The Philosophy of Bitcoin — Chapter 1: What is Bitcoin-What is Money
Bitcoin, and the wider concept of cryptocurrencies can be hard to grasp their significance and future utility.
With that in mind, I will be discussing a few topics around Bitcoin that will elucidate many of the complexities, current and future uses of cryptocurrency.
First I will discuss Bitcoin as Money, including discussing the very concept of money itself, and discuss how bitcoin is similar and different to previous forms of Money.
Second I will discuss the creation, history and significant events surround Bitcoin, in order to gain better insight into its place in current culture and technological innovation.
Third I will discuss current uses of bitcoin, its use as a store of value and currency, altcoins and other tokens, ICO’s, trading and begin to discuss its underlying technology, ‘Blockchain’.
Fourth I will delve into the technology of Blockchain, a distributed ledger of ownership and transaction of digital assets.
The fifth area I will be discussing in this post is various thought experiments involving bitcoin and cryptocurrency, as pure thought experiments to demonstrate the differences between bitcoin and other forms of currency.
These topics will conclude the first chapter of the ‘Philosophy of Bitcoin’ and will demonstrate the differences between bitcoin and other, traditional currencies in a way which will allow for a better understanding for the following chapters.
What is Bitcoin?
Although many people have heard of the idea of ‘bitcoin’, their understanding may go barely deeper than the name and sky-high price increases.
In this chapter I will discuss bitcoin & cryptocurrency technology to give a basic understanding to its constituent parts, and conclude with various examples, similarities and differences with traditional money.
For this section, it is assumed you have very little understanding of bitcoin, cryptocurrency, or blockchain and I will describe each in some detail. If you have more advanced knowledge of these concepts, you may want to skip directly to the ‘thought experiments’ section of this chapter and then continue to chapter 2.
What is Money?
In order to understand Bitcoin, we must first understanding the concept of Money, currency, and historical examples to better understand bitcoin’s role in the evolution of the way humans exchange value.
Creation and History of Bitcoin/Cryptocurrency
Bitcoin was first described in an academic “White Paper” released October 31, 2008 by “Satoshi Nakamoto”, a pseudonym for either a person or group of researchers. The first bitcoins were mined January 2009, giving birth to an entirely new industry, set of products, and technological capabilities: cryptocurrency.
The “Crypto” in “Cryptocurrency” is from cryptography, because the coins themselves are backed by ‘math’ rather than a government entity, such as in fiat currency.
What is unique about bitcoins, and gives them their value, is the fact that all ownership and transfer of bitcoin is logged through a ‘blockchain’, a decentralized ledger where all members (miners) of a network (node) must agree before a new set of transactions (block) will be added to the accepted ledger of transactions (chain).
In order to fake transactions, ‘double spend’, or steal bitcoin from someone else’s wallet, you would have to convince all other members/nodes (or at least a majority) of bitcoin that your transactions are valid, and any attempt to ‘change’ the history of the bitcoin network will cause a cascade of bad blockchain data which is easily discarded by current network.
Essentially, Satoshi Nakamoto created a new way of exchanging, storing and transferring value digitally. Paypal and online banking formats are very similar in that they are ‘digital cash’, however, these are merely digital representations of U.S. Dollars which is a fiat currency.
No person is allowed to forge U.S. Dollars, just as no one can create bitcoin out of thin air due to the security of the network. However, anyone can issue their own currency, with its own subset of rules and amounts, by simply modifying the bitcoin code, or launching a new cryptocurrency on the Ethereum Network (where there are currently 1300+ coins/tokens).
All of these tokens and currencies have begun to have a tremendous real-world value, with a market cap of around $300 Billion. As a nod to Satoshi, the smallest currency of a bitcoin (1/10⁸) is called a ‘Satoshi’.
Current Uses of Bitcoin — Current Technology
Store of Value / Currency
Due to the recent price increases of Bitcoin to nearly $20,000 in December 2017, many people have learned about bitcoin and the concepts behind it, however, they continue to debate whether BTC is a store of value or a currency due to its volatility.
At the same time, many developers are working to make it easy as Apple Pay/Mobile payment system to pay with bitcoin at a local coffee shop.
This transaction criteria (easy, capable, cheap and fast enough to be able to use the technology as a currency) seems to be a major mental threshold that, once this technology becomes more widespread, I believe prices will increase due to the further widespread adoption of bitcoin.
At the all-time high bitcoin price of $20,000, the cost/fees to send were very expensive due to the large volume of transactions needing to be confirmed, limited by the 7 transactions per second maximum of the bitcoin network. These high-fees and long transaction times (30 minutes or more) greatly reduced the ability of Bitcoin to be used as a currency, however, since this time the fees have reduced drastically (almost zero) due to the low traffic on the network and a secondary addition to Bitcoin known as the Lightning Network.
Many people continue to speculate on the price of bitcoin increasing drastically over the coming years and see this time as an ‘accumulation period’ before the next bull-run driving prices above $100,000 — and, in my personal opinion, much farther.
Ownership of a Network/Resources (Altcoins)
Many new blockchain based projects are issuing new coins, and funding these projects through what is known as an Initial Coin Offering (discussed in next section).
Many new projects are looking to add functionality to bitcoin or through the application of the blockchain technology to a domain specific problem, such as maintaining title/ownership of a real estate asset.
Many new coins/utility tokens are ERC-20 compliant, meaning they work directly with the Ethereum Virtual Network and will work with Ethereum Wallets, greatly reducing the amount of code that will be need to reproduced for new currencies/tokens.
Each coin or utility project attempts to solve an old problem with the new solution of blockchain. The coins that these groups issue can involve ownership/usage of the underlying technology (such as Gas to power the Ethereum Network), or represent an underlying asset (such as title to a house). I will now discuss the creation of new tokens, and the concept of an ‘ICO’.
Creation/Issuance of New Coins/ Tokens & ICO’s
When a new currency is issued by a group and cryptocurrency code, often the owners of the token will attempt to sell their new currency in various ways in order to make money for the development (or to pay for previous development) of their new token.
The pattern for the monetization of a new currency involves either a presale, an ICO, or both. In a pre-sale, coins are offered for a ‘discount’ price (valued relative to previous sales or upcoming listing on an exchange) to a small group of ‘early investors’ who purchase the coins with the intention of selling at a later date for a higher price.
An Initial Coin Offering, or ICO, is similar to a stock-market Initial Public Offering their shares for sale to a wider market such as an exchange or to a larger group than the initial early investors.
Additionally, founders and the company itself may hold a large number of the particular cryptocurrency in wallets they control, leading to a potentially large market cap for that particular currency and a very large reserve for future development of the project.
Founders can also gain a large number of initial currency through ‘pre-mining’: when a currency first launches and very few resources are dedicated to ‘mining’ the currency, the early adopters can use simple computers to mine large quantities of the currency before raising awareness/access around the currency for the competitive nature of mining operations to raise the difficulty of mining, sharing the bounty among a wider group of people, and increasing network security.
For these reasons, creating an ICO can be very lucrative for a small team, to launch their own currency, raise funds on a global market, and attempt to improve a business process with the Blockchain. However, due to the large amount of hype, capital, and ease of issuing a cryptocurrency, many are nothing more than highly technical ponzi schemes and must be avoided at all costs. The only way to protect yourself as a wise investor is to Do Your Own Research (DYOR) and stay abreast of new developments within the crypto ICO market.
Trading/ Speculating and Forex with Bitcoin
Buying & HODL’ing is a common strategy employed by Bitcoin advocates, in the belief that bitcoin prices will continue to drastically increase in the future, as a deflationary currency. Another trading strategy involves diversification and investing in other cryptocurrencies (altcoins) such as Ethereum, NEO and others, in order to increase profits.
Other websites/exchanges such as Bitmex allow you to leverage (up to 100x) your long/short bet. Seeing an opportunity within both of these markets, many bitcoin enthusiasts have begun trading cryptocurrency in a similar manner to Forex (Foreign Exchange, Currency) traders. Many strategies are employed in this type of trading and were borrowed from traditional stocks, bond and currency markets.
Personally I have experience crypto trading and written many python scripts for trading in crypto, and this topic contains much of my own personal history and interests. I will cover this topic in depth in subsequent chapters.
Storing Data
Another feature of certain Blockchains, including the Bitcoin Blockchain, is the fact that it is ‘censorship proof’ and no one can stop data from entering blockchain and once it’s there it’s impossible to remove (immutable), which has its own positives and negatives in itself. The positives are that blockchains provide an accurate and unchangable record of the past (transactions, temperature, population, etc), however, the fact that data can not be removed (in bitcoin blockchain), there can be no censorship during times when data should be removed due to either size constraints or legal/ethical concerns.
What is a Blockchain?
As I mentioned previously, a blockchain is a distributed ledger of transactions. I will dive a little deeper in this fascinating technology which is set to revolutionize significant industries such as Finance, Medical and Economics.
