Why Bitcoin Matters

The fuss over fake internet money

Preston Sledge
Sep 2, 2018 · 6 min read

I won’t exhaust you with the nitty gritty of what Bitcoin is… partly because we’re still figuring that out. Instead, let’s try to see why it all matters.

1. Better money

Helping you get what you want

You use money to communicate value between yourself and another person.

So, are some forms of money better than others?

Money originated from a barter system. And bartering is great. But unfortunately, not everyone that has what you want — wants what you have *sighs deeply*. Instead of always needing to sort out conflicting wants, you could use widely desired items to exchange with. Hey, lots of people seem to like fish, so I’ll stock up on fish. That way, as a local shepherd, I don’t have to convince the lactose-intolerant barber to accept my goat milk when I need a haircut.

These highly demanded items for exchange spread like a wildfire. The invention of money sparked a frenzy to speculate on and acquire the best kind of money. “With this, I can get anything from anybody I want.” Some items are more desirable than others as a tool for exchange.

For example, maybe I just want a hair cut, not the rest of them. Then I’d slice off a bit of fish to pay for the cut. But, you can’t guarantee that each piece of fish retains its proportional value. What’s the barber supposed to do with chunks of rotting fish or half a house? Good money is divisible — or retains value when divided into smaller pieces. Dollars can split value down to hundredths of a unit, or 2 decimal places. Bitcoin measures value with 8 decimal places worth of precision.

It’s easy to transact when each piece is equivalent in value — that’s fungibility. A freshly minted C-note carries more value than a ripped or stained $100 bill and it sells at a premium in other countries. With electronic cash, every unit is virtually identical. In Bitcoin however, the history of a coin is traceable to its origin, so certain coins can be considered “dirty” based on their past transactions.

You also want to move your money around easily and carry it with you. You need your money portable. Now, rather than a sack of smelly fish or heavy gold, I just carry some paper dollars or a plastic card instead. And what’s better than low weight? No weight. In fact, most dollars you spend today are probably digital. In China, paying with cash or card is socially barbaric. It’s QR code or GTFO. Electronic cash is weightless and supremely portable.

Finally, a shelf life makes it impossible to accumulate wealth. You couldn’t pay me to accept a week-old fish. Money shouldn’t “spoil”, it should retain its value over time. Money should be durable. Paper is good enough, gold is better, but electronic cash is untouchable. Electronic dollars are stored in a few massive database centers, protected by the competence and integrity of banks and corporations like Paypal and Venmo. The Bitcoin network is public and maintained by tens of thousands of computers around the world. Either way, bits of data are easier to preserve than physical items.

2. Digital scarcity

They ain’t makin’ any more of it!

Sure, bitcoins can’t be deleted or changed because of blockchain magic. But what’s really cool is that bitcoins can’t be copied. Bitcoin’s primary innovation is digital scarcity — unforgeable costliness.

Counterfeit is illegal because it steals wealth from you and me. Increasing the supply of anything makes it less valuable. We know that from economics class. So if you expect something to preserve value over time, it should be hard to produce. Plenty of metals are tough and shiny. But, gold de-monetized all other metals to become the ultimate reserve currency. Not because of its physical properties, but because of its low annual production—its rarity. Only 1.5% of gold’s circulating supply is newly mined each year!

On the other hand, hyperinflation can occur when governments print so much money that citizens begin to lose trust in the national currency. Sometimes, national fiat currencies are diluted by 100% of their supply (or more). Prices rise, so people begin to spend cash and hoard commodities, which further accelerates inflation. This is when you see pictures of people pushing around wheelbarrows full of trillion dollar bills.

People trust things like gold and land to store their value, since “they ain’t making any more of it!” Scarce commodities provide a hedge against inflationary cash. Citizens of corrupt governments — with national economies prone to rapid currency devaluation — find freedom in a portable, scarce resource like Bitcoin. The popularity of smartphones in these developing countries help facilitate an alternative economy by allowing people to easily store and transfer digital value.

So, fractional reserve banking and copy+paste make it hard to create real digital value. It’s not really valuable if I can copy and distribute something at will. That’s how Napster and that sketchy website you use to watch movies undermined the music and film industry. Digital bits are infinitely copyable.

With Bitcoin, each coin is worth at least its original miner’s cost in electricity — at least to them. To earn new bitcoins, a miner must prove that they expended energy to solve a hard puzzle. Then, anyone can verify the bitcoin’s origin along with the miner’s proof-of-work. Bitcoins are un-forgeable, costly to produce, and limited in supply. Miners would stop mining if they thought it wasn’t “worth” it. But, the scale of mining and liquidity of exchanges provide a trusted market value for Bitcoin.

Digital scarcity enables digital assets with real value, even as money.

3. Peer-to-peer networking

Nobody controls it; Everybody controls it

Most of our networks today are client-server by design. A central authority manages the network and charges you a fee. This is easy and efficient, but creates a single point of failure. Instead of a client-server model, Bitcoin’s network is peer-to-peer.

The traditional way to manage trust is by introducing a trusted third party to mediate transactions. The same goes for digital value networks. Indeed, we have digital assets like World of Warcraft gold and Fortnite skins, but a parent company controls the issuance and trade of these items. Your digital “assets” can be modified or deleted on a whim. And with a single point of failure, your assets are vulnerable to hacks, corruption, or plain incompetence. Bitcoin achieves decentralized digital value, where nobody can censor the transactions or control the production, like gold.

Bitcoin is peer-to-peer money, not client-server. A protocol, not a platform.

The Bitcoin network trades efficiency for resilience. In doing so, your money remains completely un-touchable without the private key. But, if you lose your private key, your bitcoin gets lost in cyberspace forever. People (like me) have learned this the hard way: No chargebacks, No password recovery, No bailouts. With financial freedom comes financial responsibility.

Some people are happy to sacrifice comfort and convenience for security and performance.

It’s a matter of us having that option in the first place; that’s what Bitcoin is all about.

Learn more

txblockchain

A group dedicated to the research, development, and education of blockchain technology at The University of Texas at Austin.

Preston Sledge

Written by

txblockchain

A group dedicated to the research, development, and education of blockchain technology at The University of Texas at Austin.

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