I`m writing this for the people who have “heard” about bitcoin but for a lot of reasons i will point below don`t really have a clue about bitcoin.
This is not intended on giving you the technical aspect of it. Most of people can just google that.
My intention is to give you a lot more context on why bitcoin is probably the brightest and most groundbreaking innovation in finance. After that, you can decide what to do with that information
I will try to do it as simple as i can while at the same time providing the things i believe are key in this journey of understanding bitcoin. Just read this with the most curiosity you can. Read and enjoy from a point of awe
Internet was a KEY moment
The internet brought amazing changes and lots of innovation since its conception
We could also see how at the beginning people were thinking it was just a fad
Could we really blame them? Most of humans tend to have aversion to change. Most often real innovations means change in some meaningful way
It didn`t help a lot that companies started to use this new “internet trend” to put a “.com” at the end of their company name in order to ramp up their stock prices and therefore a mug factory would go from $2 usd a share to $40 when it was mugfactory.com
Now this could very well be good if they actually were selling through the internet but most didn`t even have a concrete plan they just wanted to be part of the action
Which led to the 2000 Tech Bubble, mind you in this bubble there were companies that were going to be really important and were the real deal like Amazon
Of course, at that moment it wasn`t the juggernaut it is today, books were basically all its main product.
The bust of the dotcom bubble also took the shares of amazon down by about 90%
Disruptive technology
After the years passed by it started to get increasingly evident that the internet was not just a passing trend
The growing implications and innovations that were stacking in top of each other were evident more and more
Ranging from:
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Communication
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Entertainment
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Global connectivity
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Infomation access
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E-commerce
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Advertising
It was indeed a whole new way to do things and such an important change that not just allowed to stack new technologies on top but also completely disrupted some of the previous industries
Who doesn`t remember going a friday night to Blockbuster to rent a movie?
Reading the newspaper to actually get the news or having to look at a Encyclopedia for information regarding certain topic?
If you observe your current reality in 2023. The internet is present in almost everything you do:
- You wake up, you can entertain immediately with your social media or check emails from work
- You listen to music through some app like Spotify or apple music in your way to work or the gym
- If you are hungry and there is nothing to eat back home, you grab your phone and get something delivered
- You want to watch a movie and you just get on Netflix. Even now you have options not just on movies but on movie platforms (Disney+, Hulu, Prime Video)
Then comes money
If you want to transfer some money, you then click…
No wait, you go to the bank, fill out a form, wait for hours depending on the amount of people and pay a hefty fee for getting the privilege of transferring your own money
Wait what?
So you are telling me in 2023 we can order a pizza from a stranger from the other side of the city or get a date with stranger in a few clicks
But we have not solved one of the most important aspects like money?
Maybe you will say PayPal
To be fair we can`t completely rule it out but…
Although PayPal goal at some point in their history could have been to create a digital currency to replace the US Dollar
The reality is that it grew and became profitable as an online payment platform that allows transactions but using traditional currencies. Depending in which country you are located it may vary.
Money brings optionality
If you have a house worth 1 million. Fine you can live in there, but you already limited very specifically to the use and location of that money in the form of a house.
If you have 1 million cash. You have literally endless options
You could buy cars then go and travel to an exotic location and buy an apartment there. Maybe start a business and start a dog shelter. Blow it all in a compulsive gamble in Blackjack. Yes that wouldn`t be the best but is still an option
From that we can make a conclusion that who controls the money controls the people
That starts to brew some trouble. The government want to have control over the people so what better way to do it that placing restrictions over their optionality?
Why do you think banks account can be frozen at any moment? or even how you should report if you are traveling with more than certain amount of money?
By that we can understand that money is one of the most important tools in society.
Money is freedom
If they take the control over your own money, what does that mean? This is when Bitcoin comes into play
Bitcoin is digital currency
But you will argue, aren`t all of my savings in my bank account also “digital currency”?
Well yes, but who do you depend on if you want to do a transfer via your bank “app”? You guessed correctly, your bank.
I`m not even going to get into the technicalities explaining how the money you see in your savings account is not even there and how the bank uses the savers money to create yield by lending it to the borrowers
We can agree that we either depend on the bank, the government, or a private company (e.g PayPal) when we think about money, we are “trusting” any of those entities.
Now, who are we trusting when we use bitcoin ? This is when things start to get interesting. Buckle up!
The way bitcoin works where published in the Bitcoin white paper in 2008 by Satoshi Nakamoto. There it is explained in depth the way it works. Definitely a must read.
Here is this exempt from it:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution
This literally means, the possibility of transfers from anywhere in the world, without a financial institution, without a company telling you the amount limits, or the time
You can send transfer $20 million dollars from Tokyo to Sydney on Saturday night in an instant. Compare that with the schedules, forms, and fees of a traditional bank.
Exactly, there is no comparison
Who is Satoshi?
That remains to be a mystery.
As it was just a pseudonym, it is not clear if it was just one person. There is also the possibility argued by many that “Satoshi” could have been a group of people with in depth knowledge in different fields that made the creation of Bitcoin possible
When you think about this just makes perfect sense. Two reasons that come to mind:
If the creator of bitcoin would have been a group of people like a company with no open source project. Then problems like corruption, conflict of interests and just basic human nature would have been the risks
Being public about who did this would have gotten in trouble to those involved. It is such a powerful tool that allows freedom that it entails risks to whoever created it
Decentralized Currency
Basically 99.9% of all “crypto” currencies are designed by a “founder” a group of “founders”, “companies”, etc.
They can all use the word “decentralized” or try to sell you the idea of the great qualities their “coin” has, but the reality is 99% of this projects are just people trying to pump the price of the coin, and after that just do a classic pump and dump.
Even Ethereum which argues functionality of smart contracts, NFTs, etc. All Ethereum owners are at the mercy of its creator, Vitalik Buterin. So they are putting the trust in an individual. That is not the case with Bitcoin.
Bitcoin´s design is all ingrained in its code, which is open source. That means the whole way in which bitcoin works is transparent to the public eye.
It´s not a mistake that one of the phrases in the bitcoin community is “”don´t trust, verify” which is referring to the way bitcoin blockchain operates through verifying all transactions.
This is one of the key elements of why the say there is Bitcoin and there is “crypto”. Or the also infamous there is Bitcoin and there are “shitcoins”.
Scarcity
This is just one perspective on the value proposition of bitcoin.We can also appreciate it from a point of view of scarcity. It is ingrained in the bitcoin code there will only ever exist 21 million bitcoins
Making it a very scarce asset
For example, if we have gold prices going up by 100% over night, gold miners are incentivized to find more gold and increase the supply. Therefore, the more demand for gold the more supply there will be
The same could be said of real estate, if some specific area is getting more people interested, or a new shopping mall and school are opening nearby. Homebuilders are incentivized to build more houses/apartments
But what happens with bitcoin? It doesn`t matter if one person wants to buy one bitcoin or 200,000 people want to buy one bitcoin.
There won`t be more than 21 million
Making the supply completely inelastic to the demand
1/ want to buy 1 Bitcoin = #21,000,000
200k/ want to buy 1 Bitcoin = #21,000,000
That specific scenario combined with this trait just leaves one possibility, the price of bitcoin will have to increase in order to keep up with the demand
Making probably one of the scarcest assets on earth. We could also think of exotic art, watches, real estate and land as other kind of hard assets
We have to also keep in mind this scarcity that resembles gold in the sense that it can`t be created out of thin air unlike fiat currency.
That is also one of the reasons bitcoin is seen as a store of value and said to be digital gold
No need to overthink or analyze it right now from and investment or portfolio manager perspective. That will be something to cover on another post
Bitcoin a beauty on its own
I hope by now it is more clear for you why bitcoin is possibly the most important economic and financial technology created in recent history.
The amount of effort required to make something like bitcoin happen is not something to dismiss.
The reality is that bitcoin is a relative simple concept, with a huge complexity required to achieve.
Think about it, it goes from Macroeconomics, Coding, Austrian economics, Finance, Energy, Computer technology, Cryptography, Blockchain, Physics, Thermodyamics, etc.
It is just an incredible invention, nothing short to be absolutely amazed of.
I hope you enjoyed this post and learned something new, have a great day or a great night and a great life.
Much love
Zifush