Bitcoin Basics – What is Bitcoin?

What a difficult question! Bitcoiners new and old often struggle to communicate the essence of Bitcoin, in a way that ‘hits home’ with the audience they’re speaking to. It’s no easy task. As one studies Bitcoin, one comes to realise it is a phenomenon, unlike anything we’ve experienced in living memory. Some see it as a new monetary technology that evens the playing field for all people across the globe, others see it as a way of promoting individual freedom and choice, others as “magical internet money” and yet others see it as a silly bubble akin to dot coms in the 90s or Amsterdam tulips in the 1600s. What to make of it all?

With all that in mind, let’s tentatively express some ideas around what Bitcoin is, and how it has come into being.

  1. Bitcoin is a globally-distributed digital monetary system that doesn’t rely on centralised parties to function.  Bitcoin has a fixed supply – I believe it’s highly likely there will only ever be <21 million Bitcoins in circulation, at least during my lifetime. The current generation of Bitcoiners will need to pass down the ethos of why a fixed money supply is so valuable to humanity… if we fail in this mission we may see apathy towards this concept and future generations may again succumb to the lure of money creation by powerful actors. Bitcoin represents a tremendous innovation for humanity, for the first time in history we have the opportunity for “digital scarcity”.
  2. Bitcoins come into existence through a process known as ‘mining’.  Bitcoin miners operate highly specialised computing equipment and engage in a race to append a “block” – containing a selection of transactions broadcast by Bitcoin users – to the “blockchain”, or to use Satoshi’s words “timechain” (a public database updated on average every 10 minutes which contains a record of all the movements of bitcoins between addresses).  Bitcoin mining is distributed across many countries around the world and often utilises stranded, cheap electricity which would otherwise be wasted.
  3. Bitcoin’s users are distributed across many countries around the world.  Many Bitcoin users operate a ‘node’, meaning they download and run the Bitcoin software on a laptop or PC at home.  It’s estimated that some 100,000 Bitcoin nodes are currently in operation.  This property of the Bitcoin network makes it both censorship-resistant and permissionless. Anyone with an internet-connected computer can run a Bitcoin node, and can send or receive payments without needing to present any identifying information or to ask for any permission to do so.  As far as the Bitcoin protocol is concerned, users living under oppressive regimes are indistinguishable from those in freer nations. Bitcoin is not anonymous, but rather pseudonymous: provided the right precautions are taken, this guarantees the user a high degree of privacy.  This property of Bitcoin is very valuable to advance the cause of human rights defenders particularly those living under oppressive regimes.
  4. Bitcoin differs significantly from the government-issued “fiat” money that is in widespread use today, due to a number of factors:
  • Most importantly, the Bitcoin ecosystem is decentralised – no single party has the ability to modify its code or to bring the network to a halt.  This is unlike the fiat system where commercial banks are able to censor transactions and to limit the ways that customers can use their money.  Money held at a bank isn’t yours, it is actually the bank’s money, and the banks are legally allowed to determine whether it may be withdrawn by the account holder or sent to a particular recipient…. or not!
  • Central banks have rapidly increased the base money supply in recent times.  Even the current world reserve currency, the US dollar, saw an increase of c. 20% of its M2 supply during 2020 via Federal Reserve actions.  The vast majority of this new money went to politically well-connected parties (the “Cantillon Effect”, to be covered in a subsequent article). Lesser currencies such as the Turkish Lira have been devastated in the past few years.
  • Commercial banks also have the ability to create new money ex nihilo (“out of thin air”).  Well-connected borrowers are thus able to benefit from the creation of new money, enjoying low interest rates and ample supply of capital.  In contrast, less well-connected borrowers such as families and individuals in lower socioeconomic groups, have restricted access to bank lending and must pay far high interest rates on any money they are able to borrow.

Hopefully I’ve identified some basic advantages offered by the Bitcoin monetary system and some drawbacks of the legacy “fiat” monetary system. I’ll be expanding upon some of these ideas in later articles. Please post any comments, criticisms and questions (NB: there are no “silly questions” in Bitcoin, provided one approaches it with an open mind… every current Bitcoiner started from zero knowledge and almost everyone has made mistakes along the journey – which is how we learn!)

Written by Nathan

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