Horses, Cars, and Bitcoin — “The What: Part 1”
By Bodhi P. Break on The Capital
Let’s do some horse trading. What pops in your head when you hear that phrase — two cowboys swapping horses? Real estate agents getting a deal done? Bartering at a garage sale? No matter what image popped in your head, at a fundamental level is the issue of trust. How can I trust the person I am trying to do business with, how can I trust this transaction?
It takes experience and expertise to be able to evaluate and value a horse properly, and dishonest people figured that out very quickly, so the term “horse trading” has changed meanings over time from originally signifying two people buying and selling horses to (a) dishonest sellers who hold back pertinent information about what they’re selling and to (b) people finding an unethical, taboo, or illegal way to do business.
I want to help you understand “the what” of bitcoin and help you fulfill the original meaning of the term “horse trading,” so that when you begin to use bitcoin it is just you directly getting a deal done without having to involve any 3rd parties (like horse brokers, horse insurance agents, horse escrow, shoe specialists). If you ask me, all of that is just horse shit…but I digress.
This article discusses “the what” of bitcoin using the transition period from horses to automobiles in the early 1900s in the United States as an analogy. The next articles in the series will discuss the Why, the How, Going On a Tangent, and The Next Chapter for Bitcoin.
Being concise is easier to preach than to practice, especially for something as complex and new as bitcoin. So to minimize TLDR (too long, didn’t read), I broke this topic (the WHAT) into two parts.
Faith and Trust
Nearly everything we do as humans takes faith and trust. Not faith in a religious sense — although that is also important for many people — but faith that things will work out, that the systems we’ve built won’t blow up in our faces. Faith shows up as our taken-for-granted assumptions about how the world works. We have faith that our car engines won’t explode while we are driving, we have faith that another driver won’t plow into our lane, we have faith that when we wake up gasoline won’t cost $5/gallon, and we have faith that the global financial infrastructure (the U.S. dollar) will always be there to comfort us.
The problem is that our comfort comes from the “Guarantee on the Box,” and for the U.S. dollar that guarantee is losing its luster. Why would a country guarantee their money, because they want citizens to feel all warm and toasty inside, it makes a person feel good. It is easier to trust the product. Thanks, Tommy Boy, thanks, Chris Farley.
In the last 12 years, the global financial system has suffered some major shocks to its system, and with the amount of money being pumped into all developed economies by central banks around the world, the 2020 Money Printing Party is going to speed up the dollar’s demise.
The dollar isn’t drowning (see article #2 in this series) because of the actions of any particular leader or political party, it doesn’t matter who is in office because they would have all made the same decision to react to economic uncertainty, and that is to turn on the money machine. The dollar is drowning because of policy mandates driven by human politics and human desires based on human analysis. The non-stop money printing party can’t and won’t last forever. So what could replace a money system based on a continuously expanding supply of money? Meet bitcoin.
Engineers Are Winning and Failing
Bitcoin is a digital, decentralized, non-sovereign, uncensorable, unpermissioned peer-to-peer network monetary system with a hard-capped and pre-programmed monetary supply.
The problem with the previous statement is simple: the mental image of the person saying the statement is “Microphone drop. Boom, how do you like that?” The mental image of a bitcoin newcomer hearing that same statement is, “Middle finger extended. WTF. This makes no sense…and this person is an arrogant asshole.”
Engineers, developers, and crypto enthusiasts say this phrase, or some version of it, with pride and assume other people will be impressed or agree with them. The people using this statement (I have been one of them in the past) don’t understand the fact that one of the worst things you can do to someone is make them feel dumb. And if your goal is to (a) persuade someone of an idea or to (b) persuade them to take an action, making them feel dumb or inferior is not an effective strategy. The jargon-based approach to talking about bitcoin will create and multiply bitcoin haters rather than build bitcoin ambassadors.
Drop the jargon, build a dialogue. Invite questions.
The person/people that invented bitcoin are kinda intelligent (more on the inventor’s identity in the WHY article). They combined subject matter expertise from finance, economics, and emerging technologies to create a solution for a system they believed was/is failing (money). Fast forward 12 years, and that piece of code, their solution to an arbitrarily ever-expanding monetary supply, is still doing exactly what it was born to do, like clockwork, even during the 2020 Money Printing Party. Every 10 minutes, a block is mined and added to the blockchain, which is an amazing demonstration of global collaboration that you will learn more about in the HOW article from this series. Mining is the process of creating a new bitcoin by solving a complicated math problem. Gold is mined from the earth, Bitcoin is mined from math.
Engineers and crypto enthusiasts have failed (thus far) to effectively communicate what the hell bitcoin is and why it is such an important innovation outside of online echo chambers (Twitter, Reddit) where we high five each other, share our funny money printing memes and attend each other’s conferences. That’s not anyone’s fault or a bad thing, engineers are wired to be technical specialists, not masters of persuasion. It’s time to add a layer of velcro onto the very technical foundations of bitcoin because a layer of velcro will connect the technical aspects of the technology to what regular folks already know, thereby helping the information stick. The technology has to keep walking before it can fly.
[Side Note on Pace of Development: Bitcoin has only been around for 12 years. As a comparison, gold has been considered a valuable collectible/commodity/asset/money for 5,000+ years, when ancient Egyptians used it to decorate their tombs and temples. The pace at which bitcoin has grown in user adoption (millions now around the globe), price (from $0.008 in 2009 to $9,500 per BTC on May 14, 2020), and strengthened fundamentals (increases in usage, wallets, block size, transaction size, number of transactions, hash rate, year-over-year market cap growth) is astonishing. But for a culture totally addicted to immediate gratification and instantaneous results, the headlines are that it is taking “forever” for bitcoin to gain traction. That is not accurate. The usefulness of an economist’s four favorite words ring true in this situation, “As compared to what,” so when you think about the success or failure of the “mass adoption” of bitcoin, you have to think about what benchmarks you are comparing it to.]
Bitcoin’s creation and growth in 144 months is a truly remarkable accomplishment of global human collaboration and problem solving. This should be celebrated, not vilified. But convincing most bankers or government officials in regulatory and compliance positions about the utility of bitcoin is an uphill battle. The silver-tongued author, Upton Sinclair, explains it best, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Bitcoin has gone from an idea in someone’s head to a globally traded asset that never closes worth almost $200 billion in about a decade. No matter what the haters say, this is the definition of expedient innovation.
The crypto space is a celebration of innovation, it is the garden of Eden for creativity — where no apple is forbidden and all experimentation is encouraged. The space can also feel hollow at times, like a giant online political rally, where supporters are rocking with joy in computer chairs and grinning ear-to-ear as they bang away snarky tweets, but that energy is mostly shared with other people who already feel that way. Crypto will grow at an even faster rate once regular people (like me) understand it more, trust it, and begin to see the problems with the U.S. dollar. Losing trust in a form of money is not the same thing as losing trust in the principles of a country, those are two different things that I believe will be conflated and used as a “tool of fear” during the 100-year money storm (more on that in the What’s Next article).
Bitcoin, A New Language For Money?
It isn’t easy to learn a new language, it is actually extremely difficult, especially as we get older and more comfortable in our habits and views of the world. But once you learn a new language (French, algebra, playing piano, java, basketball, bitcoin), the payoff is immense and rewarding because you can now communicate with a whole new group of people and learn about an entirely different way of life through first-hand knowledge instead of other people’s opinions of things.
Bitcoin is a new language for money, complete with its own rules and symbols and ways to interact with that language, all very different from how most of us think about money.
We need to have a conversation with our senses. Bitcoin is not physical or tangible, you can’t really touch it. It has no smell. Over the last 500 years, humans have developed a “feel” for money (that we pass down genetically) and this new form of money looks, feels, sounds, and smells different. We trust our senses because they are our personal tools for interacting and making sense of this world. Our senses intuitively know how to make sense of money in a physical form, and bitcoin and digital assets betray our senses. This sense betrayal manifests itself in the form of mistrust and cynicism towards the new tool and stifles our learning.
Layering Bitcoin — Looking Under the Hood
Bitcoin is a piece of “open-source” software and open-source means that anyone can download the bitcoin code for free rather than a company owning the code as property and then charging people to use it. Bitcoin is a protocol (set of rules). It is not hardware, it is not stored in a warehouse somewhere. The racks of computers that bitcoin miners own — the computers whose only function is solving complex math problems inherent in the bitcoin protocol — even all of that is not bitcoin. Bitcoin is a software protocol, it is a set of instructions that carry out specific functions/actions in a certain way. The initial design of this protocol makes the bitcoin network extremely difficult to hack and extremely difficult to alter the protocol itself (more on this in the HOW article). Think about the internet. What is “the internet”? It is a protocol, a set of instructions that allows computers to connect to each other through an interconnected network/web. The Internet is not the infrastructure (cables, coax, fiber optics, satellites, and Bluetooth) that connects the computers, it is the underlying software that allows for the connection. In tech jargon, the actual internet protocol is called TCP/IP.
Bitcoin’s essence is that protocol removes uncertainty, power-seeking, and power-expanding from monetary system policy, and it can do this because bitcoin has a stable, consistent, algorithmic (instructions created using math), and pre-programmed supply of money. An example should help.
What we know as “the car” today was not always that way. Much of what we take-for-granted about our cars were not even included in the early stage models. Car manufactures experimented with body styles, metals and materials, propulsion methods, and engine location. In the first 15 years of the 1900s, you had horse-drawn buggies, steam-propelled autos, gasoline autos, and electric autos all sharing the “path” together. Remember that travel infrastructure at the time was built for horses, not cars, so the early innovators in this space had to deal with horse shit, potholes, dirt roads, and lack of traffic signals/laws. There was no “language” for the car (rules of the road…its “grammar”) because the car wasn’t a car, it was a weird new invention only for rich people or technical weirdos.
But within a single decade the auto eclipsed the horse as the #1 form of daily transportation in the U.S. The “phase transition period” from horse to auto was not clean, linear, and smooth but it was fast. It was full of fierce competition, smear campaigns, dead ends, bankruptcies, corporate empire building, and regulatory catch-up. It eventually worked out as the U.S. transportation system is pretty robust. Horse buggy manufacturers that adapted to the new technology thrived (like Studebaker) because they used their resources and economy of scale to adopt and adapt to the new technology rather than ignore it. Manufacturers that held on to their old products with their heads in the sand went out of business.
Auto industry entrepreneurs and innovators had to experiment until they got it right, and “right” was defined by what people wanted (and bought) and what the manufacturers could afford to build. Ahhh, that old supply and demand concept. Bitcoin is to money as the car is to the horse. And the biggest difference between bitcoin and other forms of money is probably its “money supply.”
Bitcoin has a reliable, unalterable method for restricting the supply of bitcoins produced and that method relies on two factors: math and how humans approach financial incentives. So the logic that guides the bitcoin platform lies outside of human psychology — because it is anchored in math — but it accounts for human psychology by considering how humans are motivated by financial incentives.
Bitcoin’s money supply is pre-programmed and inelastic, which are fancy ways of saying that only 21 million bitcoins will ever exist because that is what was programmed into the initial protocol (around 18,380,000 have already been mined), and since it is so difficult to change the protocol and miners are financially incentivized against doing so (more on that in the HOW article), bitcoin will only ever have 21 million full bitcoins as its supply. This money supply won’t change or stretch, it is inelastic.
Bitcoin is Wrangler jeans, it is not stretchy YPJ’s (yoga pant jeans).
A group of people can’t get together and change bitcoin, which is the opposite of what the U.S. federal reserve can do or what the oil-producing countries do with the price of oil. There are literally 7 people on planet earth who have the power to alter the supply of the global reserve currency thereby affecting all global commerce. They are the members of the federal open market committee and consist of 7 of the 12 U.S. federal reserve bank presidents. Believing in this system implicitly means we trust that these 7 people are doing what is best for global commerce.
In contrast, bitcoin is a math-based platform that guarantees certain trust functions not by words on a piece of paper (a policy) or by the promise of a group of humans (an open market committee decision) but by and through mathematics. Verification of the solutions to the math problems that are at the core of bitcoin is done publicly so that everyone can see the process carried out. When a problem is correctly solved, that miner is rewarded with bitcoin deposited to their computer.
Part 2 of Horses, Cars, and Bitcoin — “The What” dives more deeply into the different components of bitcoin. Keep learning, enjoy your journey…
Author Disclosures
1. I own a small amount of bitcoin.
2. I own small amounts of other digital assets, cryptocurrencies, AltCoins, whatever you prefer to call them.
3. I do not claim to be a bitcoin, blockchain, cryptocurrency, financial, technology, or economics subject matter expert. This series of articles is for education, it is not financial advice.
4. I do claim to be a regular guy who is happily married, has two young kids, am a business owner, and am a dude who enjoys BBQ and coffee…and I strongly believe we will all be faced with a Money Matrix Moment within the next 10 years. I prefer to take the red pill and learn the truth about innovation even though being uninformed is so much easier and less stressful.
5. Letting “experts” figure out all of this for me is not an acceptable answer to me. I can enhance my own knowledge, learning, and expertise. That also ties into the bitcoin ethos/spirit of self-sufficiency.
6. My goal is to give readers information to help you make choices that align with your life goals, whatever they may be. You will choose to do what you want with your time and money, and I’ll do the same.
7. Enjoy the journey while you are making decisions from positions of knowledge, strength, and understanding, not fear.
REFERENCES
Ammous, Saifedean. (2018). The Bitcoin Standard: The Decentralized Alternative to Central Banking.
Antonopolous, Andreas. (2016). The Internet of Money: Talks by Andreas Antonopolous.
Ferguson, N. (2008). The Ascent of Money: A Financial History of the World.
https://news.bitcoin.com/3-major-signs-that-precede-the-fall-of-world-reserve-currencies/
https://en.wikipedia.org/wiki/History_of_the_automobile
https://www.scientificamerican.com/article/the-motor-vehicle-1917-slide-show/
PHOTO CREDITS
Bitcoin: The What: Self-created using PowerPoint.
Tommy Boy — Guarantee On Box: https://www.youtube.com/watch?v=mEB7WbTTlu4
Crawl, Walk, Run: http://dentalmethodist.blogspot.com/2015/02/crawl-walk-run-fly.html
Traffic Jam: https://www.detroitnews.com/story/news/local/michigan-history/2015/04/26/auto-traffic-history-detroit/26312107/
