7 Analogies That Simplify Bitcoin, Blockchain & Other Cryptocurrencies
Hm, maybe this explains it:
That intro was heavily inspired by Rachel Withers, an amazing cryptocurrency and tech writer from Australia. She abhors Bitcoin analogies — or “cryptonalogies” as some have dubbed.
Analogies do become tiresome in the cryptocurrency space. Especially when analogies turn into 3,000-word monsters on Reddit. Additionally many in the community can’t even decide the purpose of Bitcoin: Is it a store of value? No, it’s digital money. How about Web 3.0 or a stance against censorship?
Bitcoin, moreover, cryptocurrency is a bottomless pit. However, along the way you do pick up a few analogies that reinforce complex ideas.
Here are a few important ones—
1. Bitcoin Mining is Like Solving a Rubik’s Cube
Imagine a world where solving Rubik's cubes released tiny bits of gold.
That’s quite honestly how they should function. I’ve only solved one-in-a-half sides ever in my entire life. Meanwhile my Japanese friend’s 13-year-old sister says Rubik’s cubes are a cakewalk…
Anyway solving Rubik’s cubes is essentially what Bitcoin miners do. High-processing computers are solving cryptographic puzzles and their reward for doing this — in a proof-of-work blockchain — is Bitcoin. In fact, even your phone is powerful enough to mine very small amounts of Bitcoin.
A good question I usually get from friends is: Why and how do you mine something online?
Mining is done because it validates every Bitcoin transaction. Miners take turns playing the role of a banker and add transactions to Bitcoin’s ledger, otherwise known as the blockchain. If transactions weren’t verified, or if there wasn’t a financial incentive to verify transactions, the whole system would fall apart.
2. Bitcoin is Gold 2.0
What makes Bitcoin special? It’s a tough question; I’ll have to think of a couple more anecdotes.
What makes Bitcoin special, among other things, is its separation from institutions like the government. After all, 25% of all U.S. dollars ever created were printed in the last year inciting a wave of inflation that will greatly and negatively impact the worth of your dollar.
My dollars didn’t sign up for that.
This is why hedges against the dollar, like Bitcoin, Ethereum or gold, are necessary investments in 2021. What makes Bitcoin better than gold, however, is it improves upon gold’s inherent flaws:
- A Giant Asteroid Strikes Earth: If we discovered a planet massively supplied with gold, or a giant asteroid full of gold hit Earth, gold would be fucked. It wouldn’t be rare anymore. Bitcoin, however, will only ever have a supply of 21 million. By 2140 the last Bitcoin will be mined making it one of the scarcest stores of value on the planet.
- Gold is Awkward: You can easily invest in gold mining stocks, much in the way you can invest in Bitcoin through Robinhood or Webull. However, many gold investors like to hold onto the asset. Unless you’re a supervillain in a James Bond movie, the common person is not storing gold bars in a safe. And compared to having a digital wallet — acquiring gold jewelry also seems antiquated.
- Gold’s Return Isn’t Much: Gold returned 24.6% on investments in 2020. Bitcoin returned more than 200%. Do the math.
3. Smart Contracts Are Digital Vending Machines
Have you ever thought about how a vending machine works?
Money + snack selection = snack dispensed.
It’s stupid simple, except this is not how anything works online, or even in real-life agreements for that matter. We have escrows, middlemen, or employees for when we want to buy snacks, who are there to ensure a transaction is legitimate.
Smart contracts, like vending machines, eliminate the middlemen.
Ethereum, the second-largest cryptocurrency by market cap, was the first to introduce smart contracts. Smart contracts allow for systems to run on their own without any external influence. If you think about it, much of our world is run by middlemen —
- Real estate brokers take a cut for showing you a house.
- Uber drivers give a cut to the company even though they’re doing all the work.
- Voting is overseen by select officials to make sure elections aren’t fraudulent.
This is why instead of decentralizing finance, like Bitcoin, Ethereum aims to decentralize everything.
Social media apps, politics, buying or renting a house, law, art, driving services, and almost every online company can, and most likely will, be affected by Ethereum.
Did I mention I’m bullish on Ethereum?
4. Ethereum is a ‘General-purpose’ Blockchain — It’s like Amazon Web Services
Capitalism is dead. At least how we used to know it.
Current capitalism isn’t so much competing with others as it is working with the competition to build a stronger product.
We’ve witnessed this phenomenon in recent years. Amazon Web Services hosts millions of companies, Microsoft releases a video game streaming service to be played on any computing device.
Ethereum is an extension of this usage case. It’s what Etherum creator, Vitalik Buterin, calls a “general-purpose” blockchain. Like AWS, Ethereum can coexist with many other companies — or cryptocurrencies like Bitcoin.
Coexistence is the future of capitalism.
5. The Blockchain is Like a Chain of Blocks
The blockchain is a metaphor in itself.
Blocks of transactions on the Bitcoin or Ehtereum network are chained together leading back to the first-ever transaction. In the case of Bitcoin, block #0, “The Genesis Block” belongs to its creator Satoshi Nakamoto.
The current Bitcoin block generation time (the time it takes for miners to mine and verify transactions) is 10 minutes. In ten minutes (600 seconds), Bitcoin can average around 3,000 transactions.
That’s God awful when you realize a company like Visa can handle 1,700 transactions a second. This is why Bitcoin has become a store of value and not digital cash.
The title of becoming digital cash is another war being fought in the cryptocurrency space.
6. Bitcoin is Not a Tulip
Ponzi schemes, magic beans, or even tulip bulbs are used to describes Bitcoin’s supposed bubble. The phrase “Bitcoin is dead” has been published roughly 400 times since 2010. Yet today it’s nearing record highs.
Interestingly enough, Bitcoin being referred to as tulip bulbs are a reference to the tulip mania that gripped Denmark’s economy in the early 17th century —
“Over four years, pure speculation drove tulip bulbs to wildly inflated prices, peaking in February 1637 — when a single bulb could sell for 10 times the annual income of a skilled crafts worker — before dramatically plummeting to almost nothing.”
Former president of the Dutch Central Bank and the CEO of JPMorgan, for instance, said Bitcoin is “worse fraud than tulip mania.”In a 2017 Medium post, that’s now deleted, entrepreneur and crypto investor Matt Mihaly argued why the tulip analogy is terrible:
Is bitcoin better than tulips? Hell yes. There’s not even a reasonable comparison to be made. The tulip bulb bubble was bound to burst because tulip bulbs are a terrible store of value. Something that has a limited lifespan, can’t be divided, is not at all fungible, can’t be recognized for its valuable characteristics (unique color variations on the bloomed tulip), and has no historical record of anything approaching stable value is highly unlikely to retain the kind of value that would let someone literally buy a house with a single bulb.
7. Nor is Bitcoin God
It’s easy to get caught up in the Bitcoin madness.
Many successful people whom I admire are avid cryptocurrency believers. Naval Ravikant, Tim Ferriss, Tim Denning, and Jack Dorsey are all extremely bullish on Bitcoin.
However, Bitcoin is not an omnipresent savior of mankind. It’s just the best store of value we’ve had to date. Now Ethereum, that’s God.
All jokes aside, many do treat cryptocurrency and blockchain like it’s holier than thou. This Reddit user for instance:
The blockchain is like if God, who can see everything happen everywhere all at once, was watching all the new gold in the world being dug up, and all the gold that had already been dug up change hands, as people traded it for sheep and swords and things.
The anecdote even has the devil show up as an evil paper-based money system. Sheesh. He’s not wrong though. Paper-based money is satan + demons multiplied by Hitler. It’s scary shit.
Bitcoin and Ethereum may save your life financially; they may enable you to go on new adventures, or they may change technology forever. However, despite all the hype and mania, don’t place Bitcoin above what should, and does matter.
Family, love, companionship. Bitcoin does not provide any of these. How’s that for getting all sappy? The journey for financial freedom ostensibly will enable you to search for deeper meaning in life.
That, in my opinion, is the ultimate purpose of cryptocurrency.
Join 1500+ people on my newsletter for a free copy of my eBook “Mind and Muscle.”