Why Bitcoin?

There is a tendency among people who become deeply convinced about Bitcoin to eventually make the biggest possible argument for it.

Bitcoin will become the world’s money. Everything will eventually be priced in Bitcoin. Bitcoin will replace fiat currencies. Bitcoin will demonetize other stores of value.

Maybe some of those predictions will prove correct. Maybe they won’t. But none of them are necessary to understand why Bitcoin is important.

In fact, the strongest case for Bitcoin may be the one that requires the fewest predictions about the future.

So let’s start there.

What Did Bitcoin Actually Change?

Before Bitcoin, transferring value electronically almost always required somebody in the middle.

A bank. A payment processor. A government-regulated financial institution.

Some trusted party maintained the ledger and determined whether the transaction was valid.

In 2008, the person or group using the name Satoshi Nakamoto proposed something different: an electronic payment system based on cryptographic proof rather than reliance on a trusted financial intermediary.

That distinction is the foundation of Bitcoin. Bitcoin created a system in which participants around the world could agree on the ownership and transfer of a digital asset without requiring one central organization to maintain the authoritative ledger.

That was the breakthrough.

Rules Instead of Discretion

Bitcoin also introduced something unusual into money: a monetary policy established in advance and enforced through network consensus.

New bitcoins are issued according to a predetermined schedule. That issuance declines over time, and the system is designed around an eventual maximum supply of 21 million bitcoin.

No central banker meets every few months to decide how many bitcoins should exist. No CEO can authorize another million. No government can instruct Bitcoin’s management team to change the issuance schedule because Bitcoin doesn’t have a management team.

That doesn’t mean Bitcoin’s software can never change. It does.

But changes to Bitcoin’s consensus rules depend upon participants voluntarily adopting them. There is no single authority capable of simply issuing an order and changing everyone’s Bitcoin.

That distinction matters.

Verification Changes the Trust Model

You’ll sometimes hear Bitcoin described as “trustless.”

I think that’s too simplistic.

Bitcoin doesn’t eliminate trust. It changes what you have to trust.

In the traditional financial system, we depend heavily upon institutions to maintain ledgers, execute transactions and follow the rules governing our money.

Bitcoin allows those rules and transactions to be independently verified.

A full Bitcoin node checks the blocks and transactions it receives against Bitcoin’s consensus rules. A miner producing a block doesn’t get to declare that block valid merely because it possesses enormous computing power. If the block violates the rules being enforced by validating nodes, those nodes reject it.

That creates a remarkably different system.

Instead of saying:

Trust us.

Bitcoin moves much closer to:

Verify it yourself.

Digital Scarcity Was the Hard Problem

Creating something digital is easy. Creating something digital that cannot simply be copied indefinitely is much harder. Send someone a photograph and both of you can possess identical copies.

Send someone a document and the same thing happens. Money cannot work that way.

If I can send you a digital dollar while retaining the same dollar and spending it again, the system fails. This is the double-spending problem that Bitcoin was designed to solve.

Bitcoin combines a distributed ledger, cryptography, proof-of-work and network consensus to establish which transactions are valid and which version of the transaction history participants recognize. That made something unusual possible:

digital scarcity without a central issuer controlling the ledger.

That may ultimately be Bitcoin’s most important innovation.

Proof-of-Work Gives the System a Cost

Bitcoin’s proof-of-work system is another important part of the design.

Miners use specialized computers and electricity while competing to produce valid blocks. The successful miner receives transaction fees and, while issuance continues, newly created bitcoin according to the predetermined schedule.

That work is costly. And that’s important. That is a feature.

Producing candidate blocks requires real resources, while validating whether those blocks comply with Bitcoin’s rules is comparatively straightforward.

This helps secure the history of transactions and makes attacking the network economically expensive.

There is no need to describe this as Bitcoin obeying “natural law” or becoming “nature in digital form.” The engineering is interesting enough.

Bitcoin created a digital monetary network whose security is connected to computational work performed in the physical world.

That’s already extraordinary.

Scarcity Does Not Guarantee Price

This is also where we should separate Bitcoin itself from some of the claims made about it.

Bitcoin’s supply can be predictable. Bitcoin’s price cannot.

A maximum supply of 21 million bitcoin does not mathematically guarantee that Bitcoin will become more valuable. Scarcity matters only when something remains desirable.

If demand for Bitcoin increases while the available supply remains constrained, basic economics suggests considerable consequences for price. If demand falls, scarcity alone doesn’t save it.

That is why saying “Bitcoin can never be inflated beyond 21 million” is fundamentally different from saying “Bitcoin must always increase in value.”

The first describes the system’s monetary rules. The second is an investment prediction. We shouldn’t confuse them.

Does Bitcoin Have to Replace Everything?

No. This is where I think some discussions about Bitcoin become unnecessarily evangelical.

Bitcoin doesn’t have to replace the dollar. It doesn’t have to replace every bank. It doesn’t have to consume hundreds of trillions of dollars of global assets.

And we don’t have to believe that someday we’ll price houses, hamburgers, businesses and cups of coffee exclusively in satoshis.

Perhaps Bitcoin becomes a dominant global monetary asset. Perhaps it primarily becomes a long-term store of value. Perhaps it serves as a neutral settlement asset.

Perhaps technologies built around Bitcoin make it useful in ways we haven’t anticipated yet. Or perhaps its eventual role is smaller than its strongest advocates expect.

Nobody knows. Fortunately, we don’t need to know. We can evaluate what exists today.

So Why Bitcoin?

Strip away the price predictions. Strip away the slogans. Strip away “Bitcoin fixes this.” Strip away the promises of a coming monetary revolution. Something remarkable remains.

For the first time, people can hold and transfer a digitally scarce asset across a global network whose monetary rules can be independently verified and are extraordinarily difficult for any single authority to change.

That’s the Bitcoin thesis I find worth examining. Not because Bitcoin is guaranteed to conquer the world. Not because its price must rise forever. And not because every existing financial institution must eventually disappear.

Bitcoin deserves attention because humanity had never previously built quite this combination of digital scarcity, decentralized verification, predetermined issuance and peer-to-peer transfer.

What the world eventually decides to do with that invention remains an open question. And perhaps that’s a better way to approach Bitcoin in the first place.

Don’t begin by asking:

How high can Bitcoin go?

Begin by asking:

What did Bitcoin make possible that wasn’t possible before?

Once you understand that, you can decide for yourself what you think it might eventually be worth. Personally, I believe it’s worth looking into and allocating a percentage of your savings.

Al Smith