What BitCoin Actually Is?
Is Bitcoin a Real Currency?
Satoshi Nakamoto invented Bitcoin, a new type of digital currency, in 2009. Bitcoin has been referred to as a bubble, a Ponzi scheme, and a con. Despite years of obituaries, we are now in early 2021, and Bitcoin is still alive and well. Even more surprising, Bitcoin is hitting new all-time highs once again. What kind of bubble bursts, only to reappear a few years later? With the Dutch Tulip Bubble and the South Sea Bubble, this never happened.
Amazon was a victim of this. Amazon plummeted by more than 90% in the early 2000s, only to roar back to new all-time highs in the early 2010s. It turns out that Amazon isn't a speculative bubble. It'll be around for a long time. Alternatively, if there was a bubble in the late 1990s, Amazon was a unique type of bubble. It was an example of the stock market attempting to price in a new reality—the reality of an online bookstore with ambitions to dominate the entire world of commerce. Bitcoin is a similar type of speculative bubble. It's the market trying to figure out what a new form of money is worth. Thus, in order to comprehend Bitcoin, we must first comprehend what money is and how it works.
Many people believe that money can only be issued by the government. However, this isn't entirely accurate. From New York to Paris to New Delhi to Kinshasa to Rio de Janeiro, there is a gleaming yellow metal that is accepted as money everywhere. Gold is such good money that it has virtually vanished from circulation. The majority of it is stashed away in central bank vaults and Scrooge McDuck's pool. With Gresham, one could say that bad money drives out good money. But what actually happens is that the good money is hoarded and removed from circulation. When early American settlers discovered that some Native Americans accepted shell beads (wampum) as payment, they procured boatloads of shells and exchanged them for land. In 1626, Manhattan was sold for $24 worth of wampum and trinkets. It is the soft money that loses when hard money meets soft money. You will quickly become impoverished if you save your money in apples.
Apples are perishable and in short supply. Shells are slightly better—they're not as easily biodegradable, but they're also not particularly plentiful. Silver is more valuable than shells, and gold is more valuable than silver. Over the last few hundred years, gold has proven to be the most powerful form of money as all of the world's cultures have met and interacted. Local currencies such as wampum, aggry beads, salt, and even silver were driven out and destroyed. Gold is long-lasting (it won't rot or rust), divisible, portable, and recognisable, all of which are desirable qualities in money. But the fact that it is scarce is what makes it truly good money (and hard money). Mining it is difficult and costly. Even if the price of gold rises dramatically, it is impossible to significantly increase the supply of new gold. We would describe gold's supply as "inelastic" if we were economists.
Higher gold prices do not result in a massive influx of new gold onto the market. The supply of gold has only increased by about 1.8 percent per year in the past. That's what we'd call the money supply's growth rate, or gold's "monetary inflation." Compare that to copper. When the price of copper rises significantly, the copper mines go into overdrive, producing enough new copper to dump on the market and drive copper prices down. With crude oil, something similar happens. That's why it's said that "the best cure for high prices is high prices" when it comes to commodities. Gold is a unique metal. It's not a typical item. The fact that gold is a "monetary good" rather than an industrial input accounts for the majority of its value. Because gold is used as money all over the world, it trades at a premium to its industrial value. For thousands of years, it has been used as a form of payment.
Gold is an excellent example of something that functions similarly to money but is not controlled or issued by any government. In some parts of the world, gold can be used to buy things directly (gold as a "medium of exchange"), but gold is now primarily used as a "store of value." One of money's functions, as we all know, is to serve as a "medium of exchange." It's easier to give you $200 for a wooden chair than to calculate how many peaches from my orchard are equal to a wooden chair. You might not even want my peaches if you're a maker of wooden chairs. The "coincidence of wants" problem is solved by money. It allows for the development of highly complex economies that would never be possible under a barter system.
Money serves as a "store of value" as well. If I work hard for 30 years and save money in a bank, I want that money to still be there when I retire. The bank must be safe from thieves as well as governments who might want to seize my funds. Most governments today steal from their citizens in ways that are far more subtle than outright confiscation. It's known as "inflation." A Big Mac cost about 65 cents when I was a kid in the 1970s. A Big Mac nowadays costs around $4.00 or more. We've all noticed how the same amount of money over time buys less and less. This is referred to as "inflation" or simply as the purchasing power of the US dollar eroding over time. Over long periods of time, the US dollar is not a good store of value. The Euro, the Yen, and pretty much all "fiat currencies" are in the same boat. Because they are magically summoned into existence by central banks, they are known as "fiat" (Latin for "let it be done") currencies. Central banks around the world have been printing a lot of new money since the Great Financial Crisis (2008-2009).
They try to hide the debasement of the currency by calling it "quantitative easing" or "accommodative monetary policy," but what they're really doing is no different than counterfeiters. Those who have the ability to print new money on demand (central banks) and those who are close to the money printer (Wall Street) profit from it at the expense of ordinary savers, just like counterfeiters. Wall Street is addicted to low interest rates and money printing, and it works closely with the US Treasury and the Federal Reserve to keep their addiction fed. The money printing continues thanks to a revolving door between Wall Street, hedge funds, private equity funds, university economics departments, think tanks, the Federal Reserve system, the US Treasury, and various regulators. That's why Janet Yellen is Fed Chairwoman and Treasury Secretary at the same time, and Jerome Powell seamlessly transitions from private equity to central banking. Financial tyranny is always the result of centralization and regulatory capture. The temptation is too great to resist when you can create new US dollars with a single keystroke on a Federal Reserve computer. The US government is issuing a lot of debt in 2020, and the Federal Reserve is buying the majority of it with newly printed money. This is known as "debt monetization," and it means that the US dollar's purchasing power will continue to erode rapidly.
When a large amount of new money is printed, the purchasing power of each piece of old and new money decreases. Hamburgers, houses, and hospitals are all increasing in price. Inflation acts as a hidden tax on all goods and services. It's how governments and central bankers defraud ordinary citizens without raising taxes or firing a shot. Governments with large debts in their own currency frequently debase their currencies in order to repay their debts with devalued currency units. In comparison, gold is a precious metal. With a computer keystroke, the Federal Reserve cannot create new gold. Gold is truly rare, and unlike fiat currencies, it is not subject to massive increases in new supply. Gold is apolitical, apolitical, and not subject to central bank whims. Unlike fiat currencies, gold's purchasing power is preserved. An ounce of gold bought you a nice men's suit in the 1800s, and it still does today. Even today, two ounces of gold will get you a nice working horse. This is what we mean when we say gold is a good store of value. A store of value is a method of transferring wealth over time and space. I can use gold to pay a friend in India (store of value across space). I can also pay myself or my heirs in the future (store of value across time).
If I work hard for 30 years, I don't want central bankers to debase my savings. I want to be able to afford hamburgers and possibly steak when I retire. If you keep your money in a fiat currency, you'll be eating dog food in retirement. The most significant disadvantage of gold is that it is difficult to transport. I'm going to have to pay a lot of money to ship and insure the gold I'm sending to my friend in India. The repatriation of $31 billion in gold from New York and Paris took four years and cost $9 million. If your country is taken over by a hostile government, you won't be able to put a gold bar in your pocket and fly or walk across a border without being stopped. Gold is also difficult to keep in a safe. I could store it in my basement, but that would turn my home into a thief's haven. I can keep it in a bank, but what about the rest of it? If I work hard for 30 years, I don't want central bankers to debase my savings. I want to be able to afford hamburgers and possibly steak when I retire. If you keep your money in a fiat currency, you'll be eating dog food in retirement. The most significant disadvantage of gold is that it is difficult to transport. I'm going to have to pay a lot of money to ship and insure the gold I'm sending to my friend in India. The repatriation of $31 billion in gold from New York and Paris took four years and cost $9 million. If your country is taken over by a hostile government, you won't be able to put a gold bar in your pocket and fly or walk across a border without being stopped. Gold is also difficult to keep in a safe. I could store it in my basement, but that would turn my home into a thief's haven. I can keep it in a bank, but what about the rest of it?
Despite these disadvantages, gold was the best money technology available until recently. It wasn't perfect, but it had the advantage of preventing governments from printing more gold bars to pay their bills, effectively devaluing the currency. Gold mining is extremely difficult and costly. Mining necessitates a lot of time, effort, and regulatory approval. As previously stated, the supply of gold has increased at a rate of only 1.80 percent per year on average. In contrast, the supply of the US dollar increased by 26% in 2020 as the Federal Reserve printed more new US dollars. It is simple for the Fed to print money. Gold mining is a difficult task. It takes a lot of effort to mine Bitcoin. A complex mathematical problem necessitates a lot of electricity and expensive specialised computers (ASICs). The first Bitcoin miner to solve this problem receives 6.25 new Bitcoin. Every four years, the "miner subsidy" is cut in half (2012, 2016, and most recently, May 2020), resulting in a Bitcoin supply shortage.
Unlike gold, we know how much Bitcoin will ever be produced. Only 21 million Bit-coins will be produced. The software code includes a supply limit. In contrast, no one knows how much gold is in vaults and coins around the world. Nobody knows how much gold will be available in the future. The price of gold will plummet if Elon Musk or Jeff Bezos succeed in lassoing a gold asteroid and bringing it back to Earth. Remember that people said the same thing about Amazon and Tesla's businesses if you think this scenario is absurd and unlikely. While it's impossible to know how much gold is on the planet or in the solar system, if you run a full node, you can easily verify the current supply of Bitcoin (more on that later). There are currently 18,586,619 Bitcoins in circulation. Bitcoin has already been mined to the tune of over 88 percent. It's simple to verify the current supply of Bitcoin and the future maximum supply of Bitcoin because Bitcoin is software code.
Bitcoin is not only more scarce than gold, but it is also easier to subdivide (1 Bitcoin=100 million satoshis or "sats"), send instantly anywhere in the world, and hide. You can use Bitcoin to walk across an international border with $1 billion in your "brain wallet" if you can memorise 12 English words. Gold can (and has) been confiscated in the past. If someone refuses to give you their recovery seed or private key, it's impossible to take their Bitcoin. Without the need for a trusted third party, Bitcoin provides digital and cryptographic security. When I put money in my bank account, I'm putting my trust in the bank to keep it safe. If the bank fails, I am confident that the FDIC will compensate me for my losses. If I keep my money in the bank in US dollars, I'm trusting the US government not to seize my assets, and I'm trusting the Federal Reserve not to debase my currency by printing too much money.
All of these issues are solved by Bitcoin. I can keep my Bitcoin in my own possession and no one can take it away from me. I don't rely on a bank or any other third party. The Federal Reserve will not be able to devalue my Bitcoin savings. If the Federal Reserve continues to print money, the price of my Bitcoin in US dollars will rise to compensate. It's also simple to send Bitcoin to anyone. Even if they disagree with our political views, no one can stop me from sending it or you from receiving it. PayPal has the ability to put a hold on your account. Your assets may be frozen by the US government. But neither of them can get their hands on your Bitcoin. As the US government's hostility toward private property grows, this will become increasingly important. The United States is rapidly approaching socialism and MMT (modern monetary theory). Government confiscation through taxes and monetary inflation caused by excessive central bank money printing have no end in sight. Bitcoin is already being used by many people in South America, Africa, and the Middle East to protect their savings from hostile governments.
The world's reserve currency (the US dollar), as well as the Euro, Yen, Australian dollar, Canadian dollar, British pound, and nearly all other fiat currencies, are currently being devalued at an accelerating rate by central bank money printing. Some people dislike Bitcoin because it can be censored. Money launderers, drug dealers, and other criminals are said to use Bitcoin. However, according to recent studies, only 1% of Bitcoin transactions are used for illegal purposes. Criminals' preferred currency is still the US dollar (along with suitcases full of cash). Despite this, these same critics continue to transact in US dollars. People who still believe Bitcoin is only for criminals will struggle to avoid cognitive dissonance in 2020. Wall Street is putting together funds to buy Bitcoin. Bitcoin has been purchased by billionaires for their own accounts. US regulators have now made it easier for banks in the United States to hold Bit-coin. US regulators have given PayPal permission to use Bitcoin. Why are US regulators allowing blue-chip companies to invest in Bitcoin if the US government is going to ban it or if Bitcoin is only for criminals? You wouldn't be far off the mark if you said that many Wall Street firms and: auios blue chip companies aren't much better than criminal actors. However, this is hardly a reason to avoid purchasing Bitcoin. Wall Street excels at spotting long-term trends and profiting from them. What's remarkable about Bitcoin is that it's the first time a small retail investor has gotten in on the ground floor. For years, retail investors have been purchasing Bitcoin at low prices. As institutional money flows drive up the price of Bitcoin, Wall Street is late to the game and making these early retail investors wealthy. Fortunately, Bitcoin is far more than a passing fad on Wall Street. Bitcoin is similar to the internet in that it is a relatively new technology that is here to stay. New technology displaces old technology, as we've seen time and time again over the last two decades. Traditional physical retailers have been decimated by Amazon. Blockbuster was destroyed by Netflix. All other stores of value are being devoured and destroyed by Bitcoin. Bitcoin is a superior money technology to gold, and it will continue to eat into its market share until gold is demonetized completely. Gold will only be used in electronics and jewellery in twenty years. It will trade like any other industrial metal, as Bitcoin has completely destroyed its monetary premium.
Isn't it crazy? This has always been the case with currencies. Wampum was replaced as a currency by gold. Since 1626, the gold/seashell exchange rate has risen steadily. As a currency, gold annihilated silver. The late-nineteenth-century bimetallism wars were all decided in favour of the more scarce metal: gold. The gold/silver ratio has remained stubbornly high for many years for a reason. Short sellers fail to recognise that gold is simply better money than silver, and that the gold/silver ratio reflects this. Bitcoin has been going through the same thing. Since its inception, Bitcoin has consistently outperformed all other assets. Since 2009, the Bitcoin/gold exchange rate has risen steadily. All other asset classes, including stocks, bonds, real estate, and precious metals, have underperformed Bitcoin. Multiple institutional investors have sold gold and replaced it with Bitcoin in 2020. This pattern will continue until it reaches its conclusion.
This trend also has a strong demographic component. Gold means nothing to Millennials and Generation Z, but digital assets, tokens, and cryptocurrencies are extremely popular. Gold is becoming extinct, much like the fax machine. Meanwhile, Bitcoin is consuming the entire globe. It currently has a market capitalization of $500 billion, which is comparable to a large S&P 500 company. Bitcoin will surpass gold's market cap of $11 trillion in a few years. One Bitcoin will be worth more than $500,000 at that point. Bitcoin's market capitalization will eventually surpass that of the global stock market ($100 trillion) and the global bond market ($100 trillion). It will probably no longer make sense to quote Bitcoin in US dollars at that point. Investors, corporations, and even governments will have started to track their assets in Bitcoin. Bitcoin will have replaced the US dollar as the standard unit of account.
Everyone underestimated the internet's dominance and all-encompassing power (it's hard to believe now, but I saw it firsthand for many years). The same can be said for Bitcoin. Even most Bitcoin bulls believe that Bitcoin's future is much brighter.