
– One peculiar note: First real-world Btc transaction was in May of 2010 for 2 large pizzas paid 10,000 BTC (consider current value of those - hundreds of millions $)
2.2 Technical background [C]
– From an engineering aspect Bitcoin protocol is a masterpiece software. We could see that the compelling idea has been circulating for some time and several components of it already existed. But nevertheless, integrating it all into a functional unit was done ingeniously. Hats down to Satoshi whoever he / she or they be, for the first full implementation of this brilliant idea. He was a truly visionary and gave this gift to humanity. And the timing was just right. Firstly, the internet and cryptography were sufficiently developed. Secondly the political and economic situation was fertile as well, inspiration came from revolt. Next, to define a word Bit (binary digit) - the smallest unit of data that a computer can process and store, whose value can be 0 or 1.
– Let’s jump to the point:
Bitcoin has a Ledger of transactions, which is a list stored in a database that is not centralized in one server but distributed on multiple computers called Nodes around the world. Ledger essentially enables reliable spreadsheet with Balances. It’s like immutable record that can’t be counterfeited. New transactions, up to 2000 of them, are on average every 10 minutes grouped into a Block 1 MB in size that is added to the ledger. Each block is connected to previous ones by hash code that is not easy to find. That’s why this structure is called Blockchain, multiple blocks connected in a line, and it’s what underpins the system. It can be used for solving other problems as well.
|PROPERTIES||of BLOCKCHAIN (type of DLT - Distributed Ledger Technology)|
|Programmable||e.g. Smart Contracts|
|Secure||all records are individually encrypted|
|Anonymous||the identity of participants is unknown, either fully or pseudo hidden|
|Unanimous||most of network participants agree to the validity of each of the records|
|Distributed||all participants have a copy of the ledger for complete transparency|
|Immutable||any validated records are irreversible and cannot be changed|
|Time-stamped||a transaction timestamp is recorded on a block|
From functional viewpoint is can be defined as the Great Chain of being sure about things. 3 pillars of blockchain technology are: Decentralization, Transparency (Auditability), Immutability.
– Hash is a cryptographic function that converts longer text into a relatively unique code (Message Digest) of fixed length, but reverse cannot be done in any practical time. This characteristic is used to do the so-called Mining, virtual one of course, a term taken from the gold industry. That work consists of trying an enormous number of combinations to find one where hash begins with several leading zeros (000…). Some like to draw analogy with Sudoku puzzle. All miners are competing to find it and when one does then a new block is finished and synced across the network. That miner also gets the reward of a certain amount of newly created coins.
–In the long term based on statistics, every miner should get approximately equal sum, while on the other side they have spent electric power. Based on the number of participants, the algorithm adjusts the difficulty level to keep it always around 10 minutes. It’s done in a way that when there are more miners leading to more hash power difficulty increases which makes it harder to find a solution. This process is called PoW (Proof of Work), the term is self-explanatory, that consists of defined rules. The Nakamoto Consensus is a set of rules that verifies the authenticity of a blockchain network. It is using a combination of the proof-of-work consensus algorithm (consensus rules) on a BFT peer-to-peer network (BFT - Byzantine Fault Tolerance that solves Byzantine Generals Problem a situation in which majority of actors must agree on a coordinated strategy).
– Another important thing to elaborate is PKI (Public Key Infrastructure), which is used here to sign digital info. Signing is done with a private key so others can confirm the signature using the public key, usually packed into a Digital Certificate. It ensures that no one can spend coins not belonging to them if they do not have the code aka private key. PKI is usually using RSA algorithm which is based on mathematical inability for large number factorization, to effectively find Prime factors. RSA can be used for digital encryption (hidden data) or for digital signature (ensures data integrity, authentication, and non-repudiation). Others algorithms include SHA-256, Diffie-Hellman and Elliptic curve (ECDSA) (discrete logarithm problem).
– Combination of these elements makes entire process quite intriguing and at the same time gives several positive consequences:
1. Prevents double spending - Digital Scarcity for the first time
(original in virtual realm that could not be copied, a groundbreaking innovation)
2. Guaranties integrity and security
3. Gives proper economic incentives to people using and maintaining the network
(Positive Feedback Loop: higher price, more attention, bigger demand)
– It also makes good distribution throughout time with descending inflation, since reward generated with mining is halved every 4 years. Maximum number of coins is limited to 21 million (hard cap) that would be reached in year 2140 according to estimates. Currently, in 2022 almost 19 million is already created, about 90 %. When reward of new coins shrinks, transaction fee will remain for the miners. Some coins in early adoption period were lost due to owners losing key and Satoshi mined almost 1 million coins that were never moved from initial address. One estimate is that owners have misplaced almost 20 % of all existing tokens, which makes it even more scarce. Some have been wondering why specific amount of 21 million exactly was chosen for max number (42 is the answer to everything, Bitcoin with 21 answers half). The nominal quantity is not that important as long as it is defined and fixed. Reason being it is divisible, currently up to 8 decimals, and 1 BTC have 100 million satoshis (sats) as smallest unit.
– Everybody should be aware that bitcoin is not anonymous, instead it is Pseudo-Anonymous, meaning transaction is public but it only has owner number. However, if someone ever connects that number to a person then it can be tracked. Ways to avoid being tracked are mentioned in paragraphs bellow.
– Coins can be stored offline in a digital Wallet or on an exchange. Wallet is a password protected application on mobile or computer, with recovery secret code stored at another location in digital manner or written on paper. It enables full Self Custody, in accordance with expression: Not Your Keys, Not Your Coins! One should not be escaping responsibility, so Take custody of your coins. Worth noting are Cold storage as an offline wallet and hardware wallets for those who desire extra security (recommended when having large value).
2.3 Extended description [C]
– As a new internet protocol Bitcoin enables transfer of value over communication channel. Other earlier application protocols include https (web page), ftp (file), smtp (mail), etc. With latest you can basically send gold coin like mail, any amount of value to anywhere in the world almost instantly. Without anyone being able to stop it or have control, it is Censorship Resistant and can’t be easily confiscated.
It is the first case where Greed and Altruistic incentives aligns. You can now make most selfish decision and also contribute to greater equality in the world when compared to the fiat system. As such it is very useful technological innovation that enables distributed consensus but can also be looked at from various angles. When trying to fully understand it one need to grasp its multitude of aspects (interdisciplinary):
1. Economic (Monetary policy) - predefined and limited quantity (relatively fixed supply)
2. Technical (Networking) - decentralization
3. Political - reducing state monetary control
4. Ideological - core value
– YT videos:
What is Bitcoin; | Explained Simply;
How bitcoin work; | How blockchain work;
-Bitcoin Rap Battle Debate: Hamilton vs. Satoshi
-Blockchain changing money and business (Don Tapscott)
-Blockchain transform the economy (Bettina Warburg)
-The future of money (Neha Narula)
|1. Executive||Full Nodes||can veto miners|
|2. Judicial||Miners||can veto devs|
|3. Legislative||Developers||help others bypass vetoes|
Legislative part also includes business and infrastructure analogous to Parliament (Representatives) while Devs are like Senate. If compared to enterprises best parallels can be drawn with IT (Information Technology) companies.
– Product is global monetary currency and payment system and at the same time the Coin represents owners or shareholders. On the other side are Developers and Miners along with Nodes, like very wide Boards of Directors, Management and Supervisory.
The Rules of Bitcoin:
1. No Confiscation
2. No Censorship
3. No Inflation
4. Anyone can verify rules 1-3
– These rules are derived from protocol characteristic that make it exist in a narrow design space, its tiny niche. Delicate balance means that even a small alteration to one of coded parameters can break some other important feature significantly. It can be compared to gravitational constant that is limited to narrow band, where even a slight change would distort entire universe. This explains some critics about development going slowly (base chain must be little conservative). There is not much room for core changes, only fine-tuning improvements and building on top of it. Still there is no reason bitcoin could not adopt any fundamentally better technology improvement that keeps its core values.
– There have been push to force some risky core changes but those attempts failed - Block Size Wars. One of proposal was to simply increase the size of Block to 2, 4 or even 8 MB, which was rejected because it does not solve long term scalability for entire world. At the same time, it bad effects on decentralization because it would drastically increase node memory requirements. On the other hand updates that passed like SegWit (Segregated Witness) and Taproot (with Schnorr signature) were more in line with the vision and brought only improvements making it faster, more efficient and private. But they first had to be developed and then 95% of miners (an overwhelming majority) needed to signal support for those to activate it. They are called BIP (Bitcoin Improvement Proposal). Not having central command presents significant logistical challenges, but also that distinguishing feature ensures no central point of failure.
– Bitcoin as a whole represents a Paradigm shift for Embodiment of capital that changed each century:
18th - farmland (agricultural age)
19th - factories, machines, bonds (industrial age)
20th - urban real estate, stocks (information age)
21th - virtual asset (digital & distributed age)
- also called The Exponential Age
(Technology evolving the world at a rate faster than ever before)
- Simply put, the world is moving at light speed
More informal (loosely) Definitions:
- 1 Hard Asset (Trust-Minimized)
- premium Commodity
- inalienable radical digital Property
- 2 Future-Proof perfect Money (Internet Native)
- most ubiquitous and omnipresent Cryptocurrency
- most ubiquitous and omnipresent Cryptocurrency
- 3 Distributed universal Ledger
- open standard and API (Application Programming Interface)
- consensually shared and synchronized database, one source of truth/validation
- 4 Programmatic monetary policy, programmable money
- narrow but powerful AI, financial singularity, an epiphany, unstoppable machine
- 5 First engineered monetary system in history of human race
- monetary Technocracy in the digital age
- unique Financial Invention, new phenomenon with special properties
- 6 Triple-Entry Accounting - info stored with many third parties
- 7 Superior Monetary Network - interoperable protocol to transport value
- convenient way for online payment
- solves economic calculation problem with continuous and instant market pricing
- 8 Diversified index of entire world economy
- 9 Productive brain power of Developers (Open Source project)
- 10 Peaceful resistance from currency Devaluation / Debasement
- 11 Modern Declaration of (monetary) Independence / Denationalization
- enables Sovereign individual (Self-Sufficient communities)
- opt out from corrupt fiat system (Silent Revolution)
- 12 Financial Freedom technology and tool
- stateless and permissionless public money
- gives you power over money, and ultimate freedom to live on your own terms
- 13 New Social Contract (Novel form of Institution, BTC-Social-Contract)
- complex sociotechnical system
- decouples need for large institutions from the network
- 14 Pilot project on how to run society in less centralized way
- 15 Decentralized monetary system in network Topology but also Philosophy
- alternative to hierarchical structure (Bitcoin killed the King)
- new model with internal checks and balances (wisdom of the crowd)
- 16 New Global financial system (uniform metric for value)
- neutral form of money (not controlled by anyone) - value of neutrality
- the New Operating System of the Economy
- 17 Monetary / Economic energy
- 18 A Weapon for Peace, Not war - Financial DMZ (an Exit Strategy for Humans)
- 19 Education vehicle, pecuniary curiosity
- transcends pure money
- financial revelation, monetary epiphany
- 20 Fintech for poor people (Instrument of economic empowerment)
- technology bridge to abundant future
- 21 Intellectual experiment (radical thought) not to have human in charge of money
- persuasive idea that rewrites your mind, an inception
- people are inspired to contemplate / speak / write about (this blog being proof)
*Genius of Bitcoin in One Sentence:
“Bitcoin is a peaceful revolution about limiting the power of the modern state, ultimately to limit the effects of the Cantillon effect, allow deflation, level the playing field and make expensive and obsolete war as a means to establish who owns what*”
3.1 SWOT analysis [C]
Most Strengths & Opportunities it brings are already stated.
So let’s look at certain Weaknesses & Threat and their explanations:
Criticisms (some are unsubstantiated):
- 1 The protocol can be copied since it’s Open Source
- Network effect keeps BTC at top, also mining makes it hard to duplicate all hardware and infrastructure
- There are many copies and forks, both Hard and Soft, but they have little or no value and less liquidity
- 2 Not backed by anything
- Backed by Electric Power (Intrinsic value from energy)
- Money as abstract concept partly depends on belief
(agreement among people who think it’s valuable)
- 3 Ponzi scheme (another Tulip Mania)
- Is Anti-Ponzi, no pyramidal structure, and no percentage for ‘bringing’ others
- Everybody freely chooses to join
- Does not ‘promise’ high nor any returns
- Had speculative waves but not empty bubble, added value is digital transport of value
- 4 Used for criminal activities
- Very small percentage of transaction are illegal ones
- Cash is used for same purposes
- It is not job of money to worry how it’s being used, it’s only a tool
(for crimes there is police)
- 5 Losing keys(password) or being stolen
- If want full custody than accept the risk but take all measures of precaution
- Otherwise keep backup with reliable third parties, or split keys with multiple subjects (MultiSig)
- Similar is needed with keys storage for Inheritance purposes
- In the long period people will learn how to keep it safe and will have more options for storage
- Just like today they keep cash or have a bank account, usually both
- 6 Consumes a lot of electricity, too demanding
- Utilizing energy is not a bad thing
- Necessary for security and decentralization
- Creating (good) money cannot be free
- Btc energy usage isn’t a problem and neither is Energy Consumption
- Incentive is to use cheapest energy, currently mostly from renewables (solar)
also stranded from remote location (Geo-independent) that was unusable because of distance like from Island (The modern-day gold rush)
- Can contribute to stabilizing electric grid by reducing miners’ consumption in peak times
- Uses excess energy of current power plants that is otherwise just wasted
- Generated heat by the mining rigs could be used for heating of homes
- Civilization level of technological advancement is measured by amount of energy able to use
(The Kardashev Scale)
- 7 Distribution fairness?
- In design it is the fairest system possible Satoshi could have come up at that time
- Historically Unprecedented experiment in Fair Distribution
- Has fair-minded issuance mechanism, miners have need to redistribute new coins
- Incomparably better then centralized ownership
- Uneven ownership not because of dishonest or unfair feature but due to risk taken by early adopters
Even today, when risk is smaller, many still afraid to buy into. As they say He Who Dares Wins!
- Had no premining and no initial sale
- Market dynamics have gradually evened Bitcoin’s distribution and will continue to do so
- Most equitable cryptoasset in existence
- Becoming more Evenly distributed over time
- Tends towards Normal (Gaussian) distribution, referred as Bell Curve (The Bitcoin Bell-Curve)
Existing problems with respective solutions
- 1 Limited capacity - Inefficient, not scalable enough
(currently max around 10 transaction per sec. making them slow and expensive)
- Blockchain Trilemma (resilience vs efficiency):
/__\ 1.Decentralisation, 2.Security, 3.Scalability
- Layered structure
L-1 base layer optimizes around Security and Robustness, and also keeps it Decentralized
(there is value in being robust) L-2 improves Scalability segment and enables Fast and Cheap transfers
(Lightning Network, Liquid, Side Chains, …)
- Blockchain Trilemma (resilience vs efficiency):
- 2 Not fully private, only semi-anonymous / fungibility
- Mixers for getting more privacy while L2 removes individual spending from main net
Future potential Risks
- 1 Some big unknown bug gets found that breaks the network
- Not likely since it did not emerge for 13 years, and hackers have tried to find it
- Code of protocol based on formal Math theorems
- 2 Total collapse of Internet
- Highly unlikely with its decentralized nature and all redundancy
- Would also break current financial system since e/mobile-Banking is using web services
- 3 Global long term Power outage / blackout
- Situation possible only with some apocalyptic event when money would no longer be important
- 4 Breakthrough in Quantum computing implementing Shor’s algorithm that could break asymmetric cryptography
- Not in foreseeable future, and algorithm is just theoretical
- Could affect privacy of all current digital systems
- Already there are ideas for quantum cryptography that would solve the problem
Some Critics would challenge Bitcoin on its Noninflationary nature, a subject that deserves separate paragraph.
3.2 Deflation [C]
– It is a decrease / drop in the general price level of goods and services. It occurs when the inflation rate falls below 0 %. Often used in Economic crisis as a scary word related to Recession and Depression.
A Deflationary Spiral is a downward price reaction to an economic crisis leading to less production, lower wages, decreased demand, and falling prices.
– But Deflationary economy isn’t inherently a recessionary environment at all. In fact, some of the most prosperous times of growth in history were strongly deflationary. As production becomes more efficient it is natural that prices go down. Also, Bitcoin is not formally deflationary, technically it’s programmed to be Disinflationary, rate of inflation reduces every 4 years. This result in a constant monetary base without changes to the supply.
– In order to be able to spread BTC, in the beginning it had higher inflation which is reducing over time. In the long time when everybody owns and use it price would stabilize, but prior it has to rise a lot while gravitates towards zero-inflation. The problem is we live in a system that is completely opposite and based on debt. This debt must get cheaper over time with inflation, because if the opposite were true, all nations and companies would default. The issue isn’t so much deflation per se, it’s the transition from where we are now, being over leveraged, to a low-inflationary environment.
– Eventually it could come to equilibrium where the value of entire money supply would match the total Economic Output of world. This allows everybody to have high time preference with long-term horizon and plan on longer period, which is good both for humans and environment. People would buy quality long-lasting stuffs, instead of buying a lot of garbage that would soon be thrown away. Instead of framing things narrowly, it allows to take a broader view, to be fearful, and make better decision. Also, in this hypothetical world there wouldn’t be extravagant hoarding that leads to macroeconomic recession. Instead, people earn in bitcoins but also spend sats according to their needs, plans and desires.
– When it comes to wages even if they go down a little bit, price of goods would go down even more making person richer. The difference between nominal and real wages is fundamental. There is no point of rising nominal wages, what matters is net of inflation/deflation.
On the whole Benefits outweighs the Risks significantly.
– For example, image a world with independent uninflatable global currency. In last 50 years average Economic Growth has been ~ 2%, while for the next 50 years estimates are it could be around 3%. Let us take 2.5% as middle value, and with fixed supply of money it’s value should increase each year by 2.5%. In that environment you would not need to rush and spend money but can take time to think what to buy and where to invest.
– Regarding credits and loans / borrowing, nominal interest rate would be low but effective one would be nominal + that 2.5%. So, credit for house could have nominal rate of 1.5% (4% effective). While investments in business, bearing more risk, would have higher rate of return or probably some share of company.
Historic data: US interest rates in the last 200 years and 30 year mortgage from 1971-2022.
– There is great book ’The Price of Tomorrow: Why Deflation is the Key to an Abundant Future’ by Jeff Boot. He suggests to stop fighting (technology driven) deflation and accept it’s potential of abundance. It would be a system where the consumers win in the form of better prices and services. Over very long time prices fall to marginal cost of production.
3.3 Other Cryptos [C]
– When compared to Others crypto coins, important differences are that BTC have First Mover advantage (the Half-Truth), so is most known and almost everybody already heard about it. Then it has no leader per se so has higher decentralization and it was never hacked. Still, this does not mean that all others are worthless, some of them could have valuable additional features. Only those that are not in the same domain as BTC and target totally different use case, anything else expect base treasury asset, can survive. Of course there were, are, and will be, a lot of those that are pure scam, like OneCoin, or deceptive with pump-and-dump manipulative scheme (Greater Fool theory). Then there is crap group with stupid idea of which some are called Dino (Decentralized In Name Only). Both are in a so-called ‘shit’ coins category. What remains is small number that could have useful purpose but even many of those will fail because of poor implementation. Just a handful will survive and thrive and maybe become leader in some domain. BTC is at the moment only one that has real chance of becoming global monetary system. Others blockchains are still solutions in search of a problem and are yet to prove themselves. If we observe competition in the cryptocurrency market it is obvious that bitcoin is the apex product of evolution.
– There are several reasons why it is main One, crypto King, which includes:
- True Decentralization - main innovation that only BTC has for real.
- This is of greatest importance and PoW with all its electricity consumption gives it intrinsic worth rooted in physical world and at same time ensures temporal and spatial security (across time and space)
- can’t be counterfeited because it has cost in energy.
- while companies and their networks/platforms can be censored protocols cannot be blocked so easily.
- This is of greatest importance and PoW with all its electricity consumption gives it intrinsic worth rooted in physical world and at same time ensures temporal and spatial security (across time and space)
- Network effect
- the more people use it, it’s more likely to become bigger
(value increases with number of users - Metcalfe’s law)
- the more people use it, it’s more likely to become bigger
- Added value
- with new unique features and functionality
- with new unique features and functionality
- Simplistic design in its core
- in accordance to IT principle KISS
(Keep IT Simple, Stupid)
- in accordance to IT principle KISS
- Does only one main function in the base
- being just money but does it very good
– Some Altcoins (Alternative coins - any other then Bitcoin) could be viewed as startups where buying those is similar to investing in that company. For example DeFi - Decentralized Finance (Crypto Glossary and Acronyms) are application that replicate certain bank services. With those, investment can often be done with ICO (Initial Coin Offer), analogous to IPO (Initial Public Offer). It’s like Dot-com bubble in the 2000s where there were many companies that had website but just a few grow to become Microsoft, Google, Apple, Amazon, etc. While bulk of others have completely failed and we never even heard about them.
Still only BTC is considered (also by the SEC) as Asset (other way phrasing it Digital Property) while all others cryptos are described as Securities based on Howey Test (The Next Bitcoin is Bitcoin and All paths lead to Bitcoin). Bitcoin was not created, but discovered, just like fire, and as such it is a one time event. It’s origin was organic and it is said to had an Immaculate conception which cannot be replicated.
– Stable coins are anothey special category money but which is mostly centralisad, has an issues, and is pegged to a fiat currency, usually USD. Their main benefit is that they are digital and can easily be send across the globe. They are in some way a modern equivalent of eurodollar.
– There are also NFTs (Non-Fungible Tokens) that act like prestige Collectibles (artist’s digital graphics and drawing). They have specific and limited usecase and are not in the scope of this article.
3.4 Proof of Work (PoW) vs Stake [C]
– Proof of Stake (PoS) protocols are another class of algorithms for consensus first invented in 2012. They work by selecting validators in proportion to their quantity of holdings in cryptocurrency. This is done to avoid the computational cost. Key distinction is that they are not decentralized enough, quantified by Nakamoto Coefficient, similar to Gini coefficient for inequality measure. PoS does not have incentives in line with it, also distribution is always an issue. So they can only ever be a Security equity (asset issued by body) and not a Commodity.
– PoW is Efficient and in its nature different and separate. PoW and PoS set side by side are not in the same level, it would be like comparing plain and train. For monetary system PoW is advantages and necessary. Electricity is Bitcoin’s physical property. It is also much safer against 51 % attack due to opportunity cost, too hard and too expensive.
– Hardware that is doing computation for mining initially included home desktops and even laptops. Later GPU (Graphics cards) were used because of multiple coprocessor and eventually came custom build server machines called ASIC miner (Application-Specific Integrated Circuit). They are much more efficient and have made regular computers obsolete for this purpose. For this reason, the algorithm has a feature called Difficulty Adjustment that is done every 2 weeks. This ensures constant time for block generation of 10 minutes, regardless of processing Hashrate (Th/s). The more power is inputted the more difficult it becomes to find the correct solution. Therefore, incentives are to have more miners when price goes up but on the other side halving makes reward smaller. Therefore it has no energy scaling issue and once equilibrium is established, reward shrinks while value is expected to rise. Additionally, miners receive a fee from each transaction. In future Transaction fees will become more important than reward. From miners’ perception Moore’s law is built into the incentive structure and lately ASIC evolution is stalling.
Chart source and other mining data with hashrate info.
4.1 Economic impact [C]
– BTC gives more Economic freedom, and it makes money SAVING simple as it should be. It brings financial tools to unBanked, underBanked and underServiced world, allowing people to become almost Bankless in traditional sense (de-bank the world). Important aspect and one of reason why entire project was successful is because of good Tokenomics - financial incentives to mine, buy, use and hold tokens.
– Worth mentioning are the Economic Cycles. A phenomenon where Economy goes through boom-and-bust period that are manifested with bullish and bearish markets. There is excellent explanation by famous hedge fund manager Ray Dalio in a video - How the Economic machine works
In it he gave few simple advice, 3 rules of thumbs:
1. Don’t have Debt rise faster than Income
2. Don’t have Debt rise faster than Productivity
3. Do all that you can to raise your Productivity
– Regarding the Cycles we find them also in Bitcoin short history, each lasting around 4 years, approximately halving period. Each next cycle has been less volatile, since larger market cap makes it harder to swing, and was also hyped in certain moments. In prior periods it was correlated with Nasdaq index and still is partially. However, lately dissociation from correlation with equities may indicate that widespread bitcoin adoption is accelerating, while stagflation may be the underlying fundamental factor driving bitcoin adoption.
– In the last 10 years we could see value goes up (as the previous chart shows) several times by order of magnitude. Waves were created either by big whales or small retail investors as more people become Bitcoiners. Whales are considered those who have 1000+ bitcoins. Others gathered around online community WallSteetBets (with famous GameStop saga) on reddit, so called Ape movement.
On the other side it had gone down the same way. Additionally recent crash was caused by collapse of overleveraged and unregulated companies that were investing and lending cryptos. Some of them were exposed to others and it was like contagion created by gambling. To point out few of those: Tera-Luna, Anchor, 3 Arrow Capital, Celsius, Voyager, BlockFi, FTX. They either went bankruptcy (financial defaulted) or were liquidated. Crypto market has repeated mistakes from 2008 crisis. But here market was cleared of bad players. And it was not the first time, some might remember Mt.Gox going under, also Coincheck hack and BitConnect scam.
– Bitcoin as a new asset class gain incredible popularity. When it comes to total market cap at some point was 1 Trillion dollars, while entire crypto market was around 2 T. It took Google 22 years to become 1 T company, While Bitcoin got there in 12 years. Tradeable Gold market is about 5 trillion. For it to catch up would mean value jumping 20 times (educated guess) from current price. Note that entire stock market is around 100 T, while real estates are 300 T.
Bitcoin in average had growth of 200 % yearly for a decade, it was the best performing asset.
4.2 Political implications [C]
– Inflating currency supply distorts the money and equals creating more imaginary products which negatively affects the markets. Central planning (of money also) goes against evolution, one of the reasons it always fails.
Monetarism - emphasizes the role of governments in controlling the amount of money in circulation. Before bitcoin we have never had an incorruptible monetary base layer. World needs a Neutral (reserve) currency, now more than ever.
– Blockchain can give more direct democracy. Technology enables higher rate of participation in voting, making referendums also easier to carry out.
– Looking into the history, Worst Hyperinflations, of all time were during the last century in:
-Hungary, -Yugoslavia, -Germany, -Greece.
Some well-known examples of big inflation since 2000s:
-Hyper: Zimbabwe (million+ %), Venezuela (10,000 %), Ghana, Ethiopia, Sri Lanka, …
-High: Lebanon(200+ %), Argentina (70 %), Turkey (80 %), etc.
-Moderate: USA, UK, EU, and others
– Since is it hard/impossible to ban bitcoin globally, countries can ignore it or try to regulate it. Some countries have more accepting laws while other have restricting ones. For example, China has ban mining, as bitcoin can interfere and jeopardize their central influence on population. They might be the first to implement CBDC (Central Bank Digital Currency) which would give even more power to the Surveillance State. This would allow easier spread of Social Credit System, an unacceptable dystopia. So, Bitcoin can facilitate reduction of government ability to track and monitor its citizens. As David Chaum said: “Privacy in messaging and payments, and the like, is so fundamental to democracy.”
– On the other side more democratic countries have embraced and made it legal but require KYC (Know Your Customer) and AML (Anti-Money Laundering). So, most exchanges have to be in Compliance with these rules and ask user for Identity documents. Still there are some DEXs (Decentralized exchanges) that can circumvent these requirements.
– At the moment countries have varying range of attitudes towards bitcoin. Those more friendly ones have legalized it in a way to be either accepted (US, EU,…), or non taxable (Portugal as prominent with residency for Digital Nomads including ‘Bitcoin family’), or even legal tender (El Salvador first one; El Zonte - Bitcoin Beach). Both Miami and New York City now have Bitcoin-friendly mayors. On the other side are more skeptical ones still waiting to see where it goes.
– Regarding legality ground there is interesting segment of the US Constitution, Article I - Section 10, where it forbids states from issuing “bills” (promissory notes) but gold and silver coin can be used as legal “tender”. So if bitcoin would be considered analogous to gold it might be used as legal tender by default (talk with attorney Aaron Daniel).
– Btc is hope for many people who are in despair and marginalized. One of use cases is to give freedom to people in countries under some sanction like Cuba, Iran, etc. It can also help refugees escape conflict zones and leave (with their saving) from Libya, Russia, Ukraine, Syria, etc. Same is true for those fleeing oppressive and tyrannical regimes. Bitcoin and revolutionary blockchain technology give a new paradigm of economy with no territory that supersedes regular borders.
– Next to mention that many African countries have very weak (high inflating) currency, in which a lot of impoverished people don’t have access to financial services. Some are even using foreign issued post-colonial money, namely CFA Franc that is still controlled by the French treasury. So Open Source code is fighting monetary colonialism as well, as described by Alex Gladstein.
-In El Salvador, where remittance fees and exchange rates can eat away a money transfer to family, Bitcoin offered lower fees and faster transactions.
-In Cuba, after a dual-currency system devalued the peso, those who saved in Bitcoin managed to stay afloat.
-In Nigeria, human rights activists depend on Bitcoin for donations after crackdowns by authoritarian regimes.
– It’s now obvious that Supremacy of the Petrodollar Economy is Waning and its unnatural hegemony coming to an end. This will probably lead to decentralized multipolar multi-reserve system. Artificially strong dollar is not good even for US, since it makes export hard which leads to less local production. Interesting book and another video presentation is ‘Changing world order’ - by Ray Dalio where he talks about China economic rise. But China also manipulates currency a lot. One could make analogy from fiat based military industrial complex to crypto industrial complex based on energy.
– CB could be gone in its current form, even fiat could be backed by Bitcoin or central government reduced in that regard. Essentially removing monetary power and leave only fiscal policy. According to Thiers’ Law: Good Money Drives Out Bad.
– The politics of bitcoin underpins its social life.
4.3 Social component [C]
– As the ecosystem grew, many diverse subgroups have joined the movement. Initially it started with crypto OG (Original Gangster) a slang for developer or founder of early crypto blockchain. Then came anonymous, libertarians, conservatives, progressives, entrepreneurs, VCs (Venture Capitalist - investors), miners, traders, etc. It was not singular ethos but had many heterogeneous Subcommunities where everyone saw something of interest that suits them. It was like wide rebel alliance with extreme diversity. Some are often referred as ‘True Bitcoiners’, a forerunners of movement and ideology. It is similar to term Bitcoin Maximalist (Btc Maxi), meaning those who promote only Bitcoin. There was some toxicity in the public space, that could be filtered. Maybe best label would be BTC Realist or simple a Bitcoiner.
– In philosophic sense there is also Bitcoin Minimalism (Create more, consume less - as explained by Dan Held), which is contrary to consumerism. In political arena it had brought together all from opposite spectrum and reduced polarization. In addition, since its wide adoption has just started all those who don’t have any amount of bitcoin yet or are against it are called No-Coiners.
– One of the reasons it takes time for adopting is that people first need to learn and understand it. Most schools teach very little about finances and even less about money itself. Governments have no interest to fully educate citizens, it’s easier for them when less people see inflation as indirect tax. And most people themselves are lazy in a way and don’t care too much about monetary system. They’ve preferred way to outsource responsibility to the Government, but as result end up being dependent and completely relying on institutions.
There are those who say Bitcoin philosophy is like a Religion (Gospel of prophet Satoshi :), for all good and bad that the term carries with it. Although one could find few similar elements, important distinction is that there are no dogmas, and nobody is above criticism. What is in common is preach and practice of people who keep spirit and ethos of it. Passionate supporters are sometimes called Bitcoin believers / evangelist for being optimistic about success of the project. They firmly hold their stance and vocally assert their opinion to the crowd.
– Yet many at first experience can feel Cognitive dissonance. It is an unpleasant mental conflict that occurs for an individual when assumptions or beliefs are contradicted by new information. In this case defense mechanisms include rejecting the claim or ignoring the new information all together. For anyone involved in Bitcoin, alignment of beliefs to behaviors is tested regularly.
– Once a person gets enough information and after a while it clicks in the mind. There is an expression used to describe it:
‘Taking The Orange Pill’ analogy from movie Matrix.
– Today’s Overconsumption Society is not sustainable in the long run. Investing in Bitcoin is reducing consumptions of short lifetime consumer goods, that end up in landfills. Society should change its buying habits since planet resources are not unlimited. Also, production should aim for durability, and not have planned obsolescence. Issue in not about having growth, it’s about efficiency, how to get more for less. This fundamentally changes how our economy functions.
– Because of broken monetary system, excess value flows to top. That is one of the reasons there are many billionaires while others have to work 60h a week just to make ends meet. Instead, higher productivity could allow most people to have 30h week (automation could free time for more human creativity).
– Let’s put up list of knowledgeable people from Bitcoin community:
-Bitcoin and Macro:
- Jeff Booth,
- Luke Gromen,
- Lyn Alden,
- Nic Carter,
- Andreas Antonopoulos (avid advocate and author),
- Jack Mallers (Strike),
- Jameson Lopp,
- Michael Saylor (MicroStrategy),
- Jack Dorsey (Twitter, Block formerly Square),
- Elon Musk (Tesla),
- Cathie Wood (Ark Invest),
- Peter McCormack (What Bitcoin Did);
- Robert Breedlove (What is Money);
- Anthony Pompliano (The Pomp Podcast);
- Lex Fridman (Lex Podcast with M.Saylor: the Future of Money);
5.1 Future Development [C]
– It is nothing less than a miracle that the project the survived and took off. Already 13 years in action uninterrupted, had not stopped for a second and it gained a lot of traction. In the first half of last decade, it was unknown to wide public, used only by enthusiasts, and also was very uncertain. Although still in early to mid-stage we can say that the biggest hurdles are behind. It is running flawlessly and is absolutely thriving in adoption. We can identify Crypto ecosystem as new cultural and economic trend that started from forum, spread through Reddit and Twitter into fabric of social circle. This created condition under which broader Adoption occurred.
– Internet evolution led from pure data and communication to social information and digital value. In that regard this next steep of scientific evolution is standing on the shoulders of giants. Just like open flow of information, enabled by the internet, made the world a better place, the open flow of value with bitcoin will make it even better.
– Although it has the power to disrupt banking and monetary industry, we can look at it more as a transformative technology that will improve and augment it. Only time will unlock its full potential. Firstly, it was a cool leapfrog technology, and later it became something like investment, sort of digital gold - Store of Value and that’s where we are now. Later if it becomes universally adopted it will be Medium of Exchange. That would probably lead to also serving as Unit of Account. These would be The 3 Phases of Bitcoin Mass Adoption.
– In the long run idea is for it to become regular everyday payment service, to fully realize function as Medium of Exchange. For this to happen it needs good integration with second layer lightning protocol for scalability. Once it grows large enough it will become stable which enables it then to be also Unit of Account. If this happens it will likely become Global Reserve Asset, Bitcoin Standard, a hypothesis explained in the book ‘The Bitcoin Standard’ by Saifedean Ammous.
– As people adopt it in many countries, regulatory will follow to make it like foreign currency, meaning no capital gain tax. Since nobody controls it, it is also easier for all countries, including world superpowers, to use for international clearing since they will not depend on the competition. In that case it’s value could rise to few hundred thousand in several years, even reaching a million in 10 to 20 years. Jeff Booth calls that hyperbitcoinization or a Hyper-Bitcoinized World(YT).
– Banks will also have their role in this new world. They are slow with change because of compliance requirements, but eventually those that survive will adapt and compete in the industry.
Some will offer custody services (bitcoin based banks) with full reserves and proof of it. Others will become lightning hubs and they will help scale payments. Also giving loans will remain a service that would need a financial entity to verify one’s employment or collateral for example. New era of free banking to some extent.
One expectation is that Bitcoin main layer will be used for settlement between countries and also banks, like GIRO transfer, RTGS and Swift are today, but just much better.
– As Adoption increases, volatility will go down. Widespread crypto adoption is pushed by millennials, a younger tech-savvy generations, that are turning into adults. People are usually afraid of new things they do not understand, so they need first to learn how to handle it safely.
Rate of adoption is following S curve and gaining speed (just like the internet did):
5.2 What lies ahead [C]
– First, it’s important to learn as much and have all-encompassing understanding of it all. Since this system is not forced but is voluntary Opt-In (freely choose to use it / be involved and possibly make better world) just learning about it is already a contribution. Next then comes playing with it and later promote the idea by teaching others around you (it’s virtuous to teach people). There is a famous meme (rapidly spread cultural element): LaserEyes - significant focus on important thing that can make a difference.
Secondly decide if you want to buy some, for now as an investment and later as a Savings Accounts. This way you will try it yourself and learn a few things. Install one or few of recommended wallets (such as Phoenix, Breez, Muun, Blue Wallet), register on exchange, withdraw funds to your wallet (take off exchanges).
– When most countries join the system, they will even compete who has better adoption. Eventually their CBs will start acquiring Bitcoin as part of their reserves. Once first large CB acquires it others will be forced to follow it based on game theory. Private Banks would also own BTC as reserve asset. As it continues to mature it will gain wider support (Lindy effect), integrate into the real world, and go Mainstream which could be beneficial for everyone.
– Currently in 2022 around 200 million people (4 % of world’s population) are estimated to have same amount of bitcoin/sats. Every big change need time, in this case decades. It’s not something that can happen overnight, as people have to learn and accept it. For most persons it was outside of their world view (mental model).
– Some expectation is that by 2030 1 billion people will have btc wallets. In over 100 countries it would be regulated like foreign currency, while in 10 at least accepted as legal tender.
5.3 Practical Approach [C]
– In broad sense Investment plan includes first to inform yourself, do your homework. Second to decide what amount is at your disposal for investing. Lastly to split it based on your risk appetite among several classes of asset. At an early-stage risk was much higher and in accordance with maxim: Invest only what you are ready to lose. Now it is less risky than in the last decade but still it is considered relatively riskier class, mainly because of large up and down swings.
Only if you become convinced enough into the Bitcoin story is it good idea to invest.
–In practice there are several generally useful strategies (one or more can be used):
1. Move (reallocate) a part of your portfolio into Btc and keep it long term
- size of part could range from 5 to 20 % depending on one’s net worth and risk appetite
- don’t made a mistake not investing anything in order not to have FOMO (Fear Of Missing Out)
- decide when to join the train and potentially build generation wealth
2. Make monthly savings into Bitcoin (for example 3 - 5 % of your salary / income)
- accumulate slowly with average price (dollar cost averaging)
3. Do not sell in bear market when it falls down
- hold tight during periods the FUD (Fear, Uncertainty and Doubt)
- happy HODLing (meme variation of Hold; Hold On for Dear Life), stay humble and stack Sats
4. Active (daily) trading would not be advisable since it not productive activity
- very hard to beat the market, even with technical analysis
Additional ways to contribute:
-Consider starting to accept payments in Bitcoin for the work/service you or your company provide
-You can even give some small discount when someone pays with BTC, it will incentivize others to use it
-In later stage use it for payments wherever possible
-Change mentality from Buying and Selling to Earning/Saving and Spending/Using
– Maintain an emergency cash cushion, enough to pay all your bills for one full year. By holding bitcoin and cash you protect yourself both from inflation in the long term and from volatility in the short period.
– On the other hand, if you have no cash cushion, if you use leverage, if you lend Bitcoin for interest, if you use Bitcoin as loan collateral, if you short Bitcoin, or try to time the market in any way it’s gambling. Gambling with any expectation of coming out ahead is foolish. And, as the saying goes: Fools and their money are soon parted. Don’t gamble if you want to become wealthy. Instead, become a patient, cold-blooded (fearless) long term holder of Bitcoin.
– Think in long-term, become wise saver and prudent investor in crypto landscape since this is ultimate savings technology. Treat it like your savings account.
– Safeguard yourself, especially from YouTube comment section under every crypto related video clip. They are full of so-called trading strategy experts with some fake name and WhatsApp number for contact (#ScamAlert - stay away)
– Bitcoin market, by nature, is not highly efficient because not all the stakeholders have same knowledge. It has interesting game theory of Information asymmetry. New people coming in don’t have same information as those who have been here. They play the game of economic coordination differently. Also human behavior in finance is often irrational and most people do not evaluate risk correctly. They are bias towards gains but still have Loss Aversion: The aggravation in losing money seems greater than the pleasure of gaining the same amount.
As for those interested in trading between cycles be aware of 80-20 Rule (Pareto principle)
– Popular crypto Exchanges (places to buy Bitcoin):
Kraken, Binance, Bitfinex, Coinbase, Bitstamp, Gemini, …
– There are also decentralized ones and in person marketplaces like:
Bisq, KuCoin, HodlHodl
– Concerning Bitcoin price prediction there are some interesting graphs, according to which we are currently in a good period to buy in.
(but don’t forget that every assumption about future is a probability bet)
-Logarithmic price chart:
5.4 Recapitulation [C]
– Money systems have changed through history and current one has mayor flaw, it being centralized and having too much power in single place. That inevitable leads to corruption which ultimately results in high inflation, so we can say it is broken. Also, as permissioned system it is over controlling. Reason it was tolerated is that it was the best that existed at the time. But with new time come new technology that enabled better systems. From Store of Value perspective, it should have lowest possible inflation. In this regard Bitcoin is in simple words just better money and overall good if we apply moral and ethical framework to it.
– Hyperinflation and currency collapses are not exceptionally rare events. In fact, the average lifespan of a fiat currency is only about 35 years, which means these events happen much more frequently than many people realize. When viewed from civilization perspective we want value to last minimum our lifetime, better even longer for inheritance. Also, many of societal problems arise from money, so fixing the money could improve the world, in part at least (meme: Bitcoin Fixes this!). Money should be a Fiduciary system - legally and ethically bound to act in clients/users’ best interest and ahead of their own, duty to preserve good faith and trust.
– Bitcoin’s ultimate goal should be to enable all of us to think colectively less about money, and more about other things that we are intereted in, to enrich human experience. Otherwise everybody would have to be full time investor or speculator, or just spend money as fast as possible.
– As a Conclusion hope that this comprehensive review can arouse your curiosity and elevate critical thinking. And watch out from being stuck in echo chamber, always seek more opinions, and stay open-minded.
– Stay tuned for next month post about Lightning Network.
With it there will be a Quiz with Questions. For those who get all the correct answers, reward will be certain amount of sats via lightning invoice.
-The opinions expressed in this publication belong to the author alone.
-It does not constitute professional financial advice, it’s more like an investigative report.
-Please DYOR (Do Your Own Research / due diligence) thoroughly before making any financial decisions and proceed with caution.
Disclosure: Author owns some bitcoins. (In line with: put your money where your mouth is)
References (data source or additional info)
– They are linked directly in text
(List of all URL-s)
– To expose mostly referenced web pages: