The Case for Bitcoin : Simplified
First things first. This is not an explainer on the underlying technology.
That being said, if you don’t learn/study crypto, it’s going to be a difficult century for you bro.
Lots of misinformation out there about Bitcoin in general. So let’s clean the BS one question at a time.
Basics: Bitcoin does not have any physical backing (Its all a Fugazi)
Yes. Just like Fiat currency. Here’s the twist though — BTC has more inherent value than Fiat.
Consider this. Amazon is a virtual network helping buyers and sellers connect for transactions. But it does not own any of the physical products that are listed on it.
Amazon has a reward points feature which can be redeemed to get discounts, i.e. buy products. Which means that they are a form of money. Bitcoin is exactly the same except:
There is no Jeff Bezos. Bitcoin does not have a CEO.
Why? Because Bitcoin is not a business.
But who owns the network? Everyone who holds Bitcoin.
Wait is this a currency or equity stock? It’s both. Rights to both ownership and usage of the network. You’re both a shareholder and a consumer.
But reward points can be used only on specific products at specific rates decided by Amazon. Who decides here? No one. Buyers and sellers decide by themselves.
Then who maintains the network? Whoever wants to. It’s distributed among miners of Bitcoin.
Who/What are miners? Miners are the people who compete to verify transactions on the network.
Why would they compete to verify? To win mining rewards paid in Bitcoins.
Where do these mining rewards come from? These are new coins automatically issued by the network just like the Government mints fiat currency.
So there is an infinite supply of Bitcoins?
Theoretically, yes. Practically, No. New coins are only created via mining rewards — which decrease by 50% every 4 years. The total possible supply is capped at 21 million.
Wait. So how is this reward decided? What are the rules of mining or transacting?
These rules are fixed and decided based on the open source code that the Bitcoin creators invented. Anyone can join, leave, mine and transact on the networks following this code. All you need is an internet connection.
Is there a team that updates this code regularly?
The Bitcoin core project has been constantly working on improving the system. The community is funded by donations, with many developers also known to own bitcoins. The development work is also posted on Github for everyone to see.
Ok, but how is it’s fundamental value decided? Amazon charges commission for every order and earns revenue and has actual physical assets. What does Bitcoin earn?
1 bitcoin’s value is 1 bitcoin.
Not satisfied? Oh you meant the fiat membership fees you’ll have to pay to join our cult? That depends on how popular our sorority becomes. Seats are limited to 21 million.
Since it’s supply is capped, the valuation will depend on the demand.
Want a minimum value anyway? The average cost of mining per bitcoin was estimated to be $5000-$8000 in 2021.
In a nutshell, it’s future value depends on public adoption. It all depends on whether humanity considers Bitcoin to be a superior monetary system.
That leads us to the next question.
What problems does Bitcoin solve? (Or why should I trade Gandhiji for fairy dust)
Bitcoin is a digital asset which is censorship resistant — its been designed to be out of control of any authority. That means:
It’s global money without national boundaries.
It’s supply cannot be altered, rendering it free from monetary inflation.
Transactions on the bitcoin network can occur without banks.
No one can track the private wealth you store on this blockchain.
Now that it’s theoretical advantages have been outlined, let’s explore the real world problems it solves.
Global Financial Inclusion.
Imagine you’re living in Congo. Your business needs a bank account to start scaling via online delivery services. Uh-Oh! There are no banks available in your village. Maybe there’s one but it charges exorbitant fees as it has no competitors. Also, since this is a small bank in a third world country, you’re unsure whether they’ll run off with your deposits or declare themselves bankrupt in the future.
Enter Bitcoin. Do you have an internet connection mate? Open your account. Here’s your password.
Ok, maybe your bank is trustworthy. Suppose you need to buy some supplies from a Chinese manufacturer. You can only pay him in Yuan. To transfer the money directly, your bank must have a Forex (Nostro) account in Yuan with the manufacturer’s Chinese Bank.
This is not true for smaller/third-world banks. Larger banks don’t maintain Forex accounts for them because of low returns compared to higher risk and costs.
Result? Your bank needs to find a larger domestic bank that has a Nostro account with the Chinese bank. Outcome? Higher processing fees and time.
This is worse if the Chinese Bank is also small and does not have a Nostro account with any bank in Congo. Worst if your transaction was priced in USD(like most foreign trade transactions), because you’ll also have to find a US Bank. More middlemen, higher costs.
The current banking system works against the geographically disadvantaged.
Bitcoin lands on your doorstep. It asks for the account details for the transfer while adjusting its cape. Then it flies off directly to the other side of the world and lands at the payee’s doorstep.
Oh, also Bitcoin is open on the weekends.
Protection against Hyperinflation and Bad Monetary Policies.
Imagine you’re living in Venezuela or Zimbabwe. Your economy has collapsed. The fiat money of your country means nothing. Inflation is at an all time high rising by 20% daily. What will you do?
Bitcoin puts an arm around your shoulder. It tells you that it is limited and predictable in supply and how its value only depends on the demand and supply of real goods in the market.
Don’t live in a third world country? Your government is infallible compared to Venezuela and Zimbabwe? Here’s a crash course in adaptive ecosystemic economics that your favorite economist won’t get.
Wealth inequality exists in your country? Salaries not keeping up with higher profits? Small businesses getting squeezed out by large corporates? Job creation teetering at lower levels?
Welcome to the problem of abundant supply but low demand. The argument against too much inequality is that most of consumer demand comes from spending of wages. If consumers don’t have enough income then who will buy the products that result in higher profits?
Your monetary economist raises his hand. He simply asks the Central Bank to print more money and allow cheap credit to create artificial demand. But what if credit is not repaid? And what about most of that money being spent again to become profits resulting in higher inequality?
The monetary economist lights up his tobacco pipe and in a voice reminiscent of Dr. Strangelove hits you with the punchline: We can always print more money.
The result? Inflation. Which will eventually turn into Hyperinflation.
Bitcoin takes this option out of the hands of government. It forces them to fix the underlying issues of the economy such as more competition and less control.
Either that or they risk losing control of the economy.
*Personally I prefer the second option because free markets without any façade of government control would automatically find a stable equilibrium. Governments create more economic problems under the guise of prosperity and will always be prone to manipulation by powerful interests.
**To the leftists: inflation is mainly a tax on the poor because lower income residents spend a higher proportion of their income on consumer goods.
Why can’t the public act like a watchdog against the Central Banking malpractices? The books of the central bank aren’t available in public domain.
Bitcoin, however has a public blockchain (ledger) that’s open to everyone for examination.
Protecting wealth from political surveillance and upheavals.
Bitcoin helps you to buy and sell anonymously without banks or institutions snooping in. This is simply a question of individual privacy and sovereignty — it’s better left open to your personal opinion.
But imagine that there was political unrest within your country. Syria or Iraq. Or like the partition in 1947. Private wealth maintained on the internet will be immune to losses due to these events.
Afraid that your tyrannical Government will shut down the internet? You can store your bitcoin offline in something called a cold wallet as a file on a flash drive.
And now the final question….
Why Bitcoin will win (Or why the ruling class won’t defeat our cult)
The public trends in favor of bitcoin are unbeatable: internet winning the cultural war, inflation reaching stratospheric levels in many countries, and public confidence in governments reaching an all time low.
However, of course, that isn’t enough to instill confidence.
Let start with a reality check: a lot of top politicians already own bitcoin privately.
But suppose you’re a tax paying politician. You get donations from Banks and Big Finance. They tell you how Bitcoin is a threat to their business. They ask you to ban it or start regulating it immediately. You ask them for policy suggestions. They tell you that they’re still occupied in upgrading the obsolete software of their ATMs.
You go to your policy team. You find out that no one has knowledge of the cryptocurrency technology. Surprised? Most of public policy is handled by graduates in humanities without any expertise in new emerging technologies.
Let’s say you spend huge amounts of money to hire tech geniuses to advise you. Voila! after two years you’ve created an effective plan. You receive a call from your campaign advisors. They inform you that 20% of your voters have already accumulated wealth in crypto. This move will cost you the next election. You start to sweat.
But maybe this is your last term as a politician. You don’t care about the votes anymore. Now you receive a call from your foreign policy advisors informing that a lot of countries have already adopted Bitcoin or are unable to ban it. Banning it domestically would mean your country loses its share of the global wealth derived from accessing a superior network.
You face the prisoner’s dilemma. The concepts of game theory suddenly dawn upon you. You call your friends in finance and invite them for a drink. While sipping Scottish whiskey, you make a case for — ‘If you can’t beat them, join them.’
Your banker friends go back home, open google and search ‘How to buy Bitcoin.’ Or start hiring young graduates with crypto expertise.
Conclusion
‘Do you know that when Bitcoin went from $17,000 to $3000 that 86% of the people that owned it at $17,000, never sold it? Here’s something with a finite supply & 86% of the owners are religious zealots.’ — Stanley Druckenmiller
If you’re sure of the climate, the weather doesn’t faze you.
Unless you’re a leverage trader. Every tiny thunderstorm will seem like a hurricane. NGMI.
You don’t buy bitcoin to sell it later at a higher fiat value. Instead, hope that our fiat membership fees falls so that you can buy more seats(sats) in our cult before it reaches the moon.
Guess the only thing left to ask is… did you buy the dip, anon?
