Bitcoin: Demystifying Money

Conversations About Bitcoin Typically Cast Doubts on Bitcoin

Discussions about Bitcoin with people who do not own any quickly enter familiar territory. There’s always the discussion about its price volatility. Often also, there’s the “But I can’t touch it” objection. Some version of “It’s only been around for a short while; how do you know it will last?” eventually works its way into the conversation. And for a finishing touch, you get some varieties of “The government will stop it, ” “Satoshi will come back and take it over, ” or “Someone’s got to be in charge.”

Experienced Bitcoiners have responses to all these concerns. However, while we are on the defense answering this familiar litany of questions, there are some bigger and more important matters that often go undiscussed.

That’s because most people, including those who claim to be experts on money, simply do not have an integrated, non-contradictory, and practical theory of what money is and how it works or how it should work.

For the overwhelming majority of people, they simply haven’t studied the nature of money. To them, money is the national currency. They don’t know who issues it, how much of it exists, how it comes into being or goes out of existence, who is in charge of it, how those people got to be in charge, what their responsibilities are, how they carry out those responsibilities, or anything detailed at all really. For those who know some things about it, they may have a theory about them, but they can’t actually verify that what they’re told about these things is entirely true.

In fiat, the whole operation of “the money” is shrouded in opaque institutions and roles, with unclear accountability and dubious statistical data.

Imagine turning around the questions that come up about Bitcoin back onto the interrogators.

True, but it’s gone way up over time. You need a log scale chart to observe it really as it’s gone from 1 cent to a dollar, to a hundred, to ten thousand and beyond.

The dollar, on the other hand, priced in almost any good or service, including Bitcoin, is down tremendously. This famous chart below shows how one dollar went from buying thirty chocolate bars in 1913 to ten bottles of beer in 1933, to ten bags of pretzels in 1953, to seventeen oranges in 1971, to only two lemons by 2008. Now, it only buys you a single cup of coffee at McDonalds.

What do you think you’re touching when you hold a dollar bill? Is there real value in a piece of paper. Why is a blank piece of paper worth less than the piece of paper money? Has the questioner of Bitcoin seen the pictures of piles of money in the streets of nations that debased their paper currency? Those are countries where the paper is worthless garbage.

Ask this back to the person who asks you “What makes Bitcoin valuable?” Chances are you’ll completely blindside your interrogator with this question. There is no one theory shared by all experts. And it is good to accompany the question of “what makes the dollar valuable” with its sibling “Why then has it lost so much of its value over time?” Now you’re talking.

Which version of the dollar are we talking about? The one that’s been backed by nothing since 1971, or the one that ceased to be redeemable for gold much earlier, when gold was, in fact, confiscated by the government in 1933.

Be careful, however, that you don’t terrify your conversation partner here with more reality than they can handle. Chances are that your friend doesn’t know that the Euro, which is the currency of thirty-six countries, including France, Germany, Italy, and Spain, has only been around for ten years longer than Bitcoin. And the Euro isn’t holding up in purchasing power any better than the dollar.

Let’s get right to the heart of the matter now, shall we? None of us know precisely what money is, even though we use it every day. We work for it. We save it. We buy stuff with it. We judge whether we should or shouldn’t buy a thing based on what its price is, what value it might bring to us, and how much money we have. This seems to work. Everybody else does it the same way. Even Homer Simpson gets this.

However, there is something obviously wrong. The lack of transparency in how money works means your friend who is questioning your embrace of Bitcoin can’t answer many basic questions like “Why should we trust the people in charge of money to not conjure lots of it for themselves?” and “Who are the people in charge of it?” Your friend may label you a conspiracy theorist for asking such simple questions. Or, perhaps, they’ll humbly and curiously admit they don’t really know the answers themselves.

You might ask the person questioning you on Bitcoin about the Federal Reserve. What kind of entity is it? How did it come to be? Who’s in charge? What exactly are they in charge of, and who are they accountable to? What are its policies, and what ensures that they are being followed?

The main thing I’m getting at is that this someone who is questioning you about Bitcoin, an alternative system of money, does not have good answers for these very same questions if they are framed up in the context of the system of money they are currently using, often without question.

Perhaps one of the most revealing things about the Federal Reserve is that they have gone to great lengths to be more concealing than revealing. Every effort to pass a bill to audit the Federal Reserve has met with objections from its leadership. On July 12, 2017, then Chair of the Federal Reserve, Janet Yellen, testified before the House Financial Services Committee, stating, “I am strongly opposed to auditing the Fed.” One onlooker in the wings behind her held up what he thought was the solution to the problem of the lack of transparency. The two words on it: “Buy Bitcoin.”

Why is the current system of money so complicated and shrouded in such mystery? That’s a very hard question to answer in detail and one that invariably raises a lot of other questions about the intentionality and necessity of all this complexity. Is it merely there to confuse and conceal, or is it necessary to keep the economy going? Didn’t economies work before all this complexity was added?

In the end, however, fiat is a system in which we must trust politicians, appointed bureaucrats, committees, and who-knows-who-else to decide what money is. We are forced to rely on their somehow-agreed-upon conclusions. And their conclusions are ones that they modify from time to time.

For example, In 2020, Jerome Powell said, “We’re not even thinking about thinking about raising rates.” But his conclusion about this changed. The Fed not only thought about it, they raised rates from 0.25% to 5.5% in roughly one year, which is a twenty-two-fold increase in the interest rate! How’s that for volatile? Maybe they should have thought about thinking about raising interest rates sooner? But they didn’t. Why didn’t they? There’s no answer.

Now, what all this brings us to is something particularly unique about Bitcoin as a system of money. It’s something that Bitcoin’s doubters tend to overlook regarding their own preferred or accepted system of money.

All the mechanisms of how Bitcoin works are:

• Completely public

• Completely auditable

• By anyone

• At any time

There is no mystery as to how Bitcoin issues its units of currency. There is no committee that meets behind closed doors to decide upon changes. There are thus no public announcements that everyone must eagerly and anxiously await to see what changes have been made. There are no leaders that must testify before Congress to defend their decisions.

Bitcoin doesn’t rely on unpredictable people and institutions to decide what it will be. There are, in fact, no decisions for people to make.

As such, anyone who studies the basics of Bitcoin knows exactly what all the policies and workings of Bitcoin are.

It’s remarkably straightforward, in fact:

• Bitcoin is a ledger of units called Bitcoins (or, alternatively, their sub-units called satoshis, of which there are one-hundred million of per Bitcoin)

• Anyone in the world can keep track of this ledger by running the software.

• Everyone who runs the software agrees on the state of the ledger because consensus is achieved through Bitcoin’s breakthrough “Nakamoto Consensus” algorithm. This algorithm states that any discrepancy between two versions of the ledger will, in short order, be settled by the version that demonstrates more proof of work than another version. And this test is easy to conduct and has no ambiguity.

• Spending Bitcoin requires transmitting a transaction that spends only never-spent entries in the ledger, signed with a valid cryptographic digital signature. Such signatures cannot be forged and can only be created by someone in possession of a secret key that itself is impossible to guess.

• Bitcoins are issued on a precisely predefined schedule. The issuance began with fifty coins issued per block, and it gets cut in half every 210,000 blocks so that the final total of all Bitcoin in existence can never exceed 21 million coins.

• Bitcoin has an internal adjustment system called the “Difficulty Adjustment Algorithm” that ensures blocks of transactions get added only roughly once every ten minutes.

• Anyone can try to discover new blocks, but they must compete to do so on the basis of solving the proof of work challenge for a new block that gets issued only when the previous challenge is solved.

It may not be super-simple, but it’s absolutely clear. None of the rules come in the form of “There are people trusted to keep the rule but who can also change the rule.” If you think about it, that form of governance really says, “The rules can change at any time.” History shows this to be true about the dollar and other national currencies.

One day, President Nixon showed up on TV and said, “I have directed Secretary Connelly to suspend temporarily the convertibility of the dollar into gold or other reserve assets…” That’s all it took. The rules immediately changed. And that temporary suspension, which began over fifty-two years ago, is still in effect.

Did people know that such a rule change was possible with the dollar the day before it happened? In hindsight, they should have. But once it did happen, it became clear that there were people who could change the rules of the money and who would, in fact, do so frequently. But it was now too late. No election was even held. There was nothing anyone could do about it.

Not until Bitcoin came around, that is.

All kinds of shenanigans might take place in secret meetings to change the rules of money issued by decree. But none can affect Bitcoin’s rules.

All manner of ‘pomp and circumstance’ and ceremony can be paraded out to try to make changes seem legitimate in fiat money. None of these can affect Bitcoin’s rules.

There’s simply no ambiguity about the rules of Bitcoin. But the rules of fiat money can be whatever the authorities in charge say they are.

What a dramatic contrast this represents.

Bitcoin takes money out of the arbitrary realm of decree and puts it squarely in the deterministic realm of science, technology, engineering, and math (STEM). It’s no wonder that this was first recognized and appreciated by those who tend to appreciate the reliability of the STEM disciplines.

It’s also no wonder that it is also appreciated by those who recognize the fallibility and fragility of systems based on the arbitrary, unpredictable, unreliable, changing opinions of humans with absolute power.

Bitcoin demystifies how money works. Everyone in the world can see how Bitcoin works, how much of it there is, and can verify the authenticity of any quantity of it. And everyone can also rely on it to continue working according to these rules.

Nothing like this has ever existed before.

Gold, too does not have this level of transparency.

For one, nobody really knows how much gold there is. Estimates vary dramatically. That’s actually a big mystery about gold.

And then, to use gold, even between two consenting parties, requires trust in the coinage (i.e., the mint) or trust in the issuers of gold-back notes if those are being used or very expensive and difficult-to-use equipment. So there’s always the question of gold being real, untainted, base gold.

Only Bitcoin eliminates all doubt about all of these factors — which are all the weaknesses of all of the things that have been used as money before.

Bitcoin is even immune to inflation caused in hard monies when innovation occurs in the method by which they are created. No matter how much more efficient mining Bitcoin gets, no more Bitcoin is discovered.

Only Bitcoin completely demystifies how money works and, even more importantly, will continue to work.