Horses, Cars, and Bitcoin — “The What: Part 2”
You can think of the U.S. dollar as the horse from the early 1900s, a symbol of strength, comfort, trust, prestige, quality, and even nobility
Picking up where we left off…
Bitcoin has a variety of important components including being publicly verified, uncensorable, non-sovereign, permissionless, decentralized, digital, and being hard money with a pre-programmed money supply (discussed in Part 1).
Public verification of solving complex math problems is at the heart of bitcoin. Because the verification is done publicly there is no need for third-party intermediaries (middlemen) to verify what is going on and charge you for their trust. The computer code just does it automatically because that is how it was designed. Bitcoin is also non-sovereign — nationally speaking — because it isn’t tied to a particular country’s monetary system. It operates outside of national sovereignty and serves as its own ruler by simply following the math in its protocol. Just these few features are so different than how we think about money, it is difficult to place them in a money framework in our minds.
You can think of the U.S. dollar as the horse from the early 1900s, a symbol of strength, comfort, trust, prestige, quality, and even nobility. At its stage today, bitcoin is the car of the early 1900s, it looks odd, it is hard to make sense of, most people don’t know what propels it (its engine), it doesn’t feel like money, and the companies that support it (exchanges, financial services) can have technical problems that temporarily stall their services, much like the man in this photo fixing his stalled engine.
Much like the early adopters of cars in the early 1900s — on the side of the road fixing their cars whose engines temporarily stalled — the developers and early adopters of bitcoin (and other digital assets) are building the infrastructure for these tools and are coming up with solutions to the temporary breakdowns in that infrastructure that accompany the emergence of any new technology. The bitcoin protocol, the underlying instructions that govern its process (the most important component), is still intact and unaltered from its original form (the bitcoin protocol has never broken down), it is the exchange companies where people can buy and sell digital assets (i.e., Coinbase, Gemini, Binance) that sometimes have technical issues and temporarily pause trading. This, of course, upsets users/traders/investors, the companies adapt and improve, and these hiccups draw the attention of regulators.
Government officials — the regulators, compliance officers, and legislators who write and enforce the rules for the financial system — are always playing catch up with new innovations because that’s how innovation unfolds. People don’t experiment with new rules and regulatory structures first and then build new technologies to fit them, they do the opposite. So it is normal that regulators (rule enforcers) and legislators (rule writers) will always be hitting the tailwinds of the latest technology. They have a difficult job of trying to create an environment for technology to thrive without stifling creativity. Unfortunately, it seems easier to find instances of when laws and rules have stifled innovation than helped it proliferate. Have you heard of London’s Red Flag Acts from the late 1800s? I couldn’t make this stuff up…
Because people were fearful of the new automobile technologies — because compared to horses they were loud, dirty, and unpredictable — London enacted a series of laws to regulate the emerging tool. One of the laws required in-city driving limits of 2 miles per hour and required a team of operators for a single vehicle: a driver, a navigator, and a person walking out front of the vehicle waving a red flag. Do you think these laws enabled or stifled innovation? This is one of the reasons why you probably aren’t driving a British car, their auto industry did not thrive compared to other countries whose regulatory environment didn’t stifle innovation. When you invent something unique and then society writes rules that restrain or eliminate its uniqueness, it slows down innovation, weakens the scientific spirit of the entrepreneurs and builders, and dries up in-flows of investments. This same scenario could happen in the digital assets/cryptocurrency space, if over-regulated.
There are only 4 options for building out crypto infrastructure: (1) it will organically emerge led by the users in the space based on their needs, (2) governments could stifle innovation by over-regulating, (3) governments create the optimal amount of regulation that allows innovation to flourish and provides protection and clarity, or (4) some combination of these scenarios. I advocate for #1 but realize that #4 is most likely. #3 is a unicorn, a mythical beast that lives only in our minds.
New Tools Get Used In Familiar Ways
The infrastructure will organically emerge led by the very users in the space, if not stifled by governments. As the digital asset (crypto) space matures and is more accepted by regular folks, as it is integrated into mainstream financial systems, and as more money is invested into the space, the efficiency and consistency of the ways that people can exchange and trade their digital assets will continue to improve. The infrastructure will organically emerge, led by the very users in the space, if not stifled by governments. The apps that have been built to allow users to use bitcoin are already solid and reliable and will only get better. If you can navigate a banking app, Facebook, or Twitter on your phone, you can easily do the same with digital assets. In terms of where we are in people adopting/using bitcoin, we are in the Early Market/Early Adopters phase in this image (as of May 15, 2020).
The portability of bitcoin is an important feature because it allows people to move around their money very easily, very quickly, and very cheaply, especially compared to current alternatives. Even with gold (the best “store of value” asset in human history, until bitcoin), buying, storing, and transporting physical gold is difficult. When’s the last time you bought a beer with a gold coin? If you are vacationing abroad (pre-corona), would you pack a suitcase of gold or bring wads of cash and then claim that these assets at customs? With bitcoin, you don’t need to worry about these things.
Decentralized means there are lots of people around the globe running the bitcoin blockchain (nodes) on their computers. The code is free and open-source, you can install it on your home computer and see all the past bitcoin transactions. The “independent verifiability” of every bitcoin transaction that has ever occurred is part of its security strength.
So with bitcoin, what do you actually own and where is it kept? As long as you have possession of your private keys, you own data associated with the bitcoin transaction that your keys unlock. As long as you have your keys, you have outright, sovereign ownership over your bitcoin. This is why you don’t want to store your bitcoin in a wallet on an exchange because technically you do not have total sovereign ownership over that wallet, the exchange does.
Bitcoin Blockchain — A Wall of Glass Doors
Your bitcoin lives on the blockchain, all bitcoin transactions do. Even if you own a “cold storage wallet” like a Ledger, your bitcoin is not stored on those physical devices, only your private keys are. And your private keys prove ownership of certain transactions that have taken place on the blockchain. So if you think of the bitcoin blockchain as a giant wall of doors, like in the photo below, when your key opens certain doors you can verify/see the data from your bitcoin transactions, thereby proving you have ownership of the bitcoin associated with that transaction. Your key is proof of ownership of what’s “behind the door.” It would actually be a better analogy if all the doors in the image were glass doors so that everyone could see the data behind each door because that is how the bitcoin blockchain actually works. And when you have the keys that prove the signature in a bitcoin transaction, you own it, you unlock the door and own the data tied to that transaction. Window shopping is another way to think about it. You can see everything on the other side of the glass but you don’t own it, just like someone running a node on the bitcoin network can see all the previous bitcoin transactions…but if you had the keys to the store then you do own the stuff.
Bitcoin doesn’t need a 3rd party intermediary (middleman) to determine your proof of ownership or hold any money in escrow while a deal is done and then charge you for that “service.” Bitcoin settles on its own. Bitcoin (and gold) are extinguishers of debt, their value is not a liability to anyone else (unlike the dollar), and bitcoin and gold carry no “counterparty risk,” a fancy way of saying that one of the people involved in a transaction could default on their obligation or back out of the deal. Can’t happen in bitcoin once a transaction block is added to the blockchain. The transaction is final and has been independently verified across the network, who can all access the same “wall of glass doors.”
Elastic Complexity = Gets More Difficult AND Gets Easier
Bitcoin’s supply is not just pre-programmed according to the protocol, it is also achieved through a brilliant difficulty adjustment process where the difficulty of the math problems adjusts (harder or easier) based on how many participants are trying to solve the problems. The more miners that join the bitcoin network, the more difficult the problems are to hash (solve), the more miners that leave the network (go offline), the easier the problems are to solve.
This has lead to a bitcoin “block” being added to the immutable (unchangeable) distributed ledger roughly every 10 minutes since bitcoin’s birth in 2009. Remember that the money supply mechanism (i.e., how much is created and when it is created) is rooted in math instead of in human desires based on human analysis. So while the U.S. dollar has an elastic money supply policy that can be flexed whenever deemed necessary by groups of humans (who will always have political motives…human, all too human), bitcoin has a hard money supply policy administered through an elastic complexity policy, which is called the hashing difficulty adjustment process.
As bitcoin’s price/value rises and more miners join the network, and they do this because they are incentivized to earn a larger financial reward (higher priced bitcoin), then more effort goes into trying to solve the more difficult math problems. This process does NOT lead to the creation of more bitcoin. The difficulty adjustment process — which is built into the protocol/code — prevents more than 21,000,000 bitcoin from ever being created and from being created too quickly. The final bitcoin will be mined in the year 2140. In short, growth in bitcoin’s value per coin cannot increase its supply, it is the hardest money ever created, even more hard than gold because bitcoins supply has “math-based absolute scarcity.” Gold has “relative scarcity” because it is scarce only because it is difficult to mine. But theoretically, there is a lot more gold buried on the earth.
Bitcoin is censorship resistant. Outside of torture/coercion, no person or government can control when, where, or how it gets used. Bitcoin doesn’t depend on access codes or passwords to remain secure, the network security depends on a mathematically sound formula distributed on computers spread around the world with clearly articulated incentives and rewards.
Bitcoin is permissionless, there is no central authority that you have to get permission from to join the network. There is no form to fill out — if you have the ability to buy some bitcoin, you are automatically part of the network. The answer is always, “Yes, please join the network, open a node, start mining, start buying/selling…participate, innovate, and enjoy.”
Here’s that fancy counterparty risk term again. This is how banks think of their customers, as counterparties who may default on their loans, so they build in additional charges in case that happens. You pay those fees whether you default of not. Bitcoin doesn’t have this because there is no counterparty risk with bitcoin, it automatically settles a transaction. It is final. Signing a bitcoin transaction with your private key allows everyone on the network (operating nodes and/or mining bitcoin) to independently verify your transaction and add it to the bitcoin blockchain (unchangeable ledger). Once a transaction block is added to the blockchain, it is immutable, it is final, it is settled.
Jargon = Bitcoin converts energy into truthful, undisputable records using computing processing power based on pre-programmed mathematical algorithms.
Translation = Bitcoin is a set of instructions coded into software that uses math to turn electricity into unchangeable facts (truth) that are written in a log shared on thousands of different computers and anyone can view and verify the log for free.
Making change to the code is very difficult because it requires gaining consensus from every developer on the global network, where they all adopt the same changes to the software. Outside of the difficulties of changing bitcoin code having to do with decentralization and gaining consensus from the dispersed developers, it is also difficult because of how the financial incentives are built for the miners. Bitcoin has an extremely strong status quo bias, staying true to the original protocol/code and the slow pace at which the network operates is actually what gives bitcoin its strength. Abiding by the protocol and consensus rules (getting everyone to agree on any changes to the code) is what maintains the network, expands the value, and follows the protocol to keep the money supply capped. Bitcoin is tortoise, cash is hare.
Horses didn’t go out of style due to any fault of their own, they didn’t get slower, they didn’t get more expensive, they didn’t all die off. Horses went out of style because humans invented a better solution to the problem of transportation and most humans made the choice to use that solution instead of horses. In its first 20 years, the new transportation solution wasn’t pretty, clean, or smooth — that’s because the autos had to operate on the infrastructure built for the old technology (horses). This is where bitcoin is today. Still bumpy but building a lot of momentum.
In just 10 years, cars replaced horses as the standard form of transportation in the United States. The 2020s will be the decade where a financial infrastructure inversion occurs, where digital assets (public and private) take off, and where the 100-year money storm rains down hail, thunder, and lightening as the global reserve currency evolves beyond the U.S. dollar.
According to Alex Machinsky, an inventor of VOIP (voice over internet protocol) and the founder and CEO of Celsius, an online financial services company allowing users to earn interest and make loans using their crypto as collateral, “There will be three horses in the monetary race to create the future of money: (1) government-sponsored unlimited supply coin (like what we have with the U.S. dollar but digital), (2) corporate-sponsored permission-based blockchain (like Facebook’s Libra), or (3) an open blockchain (like Bitcoin). If you pick the wrong horse here, the dollar ends up falling off a cliff. The world economy is going to adopt one solution to replace the old U.S. dollar.” Bitcoin is a strong option but other assets could be (and will be) invented that could also fill that role. What horse will you back?
So for all the bitcoin and crypto haters, doubters, or “I’m just not surers,” here are some useful questions to ask yourself (and honestly answer):
- In terms of financial evolution, what are you against? Jot down your ideas.
- What do you know about how bitcoin/digital assets work?
- How much time have you devoted to learning about these new technologies?
- Does living a “meaningful life” collapse for you if the U.S. dollar is not the global reserve currency?
- What if a new tool could serve as our money system in a different and better way?
No more dishonest horse trading because bitcoin has removed trust from its system, or at least what users are trusting (math) has shifted to something with less opportunity for a small group of humans to manipulate. The main source of dishonest horse trading going on is what’s happening at the U.S. federal reserve and other central banks. The people there aren’t bad, immoral, or conspiratorial agents and I realize they view themselves as the good guys (as we all view ourselves as the “good guys”), they just happen to work for an organization whose policies and mandates have outlived their use. The federal reserve’s “consume by” date is expiring and their product is souring.
More questions than answers? Good, that shows intelligence and curiosity. So keep learning to find fact-based answers to your questions and the next few articles in this series will give you some of that information.
“Never look a gift horse in the mouth” means that you shouldn’t criticize gifts that you receive from others, but that’s exactly what I want you to do with bitcoin. Because this gift — from an anonymous donor — should be explored and discovered on your own terms. Ask questions…but don’t confuse a lack of knowledge or a strong feeling of not wanting to change your financial behaviors as a problem with the tool. That would be rejecting a potential solution or tool out of ignorance (not knowing) and feelings of inferiority (not knowing the jargon). Two things happen in this scenario: solid decisions are rarely made and many opportunities are missed. Make financial decisions from solid information and facts, not fear.
Don’t get caught out on your horse in the rain.
Check out the next article in our series: The WHY of bitcoin.
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://en.wikipedia.org/wiki/Locomotive_Acts
https://www.scientificamerican.com/article/the-motor-vehicle-1917-slide-show/
PHOTO CREDITS
Horse and Car: http://austintexas.gov/blogs/Communications/346/Then-and-Now%3A-The-Austin-City-Council
Technology Adoption Lifecycle: https://www.youtube.com/watch?v=84S8O7xILGM
Wall of Doors: https://www.pinterest.com/pin/211176669997001431/
Bitcoin Tortoise: https://steemit.com/bitcoin/@attalis/is-antpool-deliberately-delaying-bitcoin-block-times
Horse Carriage and Car: https://sites.google.com/site/motormiscellany/motoring/motor-cars-and-horses
Bitcoin: The What: Self-created using PowerPoint.
