A note for friends and family
Over the past year I'm sure you've noticed me steering nearly every conversation into Bitcoin. I'll say something like, "And that's what's so great about Bitcoin..." or "Bitcoin fixes this because..." or a simple "Buy Bitcoin!"
I appreciate your forbearance as I've devolved into a crazed cult member of an improbable, invisible, digital currency.
But what if I'm not, in fact, crazy? I'd like you to give me a few minutes of your time while I explain the rationale behind my obsession. I don't mind you dunking on me with "silly Paul and his Bitcoin!" goofs, I understand that Bitcoin on its surface sounds weird and pointless. But there is an actual depth of thought and a serious motivation behind Bitcoin, and I'd love it if you hear me out just this once, as a kindness to me if for no other reason.
Seriously, what is it? How would you define it? Why is it important? Why don't we just have a barter economy? Why is some money better than other money? Which money is best?
I'd encourage you to think through these questions at your own pace and make sure you have a satisfactory answer. It's questions like these, many of which I first encountered in Saifedean Ammous' The Bitcoin Standard, which led me to my current stance on the topic: Bitcoin is the best money.
Here's one way to think of money: money is a technology for transferring value through time and space.
When we do useful work we create value. Often someone is willing to pay us for our work. It might be a like-for-like exchange: "I'll do the dishes if you mow the lawn." It might be some form of barter: "I'll give you a PlayStation if you paint the fence." But usually our primary income is in the form of money: "I'll give you $75,000 if you show up at this office and edit spreadsheets for a year."
When someone pays us for our work, we're making a trade: I value this payment more than I value my time. And the reason our day job usually pays us in money, not PlayStations or backrub IOUs or Chuck E. Cheese tokens, is because money is "the most saleable good." That is to say, there are more buyers of money than there are buyers of PlayStations or backrub IOUs, therefore it's usually the most convenient thing to store value in, all things being equal.
Money is an intermediate. It's for transferring value through time until you know what to do with it. If you don't know what to get someone for their birthday, you give them cash, so they can buy something they actually want. And your employer paid you that cash in the first place for similar reasons.
So, what does this have to do with Bitcoin. Well, here's a question about your current money: how many dollars are there in the world? How many dollars will be in the world tomorrow? Or a year from now? Fifty years from now?
If the purpose of money is to move value through time, wouldn't it be nice to know what "one dollar" is actually a share of? You know the number on the top of the fraction, but what's the denominator? And, more importantly, what will the denominator be when you finally need to spend it? In the extreme case: are you holding on to dollars that you will one day be shoveling into a wheelbarrow?
For Bitcoin, figuring out the denominator is easy. At the time of this writing there are 17,947,425 Bitcoins. Each day there are 1,800 new Bitcoins added. Every four years the issuance rate is cut in half. In the long run there will be 21,000,000 Bitcoins, and never any more.
So, all things being equal, how would you prefer to store your wealth: as a fixed fraction of a fixed supply, or as a dwindling fraction of an ever-increasing and difficult to audit supply?
What's worth more: a rare Beanie Baby or a non-rare Beanie Baby? You don't even need to look it up on eBay, the answer is intuitive. Humans value scarcity.
See, government-run currencies (and Beanie Babies) serve a dual purpose. You use them to store value. Governments and banks (and Ty Inc.) use them to raise revenue through debasement and seigniorage. These purposes are at odds! For a centrally controlled asset, the temptation to inflate is too strong to be resisted!
Because we've grown up in a country with a frog-boilingly-steady rate of inflation (with the occasional terrifying blip of serious inflation), we're knowledgeable in ways to mitigate the pain of having our hard-won wealth siphoned away. Buy stocks. Buy houses. If you're really rich, buy art. These items gain what's called a "monetary premium," as in they cost more than they might otherwise, due to their dual use: part practical asset (stocks are supposed to give dividends, houses are for living in) and part money (saleable, value-holding).
But houses are harder to sell than money (less liquid). The stock market is dominated by professional investors who know more than you do, and big players who get new money for cheaper than you do (unlevel playing field). Putting a $10 million painting in a vault seems like it's missing the point somehow, and paying $10 million for a painting you hate, just because it might store value, seems even sadder.
Investing is a use for money, but it's different than money. Ideally money would hold its value through time while you wait for an opportunity to use it well, rather than slipping through your fingers as you hold it, forcing you into sub-optimal investments.
Once you start to realize how arbitrary, inflationary, and weaponized the US dollar is, a lot of the puzzling parts of the economy start to make sense: Why are all these people making millions on Wall Street for the seemingly non-productive task of making weird abstractions out of money, debt, and risk? Why do we have booms and busts? Why don't retail banks pay me interest on my savings anymore? Why is Trump tweeting about negative interest rates? Why is Modern Monetary Theory so hot right now? Why do TVs get better, bigger, and cheaper every year, while education and health care skyrocket in cost?
A better money fixes this. Bitcoin fixes this.
But will it work?
And so perhaps let's say you could be convinced that a better form of money is conceivable. But practical? That's pie-in-the-sky thinking, yes?
Well, I want you to take yourself back in time three years. Imagine if you had been convinced then that Bitcoin is money and you said, "alright, I'll give it a shot." Each week you bought $100 of Bitcoin, no matter what the price was, and you never sold. After investing $15,700 in three years, that Bitcoin would now be worth $51,477 if you wanted to exit back into dollars. How many stocks do you know of that could outperform those returns?
Past performance is no indication of future success. Bitcoin has been making investors fabulously wealthy for ten years running, but it could be just one giant bubble, or a truly excellent ponzi scheme.
Or it could be what I think it is: a better money. A money that stores value, with no long milkshake straw available to banks and government to siphon that value away. And a better money in all other regards as well. The people that believe that are buying Bitcoin. Not just as an investment, but as a transition to a new system. The true "hodlers" aren't planning on coming back.
I understand this is a wild and improbable claim. It requires some serious evidence to back it up.
And this, I would argue, is why Bitcoin is such a rabbit hole for someone like me. My first reaction is: it would be cool if it could work, but it won't. Then, a few years later: woah, that Bitcoin thing is still around? Why? How?
Why? How? are very deep questions.
Most people don't know why or how their fiat currency works. It just works until it doesn't. Many people are confused and disheartened to learn about fractional reserve banking. Or the fact that the US dollar isn't backed by gold in Fort Knox. You've probably heard the term "quantitative easing," but have you looked up what it means? Who do you think gets rich off of that sort of scam?
In contrast, everything I learn about Bitcoin's fundamentals is heartening. And it makes me want to learn more.
What Bitcoin is
Bitcoin is a digital currency. Its fundamental technical breakthrough is solving "digital scarcity" through an algorithm called "proof of work."
Basically, Bitcoin is one big shared ledger. It's easy to add new transactions, but it's nearly impossible to edit old ones.
Nodes on the Bitcoin network accept valid transactions and reject invalid ones. Valid transactions are put into a "block" which is "hashed" by miners. When a miner finds a hash under a certain number (akin to rolling a huge set of dice a few trillion times until they come up all ones) then that block of transactions is added to the "blockchain" and is propagated to the whole network. The miner is rewarded for his effort with a "block reward" (some quantity of new Bitcoin issuance) and any transaction fees (which are the miner's incentive for including any specific transaction in the block).
The "difficulty" (how improbable of a number the miner needs to find) is dynamically adjusted to make sure a new block is found, on average, every ten minutes.
Every four years the size of the miner's block reward gets cut in half. Right now it's 12.5 BTC. In May of next year we're having another "halving," and miners will only receive 6.25 BTC per block they discover. Despite this unstoppable downward trend for the block reward (in BTC terms), the "hashrate" (the amount of computing power being actively applied to mining Bitcoin) is climbing rapidly.
Since this network is completely decentralized and permissionless, the "true state" of the Bitcoin network — who has how much Bitcoin — is whichever blockchain is the "tallest," which means whichever chain has the most blocks in it, and hence whichever chain took the most "work" to create.
To attack the Bitcoin network with fraudulent transactions you would need, at a minimum, to have more than half the "hashing power" of the Bitcoin network under your control. This is very different than typical cyber security. Each individual member of the Bitcoin network can be hacked (which is just like typical cyber security), but because the Bitcoin network has no central point of failure, there is no known way to attack the network as a whole outside of brute force hash power — which, at the current levels of hashing, would require a significant amount of resources and effort on the part of a major nation state to pull off.
Thanks for the nerd rant, nerd!
Look, I know I just threw a ton of technical terms at you. And, I'll be totally honest right now: I don't know how the US dollar system really works in counterpoint. As far as I know, it's a few people in a room who decide interest rates and occasional quantitative easing, and then banks hand out the dollars through fractional reserve lending and... yeah, I really don't get it.
But I get Bitcoin. I dare you to ask me about it. It's a complicated system with several novel-sounding pieces. But the system is knowable, it's well defined, and it works.
With Bitcoin, possession means owning the cryptographic key (a long password) to a Bitcoin address (a string of letters and numbers). If you have the password, you can send Bitcoin to another address. If you don't, you can't. That's all you really need to know to actually use Bitcoin. There's no bank to put a stop on your account whenever it feels like it. There's no government to inflate the currency or limit you with capital controls.
And there are no backsies if you screw up.
The tradeoff with Bitcoin is that it requires taking more responsibility for the custody of your money. There's no FDIC out here in this wild west.
It also means taking responsibility for the monetary policy. The issuance rate, the 21 million longterm fixed supply, and the validity of every single transaction, are validated by network participants running "full nodes." It's a self-selected Federal Reserve in a weird way. And the more people who join, the more ossified the fundamental rules of the network become.
In some ways this is more straightforward than storing your money in a bank, with all their arcane rules, random fees, and arbitrary rights over your money. But I can't argue that it's easier.
Plus, Bitcoin's 10 year track record is impressive for a project in the digital age, but isn't quite on the scale of something like the US dollar or gold.
And so I can understand why someone who is doing well inside the current system would have very little impetus to diversify to Bitcoin.
But if you're worried about the stability or practicality of the current system, I think Bitcoin is an excellent hedge. Or, for some of us, a beautiful exit strategy. And fully worth the hassle.
The ethics of hoarding
Jesus said to him, “If you would be perfect, go, sell what you possess and give to the poor, and you will have treasure in heaven; and come, follow me.”
Let's imagine again, for a moment, that you agreed with me. The US dollar is bad money, or at least has some major flaws, and Bitcoin is a better money, at least in the long run.
But why should I be this focused on money in the first place? As it says in 1st Timothy: "The love of money is the root of all kinds of evil."
Or, here's another classic from Jesus Himself:
"Why put me to the test, you hypocrites? Show me the coin for the tax." And they brought him a denarius. And Jesus said to them, "Whose likeness and inscription is this?" They said, "Caesar’s." Then he said to them, "Therefore render to Caesar the things that are Caesar's, and to God the things that are God’s."
There's no portrait on Bitcoin, so who should we render it to anyway? Just like how the US Constitution made the "we the people" sovereign, not the leaders, the sovereigns in Bitcoin are the network participants, not Abraham Lincoln.
Let's break down the basic uses for money and see what Bitcoin's ethical implications are.
1. Buying stuff we need
A better money would be better for buying stuff we need, because it would hold its value up through the exact moment spending is required. An inflationary, debt-based money, in contrast, encourages spending as quickly as possible.
2. Buying stuff we want
A deflationary currency like Bitcoin discourages consumerism, because your money is almost always worth more tomorrow than it is today. Ask any long term Bitcoiner how their purchasing habits have changed over time. It's a remarkable shift in mindset!
A hard money benefits investment (at least from a subjective point of view) because with a hard money, investment isn't a mandatory activity. This improves the signal to noise ratio. You can invest in innovation and truly important businesses and projects, but you don't need to play the stock market and invest in random megacorps just to stay afloat.
This is where it gets interesting!
It's harder to give your Bitcoin away than it is to give away fiat. As in, you aren't going to want to do it. When you give away a Bitcoin you might think to yourself: "That could be worth a fortune someday." When you give away fiat, you can maybe think: "I'm not using it, and it will be worthless in a decade or two!" Bitcoin creates the opposite sensation of "It's burning a hole in my pocket." Bitcoin repairs pocket holes.
What a good, "hard," money like Bitcoin teaches you is that hoarding money is using it.
One way to think about hoarding is it's giving everyone else a chance to spend. You're creating scarcity by witholding your spending, which improves the purchasing power of anyone who needs to spend right this second.
Imagine you're shopping for a house. And also Jeff Bezos is shopping for a house in the same neighborhood simultaneously. Will it be easier for you to afford a house, or harder? Jeff Bezos could help me with his money by investing in my business, but him spending in the same market that I'm spending actively hurts my purchasing power.
Okay, back to Jesus. Did Jesus ask the rich young guy to sell everything he had and give the money to the poor because of rampant inflation? Or the available tax deduction? Or as an economic stimulus plan? I don't believe so. I believe he asked it of this man because he knew it would be the hardest thing for him to do and was trying to prove a point.
Bitcoin, like any good money, is difficult to give away. I don't think that's an indictment on Bitcoin, I think that's an indictment on us.
What money actually is
Humans long for safety. We wouldn't need money if we knew, for a certainty, that our every need and desire, and the needs and desires of the people we care about, would be supplied in perpetuity. Wealth is a hedge against uncertainty, and money, being the most saleable good, is the most convenient form to hold wealth in.
Which is why wealth is so dangerous: we can begin to believe that we have true control over our lives, or at least become obsessed with chasing that control.
Bitcoin removes some of money's uncertainties. Mostly due to the fact that it's neither a traditional physical good like gold, or subject to the day-to-day arbitrary judgement calls of the Federal Reserve. Bitcoin doesn't rust or dissolve over time. It's easy to transport. It's harder to steal. It impossible to inflate. It's really just math, numbers, and energy at the end of the day, and there's something really beautiful about that.
I think it's better at money things than any money we've ever had on this planet.
But it's still just money.
I think it's possible to love a money without necessarily loving money.
Maybe I'm just mincing words.
Anyways, this is getting long, and I promised it would only take a few minutes of your time.