Bitcoin as a transcendent, egalitarian force for human flourishing
Bitcoin is both difficult to see and impossible to unsee once discovered.
This is an essay I published a few weeks ago on a couple of outlets. I had not planned to share this on Substack. However, the news this week that El Salvador became the first sovereign nation to pass a bill designating bitcoin as legal tender was so momentous that I felt compelled to publicize this essay, as it’s something I’m proud of, having put a significant amount of time and energy into researching and writing it. A health warning - it runs to 8,500 words, features 59 footnotes, and relies upon 36 unique sources.
I have spent hundreds of hours studying Bitcoin. It is probably the most intellectually engaging multiverse of ideas I have encountered. However, I would like to say that there is a non-zero possibility that it could all turn out to be a >trillion dollar Ponzi scheme, which would be particularly ironic for me given that I have worked on the biggest Ponzi scheme in financial history in my professional life (the Bernie Madoff fraud). Bitcoin raises a lot of red flags in the first instance, and the wider crypto space is plagued by bad faith scammers and snake oil salespeople.
Yet I’m willing to take that risk, because I am unbelievably enthused by the liberating, human rights potential of Bitcoin. That is why I wrote this essay, why I’m sharing it with you, and why I intend to continue to devote much of my time to this paradigm shifting technology.
Financial Disclaimer
This essay is for educational purposes only. It does not constitute investment or financial advice. It is a technical explanation of a complex phenomenon that demands your own self-education and deep learning before committing any financial energy towards. Determine your own risk/reward tolerance.
Reader Presuppositions
This essay is intended to act as a conduit to the expansion of your understanding of Bitcoin, perhaps even facilitating a journey down the proverbial rabbit hole. I believe that most of the value in writing this comes from compressing and collating the best information that is already out there in the Bitcoin ether, filtered through the prism of my own knowledge base. This explains why I have so thoroughly referenced the resources relied upon, so that you can bookmark them for future educational reading.
This essay should be a springboard to you taking responsibility for your own understanding of Bitcoin. I felt compelled to write this at this particular moment in time because I am concerned that Bitcoin’s narrative is being hijacked and misconstrued. Bitcoin has the potential to liberate billions of human beings from monetary and political tyranny, and I am fully invested in seeing this paradigm-shifting progression for humanity come to fruition.
Acknowledgements
I want to thank those friends of mine who provided editorial commentary, proof-reading and generally added their nuanced analysis and intelligent feedback.
I would also like to thank all of the heterodox thinkers – past and present – who helped enlighten me about Bitcoin through their writing and public enunciations.
And finally, I acknowledge the great legacy Satoshi Nakamoto has provided to humanity, immortalized by their anonymity and their decision to refrain from personal acclaim. This is an inherent part of the Bitcoin story.
Table of Contents
1. Introduction
2. What is Money?
3. Origin Story
4. Public Keys and Private Keys
5. Technical Properties
a) Portable
b) Durable
c) Programmable
d) Verifiable using Proof of Work
e) Fungible
f) Scarcity
6. Philosophical Properties
a) Decentralization of Power
b) Censorship-Resistant
c) Freedom and Human Rights
d) Eliminating Counterparty Risks and Third Party Intermediaries
e) With Individual Sovereignty Comes Individual Responsibility
7. The Primary Function of Bitcoin: A Store of Value
8. Potential Secondary Functions
i. Medium of Exchange
ii. Unit of Account
9. Features Propagating Bitcoins Growth
a) Network Effects and Metcalfe’s Law
b) Bitcoin as Religion
c) Elite Derision
10. Conclusion – Gradually, Then Suddenly
Bibliography
Introduction
Bitcoin is both difficult to see and impossible to unsee once discovered[1]. It is an anti-entropic, anti-fragile, incorruptible, immutable, permissionless, programmable, censorship-resistant, seizure-resistant, borderless, agnostic, egalitarian, pseudonymous, and peer-to-peer technological form of energy – the likes of which our species has never experimented with in all of human history.
My journey to understanding Bitcoin[2] has ebbed and flowed; been continuously fascinating, yet at times challenging. It takes time to ‘get it’, which means seeing it as much more than a speculative financial investment. Bitcoin requires first principles thinking and demands deconditioning oneself from the pervasive monetary assumptions that have been inculcated through decades of ideological hegemony by legacy political and financial institutions. Like any process of unlearning, there are peaks and troughs as spectacular as bitcoin’s price chart.
“The difficulty lies not so much in developing new ideas as in escaping from old ones” – John Maynard Keynes
What makes Bitcoin so interesting is that it encompasses such a broad array of areas – economics, philosophy, politics, psychology, cryptography, computer science, and game theory – to name but a few, and necessitates first principles thinking to quest
ions like:
▪ what is money?
▪ how do we transfer energy across space and time?
▪ who should control the supply of money?
▪ what does it mean for an individual to be ‘free’?
“People that store wealth in bitcoin are forced to think through first principles in order to understand characteristics of bitcoin which otherwise seem, on the surface, to contradict an establishment view of money, which ultimately hardens convictions.[3]” – Parker Lewis, Unchained Capital
The gateway for most people into Bitcoin is its eye-catching appreciation in fiat currency value over a relatively short period of time. Many initially perceive it to be a ‘get rich quick’ pump and dump type opportunity, or perhaps they buy into the portrayal of it as a Ponzi scheme.
Of course, these contentions cannot be refuted by falsification. There is a non-zero chance that such predictions could manifest themselves in the future. If they do, it almost certainly will not be because of a fundamental flaw in the Bitcoin protocol. It will be because the ideological battle to control the narrative of what Bitcoin is and can become will have been lost. Even though Bitcoin relies on the immutable, objective, binary, mathematical laws of code, it requires adaption and acceptance through the prism of fallible, irrational, subjective human minds.
Once an individual begins to acquire deep understanding of the technical foundations of Bitcoin, they realize that they are engaging with a paradigm-shifting technology that will likely revolutionize the world we inhabit. It's “a chance for random bystanders to hang out with problems on the edge of human understanding, because nobody cared about these problems before there was so much money floating around in them”[4].
In terms of understanding, my anecdotal experience and non-scientific empirical evidence[5] is that the critical mass for appreciating and understanding Bitcoin in the first instance requires about ~40+ hours of learning, and then maybe ~100+ hours before true understanding – for many, Bitcoin maximalism – might be achieved (crude and oversimplified approximations). Bitcoin is easily one of the most intellectually fascinating topics I have ever engaged with. I hope this article proves a launching pad for your own intellectual engagement.
What is Money?
“Bitcoin is perhaps best described as a revanchist movement, aimed at taking back what certain developed countries once had: a system of free and unconstrained banking based on a gold standard” - Nic Carter[6]
Money is energy[7].
Imagining every human interaction as an exchange of energy is mind expanding. The food you consume in order to provide energy to your body for biological survival is usually purchased with fiat currency, which itself was acquired through the sacrifice of energy through your valuable and finite time. We operate within in a wordl constrained by the physical laws of thermodynamics, the first law stating that energy cannot be created or destroyed but can only be converted from one form to another. Trade-offs are merely the choice of where to allocate one’s energy.
Human progress and human flourishing tend to have linear relationships to energy usage in their initial stages of growth – hence why China and India’s energy usage is increasing as they transition to developed nations – although this linear relationship can be offset by subsequent technological and entrepreneurial innovation.
In the earliest human societies, trade between groups of people occurred through barter. The incredible inefficiencies inherent to barter drastically limited the scale and geographical scope at which trade could occur. A major disadvantage with barter based trade is the double coincidence of wants problem. In order for me to acquire your wheat, I have to hope that you demand a corresponding amount of the apples that I have produced, in an amount that is equivalent and mutually advantageous. This double coincidence of wants is rare and does not transfer well beyond individual transactions.
A more formal definition of money might be that it is an information system that records and updates who has done work that is valued by others, such that credit can be universalized and socially scaled[8]. The solution provided by Bitcoin is in some sense the purest yet conceived, in that it captures this information as speech[9] in the form of code, verified on the blockchain.
Technology is increasingly trending towards the digital over the analog, and Bitcoin is a natural evolution in the decoupling of our monetary system from the physical world into the realm of bits, which rely upon the incorruptible laws of mathematics and code rather than arbitrarily created human laws and customs.
Origin Story
The Bitcoin whitepaper published by Satoshi Nakamoto in 2008 is an extraordinary relic of history, particularly if one reads it not with modern hindsight but from the foresight of a 2008 perspective. Its immaculate conception serves as the foundation upon which the protocol sits, and the ideals outlined in this whitepaper are what make Bitcoin the force it is today.
Satoshi’s continued anonymity and retreat from all public engagement is one of the most significant contributions towards Bitcoin’s emergence as a decentralized life force. Any technology or organization that relies upon a centralized figurehead is doomed to succumb to the cult of personality. Power corrupts, and absolute power corrupts absolutely. One of Bitcoin’s great strengths is its absence of any figurehead. There are individual acolytes who propagate the Bitcoin ideals, but no one person commands sovereignty over the protocol, no matter how powerful or wealthy they are.
Public Keys and Private Keys
Bitcoin relies upon public-key cryptography. This means that bitcoin owners are assigned both:
§ a public key – which is used by the protocol to prove you own bitcoin; and
§ a private key – this generates the public key and acts as a kind of password that guarantees that an individual’s bitcoin can only be accessed securely. It is not possible to determine the private key by examining the public key, by the reverse is of course an inherent feature.
The generation of such key pairs depends on cryptographic algorithms which are based on mathematical problems, termed one-way functions. Effective security requires keeping the private key private; the public key can be openly distributed without compromising security[10]. Individual privacy can still be maintained by keeping public keys anonymous. Others can see that a particular public address is sending an amount to another public address, but without information linking the transaction to a specific identity[11].
Private keys control access to the Bitcoin network, and in order to transfer any bitcoin, valid cryptographic signatures must be created with a private key, which the rest of the network then verifies. By holding private keys, counterparty risk is eliminated and permissionless access to the network is preserved. Hence the maxim, “not your keys, not your coins”[12].
Technical Properties
“Bitcoin is not a list of cryptographic features, it's a very complex system of interacting mathematics and protocols[13]” – Nick Szabo
a) Portable
Bitcoin operates in cyberspace, meaning that it can transcend the physical limitations of time and space. Private keys can be stored on a USB drive and easily carried anywhere. Private key recovery phrases can even be committed to memory by an individual so that they needn’t carry anything on their person, which might prove useful in circumstances such as crossing a hostile border or escaping a tyrannical dictator.
Valuable sums of bitcoin can be transmitted between people on opposite ends of the earth almost instantaneously. Although fiat currencies are also highly portable in their digital form, government regulations and capital controls mean that large transfers of value usually take days to settle, or may not be possible at all.
Traditional commercial banks are also notoriously slow at honoring transfer and settlement requests and are constricted by archaic 9am-5pm, Monday-Friday work schedules; in contrast, the internet never sleeps. This expands the window for commerce from 35 hours to 168 hours per week (a ~5x increase).
b) Durable
Bitcoin is not perishable, it is very difficult to confiscate, and it cannot easily be destroyed (although it can be hacked or stolen if not properly custodied). Despite prominent instances of nation-states attempting to regulate Bitcoin and years of attacks by malicious actors, the Bitcoin network has continued to propagate. It has survived countless events that many predicted would signal its demise – the Mt Gox theft in 2014, the Bitcoin Cash fork in 2017, various bear markets, the COVID-19 pandemic in 2020, the hash rate outage in Xinjiang in 2021, Elon Musk tweets – amongst many other events.
Bitcoin embodies the Lindy Effect, which observes that the future life expectancy of a non-perishable technology is proportional to its current age, meaning that the longer something has survived, the greater its remaining life expectancy. Where the Lindy Effect applies, mortality rate decreases with time. Bitcoin’s perceived value as a digital asset and store of value will only continue to increase as its time in existence perpetuates beyond its current 12 year history.
c) Programmable
“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime”[14] – Satoshi Nakamoto, 17 June 2010
Code – which both Bitcoin and the Internet run on – is a form of speech. Mathematics is a language that objectively corresponds to the fundamental nature of reality, independent of human subjectivity. Money is a linguistic tool we use as a means of expressing value to each other and as a way to transport value through space and time[15]. Therefore, Bitcoin as money through code is the most efficient and immutable kind we have ever discovered or created, and any limitations implemented against Bitcoin ought to be viewed as a restriction on freedom of expression. The fact that the Bitcoin protocol cannot be tampered with vis a vis its original conception provides a security and certainty that other altcoins cannot match.
d) Verifiable using Proof of Work
Bitcoin ownership can be publicly verified with mathematical certainty using cryptographic signatures. The use of a peer-to-peer network avoids the ‘double spending’ problem that can hinder electronic payments. Computers running the software, called nodes, review transactions to ensure the software’s rules are being followed. Nodes using special computer chips, called miners, then compete for the right to batch these transactions into blocks, which are added to the blockchain every 10 minutes[16]. Nodes work all at once with little coordination, enforced by consensus mechanism. Thus, the network “is robust in its unstructured simplicity”[17].
The nodes compete to solve mathematical problems that are hard to solve but whose solution is easy to verify[18]. The network timestamps transactions by hashing them into an ongoing chain of proof-of-work, generating a computational record of the chronological order of transactions, which cannot be changed without redoing the proof-of-work. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of central processing unit (“CPU”) power. Miners are incentivized and remunerated with transaction and block fees. These incentives make dishonesty extremely expensive and ensure the integrity of the network. To modify a past block, a malicious attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes[19].
No doubt, proof of work has its downsides. “It’s ugly to make your network’s security depend solely on having more brute-force computing power than your opponents, ugly to need now and in perpetuity at least half the processing power just to avoid double-spending[20]”. There are many easier and less cumbersome ways of recording transactions, but Bitcoin is a system built entirely on cumbersome and expensive verification so that it can eliminate the need for any trust or accountability between all parties: it is 100% verification and 0% trust[21]. Analogous to Churchill’s dictum on democracy, it is the worst form of verification – except for all the others.
e) Fungible
Fungibility is a requirement of any medium of exchange, meaning that each coin is the exact same – in both type and value – as any other coin and is therefore indistinguishable, replaceable, and interchangeable. If you swap one US dollar for another US dollar, there is no loss or gain in type or value (assuming the physical note isn’t a counterfeit). Bitcoins are perfectly fungible strings of bits.
f) Scarcity
Scarcity is perhaps the most important attribute of a store of value as it taps into the innate human desire to collect that which is rare. A monetary good must have “unforgettable costliness”[22].
One of the great visionary decisions of Satoshi Nakamoto was to create an eternally finite supply of 21 million bitcoin. Humanity has never engaged with an absolutely scarce, perfectly inelastic supply of monetary energy before. At the same time, a bitcoin is highly divisible into 100 million units (8 decimal points), known as satoshis or sats. This will prove useful as more and more people adopt Bitcoin as a monetary standard.
How is this guaranteed scarcity achieved? The number of bitcoin released in each block is cut in half roughly every four years to keep the total supply finite, in an event known as the halving. This gives the owner of bitcoin a known percentage of the total possible supply. For instance, an owner of 1 bitcoin would know that at most 21 million people on earth (less than 0.3% of the world’s population) could ever have as much bitcoin as they had[23].
This feature is more relevant than ever as a result of governments’ increasing proclivity to inflate their money supply to solve immediate problems, incentivized by short-term election cycles. The inflationary tendencies of governments across the world leaves owners of fiat currencies facing a reality of devalued savings and diminishing purchasing power year on year. In 2020 alone, 22% of all US Dollars in circulation were printed[24]. Not only does this disproportionately negatively impact the non-wealthy classes – since they own less or no assets, which act as a hedge against inflation – but it is the elite insiders who acquire the early benefits from any increase in money supply, in a phenomenon known as the Cantillon Effect, as they are “close to the money”.
This unhinged expansion of the money supply is largely the product of the economic ideology that has taken hold across the world. Modern Monetary Theory (“MMT”) is a macroeconomic theory that conceptualizes currency as a public monopoly, and views unemployment as evidence that central banks are overly restricting the supply of currency. Whilst devaluing a currency through printing may make a country nominally richer, and exports cheaper, it does nothing to make the country more prosperous[25].
MMT is itself considered a restatement of elementary Keynesian economics, which at its core necessitates ever-increasing aggregate demand through consumer spending. It served as the standard macroeconomic model in the developed world during the latter part of the Great Depression, World War II, and the post-war economic expansion. Bitcoin embodies the principles and ideals of the diametrically opposed heterodox thinking of the Austrian School of economics[26].
Philosophical Properties
a. Decentralization of Power
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.” – Satoshi Nakamoto (February 11th, 2009)
The legacy monetary and financial system is built on a centralized and permissioned set of security principles. It is a system built on trust, and counterparty risk has become an inherent consequence[27]. In contrast, Bitcoin is built on a decentralized and permissionless set of security principles. Hence the Bitcoin mantra, “don’t trust, verify”.
Bitcoin is thriving without any central coordination, and it is the lack of central coordination that gives bitcoin its lifeblood; decentralization not only allows Bitcoin to function, but it is also what causes it to gain from stressors[28]. Since its inception in 2009, Bitcoin has withstood a myriad of attacks and challenges, and evolved as a result to become stronger and more resilient. It is, in the words of Nassim Nicholas Taleb, antifragile.
“…Incentives and accountability optimize for innovation and naturally drive toward consistently better outcomes in aggregate. It doesn’t eliminate error, but it ensures that errors are productive, as the mere fact of survival affords that the network as a whole has the opportunity to adapt to threats and to immunize around them. Whether borne from exogenous shocks or internal errors, bitcoin feeds on disorder, stressors, volatility and randomness, collectively a hallmark of an antifragile system[29]” - Parker Lewis, Unchained Capital
The decentralized bitcoin ecosystem mirrors the parsimony, interdependence, and complexity of the human biological ecosystem. Bitcoin’s fragmented power structures render it immune to attacks or single points of failure. As the network becomes more decentralized over time, it also becomes resistant to threats it may not have been capable of surviving in prior states, as it adopts to Darwinian evolutionary pressures. Our immunity depends on the complex network of information distribution and communication, with the nodes in the Bitcoin network akin to the nerves in the body, sending signals throughout the system in real-time, providing valuable feedback and information that maintains the vitality and integrity of the whole system.
b. Censorship Resistant
“That bitcoin is natively digital and powered by computers running software capable of being shut down lends to the default impression that bitcoin is inherently fragile. The mental image of a computer network being unplugged creates the false sense that one day and suddenly, somehow bitcoin as a system could cease to exist when the opposite is true for the very same reason. That bitcoin both exists everywhere and nowhere, that it is controlled by no one, that anyone is capable of running the open source software from anywhere, and that hundreds of thousands of people do, relied upon by tens of millions (and growing) is what gives bitcoin permanence. With no single point of failure, bitcoin is practically impossible to stop because it is impossible to control, and it is a dynamic system that only becomes more redundant and further decentralized in time and with increasing adoption[30]” – Parker Lewis, Unchained Capital
As a distributed peer-to-peer network Bitcoin is simultaneously “everywhere and nowhere”. If certain jurisdictions seek to impose sanctions or regulations that inhibit the incentives to mine or trade bitcoin in that particular jurisdiction, it would incentivize other countries to play game-theoretic geopolitics and become a haven for the digital asset (notwithstanding the fact that the Internet itself transcends national borders and exists in an unbounded world).
Even if a whole bloc of political entities were to collude to collectively ban bitcoin, it is possible for individuals to set up their own nodes on the blockchain. China and India have both taken material actions to curb the spread of bitcoin. Despite this, the network as a whole continues to function without flaw, and bitcoin continues to be used in both countries. When the Central Bank of Nigeria issued a circular in February 2021 warning banks and financial institutions that facilitating payments for cryptocurrency exchanges was prohibited and that they needed to identify and close accounts associated with them, the level of bitcoin activity in Nigeria actually increased[31].
Censorship resistance means equality of participation for all, since characteristics traditionally relied upon as a basis for arbitrary discrimination are decoupled from the Bitcoin protocol. Anybody can participate in the market without needing permission from a centralized body. The political games and nepotism of our current system will be bypassed by the agnostic, nondiscriminatory blockchain. The actor Terry Crews noted that when he used bitcoin for transactions, the other party doesn’t care about the color of his skin, only the authenticity of his coins being transacted. Anecdotally, I read on Twitter of a Palestinian girl in Gaza that was evading the Israeli blockade by getting paid in bitcoin for coding. This would simply not be possible without a peer-to-peer network.
c. Freedom and Human Rights
“As a currency which deliberately expunges any notion of identity, supporting the transactions of dissidents has always been at the core of bitcoin. At a time where financial infrastructure is increasingly politicized, and individuals risk getting unbanked or “derisked” from banks and payment processors for expressing disfavored political views, Bitcoin is rightfully gaining usage as a censorship-free payments medium.[32]” – Nic Carter
The Nobel economist Paul Krugman once described Bitcoin as "some fancy technological thing that nobody really understands. There's been no demonstration yet that it actually is helpful in conducting economic transactions. There's no anchor for its value[33]". Krugman lives in a sheltered environment in a liberal democracy with constitutional protections[34]. His native currency, the US Dollar, is globally dominant and relatively stable. It's easy for him to open a bank account, to use a mobile app to pay bills, or to grow his wealth by investing in real estate or stocks without fear of confiscation.
In contrast, Bitcoin is increasingly being leveraged to challenge authoritarians around the world and to protect oppressed and marginalized groups, such as:
Nigeria
In August 2020 the Feminist Coalition in Nigeria, aimed at promoting women’s rights, offered help to protestors that demanded the dismantling of the Special Anti-Robbery Squad (SARS), a violent police subdivision. During the widespread #EndSARS demonstrations, people were arrested and killed. The Feminist Coalition helped with medical care, legal aid and funeral funding. After the local payment platform in Nigeria stopped servicing the organization, it switched to bitcoin donations. According to the Coalition’s own report[35], by October 2020 it had raised almost 12 BTC (about $155,000 at the price on that day). The report outlines the trail of funds on the blockchain in order to give credence to the Feminist Coalition’s transparent use of funds – the report makes for fascinating reading.
Belarus
In 2020, protests erupted as a dictatorial president, Alexander Lukashenko, attempted to hold on to power by stealing the election with a rigged vote. These protests were met by violent crackdowns and internet shutdowns. BYSOL, a non-profit started by a group of tech entrepreneurs, was established to help people who were fired in retaliation for showing their political stance or who quit their government jobs in protest. BYSOL distributed more than $2.3 million in donations, all via bitcoin, to a thousand people across Belarus[36]. BYSOL partnered with By_help, helping people arrested during the rallies to pay court fines, and a peer-to-peer network Honest People, where users could send money directly to the people in need, verified by volunteers.
Argentina
Argentina – a country with a 30 year history of crippling hyperinflation and a deflating currency – has recorded a 10x increase in the number of user accounts for investing in cryptocurrencies since 2020[37]. Argentines from all backgrounds and age groups are getting on board, with investments possible from a single peso.
Greece
In 2015, the Greek government defaulted on its scheduled debt payment to the International Monetary Fund. In response, the Greek government imposed stringent capital controls on its citizens, such as €60 daily limits on ATM withdrawals. Debit cards were still permitted to be used for payments within the country, but the money was simply transferred from one frozen bank account to another. As a result many businesses no longer accepted debit cards, and many more demanded a substantial premium price for debit cards over physical cash. When capital controls were announced, vast lines formed at ATMs as Greeks rushed to rescue what little of their life savings that they could. Use of credit and debit cards to pay out of the country were banned, resulting in a near-complete freeze-out of Greeks from Internet commerce. This restriction, along with the controls resulting in Greeks being excluded from the pan-European money settlement system, meant that Greek businesses couldn't pay for imports[38].
“Opponents must be forced to explain what is wrong with people interacting freely, and why true goodness can only follow from coercion, in their understanding.” – Allen Farrington
What these few examples show is that Bitcoin can act as a bulwark against hyperinflation, oppressive capital controls, and tyrannical regimes across the world. By endowing the individual with sovereignty and autonomy through a peer-to-peer network, it can liberate oppressed and marginalized groups. For activists living under state repression, Bitcoin provides a way to preserve their money in cyberspace through encryption[39].
Most of the conversation in the privileged Western world surrounds Bitcoin as a speculative investment, but the real story is in its enormous human rights potential for liberation. This is the unheralded part of Bitcoin’s story.
"Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as a get-rich-quick scheme." – Naval Ravikant
d. Eliminating Counterparty Risks and Third Party Intermediaries
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.” – Satoshi Nakamoto, Bitcoin Whitepaper
The Latin word fiducia – from where we get our modern word fiduciary – means trust. Trust is one of the oldest ways to ensure that an agreement is honored. However, as the scale of transactions goes beyond the immediate one-to-one level of abstraction, trust becomes a poorer mechanism of enforcement as the downsides of breaking trust aren't as immediately obvious (notwithstanding the game theoretic implications of this strategy), especially if the parties are transacting once off.
Hence, we have developed contract law and other statutory/common law protections to enforce agreements between parties transacting at arm’s length, which act as a bulwark against bad faith on the part of either side. This has created a huge marketplace for legitimate and useful services provided by third party intermediaries. The problem with these are that:
a) the third party intermediary will require a fee for this service, which can be extortionate under conditions of monopoly or oligopoly or simply too expensive for most people; and
b) both parties will need to agree upon and trust the third party intermediary itself (a meta consideration).
“Never in the history of the world had it been possible to transfer value between distant peoples without relying on a trusted intermediary, such as a bank or government” - Vijay Boyapati[40]
Technology like smart contracts are already alleviating the need for these third party intermediaries. They do so through a set of conditional requirements that then trigger automatic execution when those particulars arise. Whilst these smart contracts tend to run on the Ethereum protocol – which has many exciting potential application uses in the DeFi space – Bitcoin also alleviates the need for third party intermediaries in a different realm, through direct peer-to-peer transactions.
“Financial institutions make people feel safe by hiding risk behind layers of complexity. Crypto brings risk front and center and brags about it on the internet” – Elaine Ou[41]
The beauty of this disintermediation is that the finance and banking sectors will no longer reside at the epicenter of the economy but, instead, will sit alongside every other industry and directly compete for capital in a more socially and economically valuable way[42]. In a world that operates on the Bitcoin standard as the reserve currency with sound money, the banking sector will continue to act as custodians for assets, and provide investment advice, but in a manner where they have ‘skin in the game’ rather than under the current system where they outsource their losses to the State under the guise of being “too big to fail”. Bitcoin – and in particular the concept of Proof of Reserves being advocated in some quarters – removes the liquidity and solvency risks underlying all financial institutions today. The privatization of gains and socialization of losses will be eradicated. It is no coincidence that Satoshi released the Bitcoin whitepaper in the aftermath of the 2008 financial crisis.
“As Bitcoin is a digital bearer asset and not a debt instrument, its natural state of safe custody is outside financial institutions. Also, without the ability to mint new Bitcoin as and when politically convenient, deposit insurance is impossible and loan origination requires the prior provision of liquid capital. Hence prospective intermediaries would not be able to guarantee investor protection from loss arising from the debtor’s activities”. – Allen Farrington
e. With Individual Sovereignty Comes Individual Responsibility
At all times, network participants are maximally accountable for their own errors. There are no bailouts[43]” – Parker Lewis, Unchained Capital
Each participant is entirely responsible for the security of their bitcoin holdings. They can choose whether to trust a third-party exchange/custodian, or take responsibility directly through self-custody, or alternatively a hybrid approach like multisignature wallets.
Unlike fiat currency, self-custody doesn't entail storing hard cash under a mattress. Rather, it involves taking bitcoin off of third party exchanges and into offline cold wallet storage. The downside risk to this level of responsibility is that there is zero recourse if something goes wrong, so it is essential that individuals conduct extensive due diligence and acquire understanding of these technologies before custodying their bitcoin.
The Primary Function of Bitcoin: A Store of Value
“Bitcoin is a digital, scarce store of value[44]” – SEC Chairman Gary Gensler
People have criticized the volatility of bitcoin’s price. This presupposes that volatility is inherently a bad thing. Price – and price volatility – is a mechanism for information exchange, providing long-term stability and equilibrium. The volatility witnessed today is nothing more than the logical path of price discovery as adoption increases by orders of magnitude and as we advance toward that future state of full adoption[45]. Stability in the value of bitcoin will only be realized over time as mass adoption occurs.
“Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. Such environments eventually experience massive blowups, catching everyone off-guard and undoing years of stability[46]” – Nassim Nicholas Taleb
In contrast to Bitcoin, central banks manage currencies to maintain short-term stability[47] but by suppressing volatility, structural imbalances accumulate which lead to underlying fragility and greater systemic shocks in the long-term, as has been witnessed with increasing regularity over the last two decades[48]. This accumulation of tail risks in artificially stable environments eventually leads to corrections far worse than they would have been had they happened in a natural, Darwinian incremental basis.
“In a Bitcoin economy you borrow the house using bitcoin as collateral. In a fiat economy you borrow the fiat using the house as collateral. This is going to confuse a lot of people who are used to inflationary finance and have never thought about deflationary finance” - Pierre Rochard
Conceiving of bitcoin as a cryptoasset rather than a cryptocurrency is an important distinction. Referring to bitcoin as a cryptocurrency is a misnomer and the term has encouraged the “popular but profoundly naive view[49]” of bitcoin as merely another form of digital cash.
Most central banks target the devaluation of their local currencies at close to 2% inflation per year[50]. The compounding effect of this over years and decades is crippling. Such a devaluation is relatively undetectable day-to-day, but taken along a longer time horizon one begins to realize the theft and taxation that this represents against – in particular – ordinary, non-wealthy classes who don’t own assets. Bitcoin as an asset – and as a store of value – eliminates the negative asymmetries inherent to systemic currency debasement.
Potential Secondary Functions
i. Medium of Exchange
There is always a tradeoff between scale and decentralization[51]. Bitcoin’s 1-megabyte block limit means that the capacity for transactions is currently around 500,000 transactions per day. The use of bitcoin for micro transactions doesn’t make sense primarily for two reasons:
Tax treatment – how do national revenue commissioners intend to treat bitcoin transactions as taxable events? At the moment, most view bitcoin as an asset which is subject to capital gains tax.
The transaction costs for micro transactions are prohibitively expensive. This isn’t necessarily a bad thing, since Bitcoin is primarily a long-term store of value asset that will rarely be transacted, in the same way gold isn’t used to purchase a cup of coffee.
Therefore, it may be that sats used on the Lightning Network will serve the medium of exchange function. The Lightning Network is a technology that allows nodes to run payment channels off-chain, while only using the Bitcoin ledger for verification of valid balances rather than transfers, thus increasing transaction capacity significantly[52]. If the Lightning Network proves to be successful, it could eventually rival Visa or MasterCard’s staggering volume of daily transactions.
ii. Unit of Account
When money is widely used as a medium of exchange, goods will be priced in terms of it. As things stand, we are still operating in a US Dollar denominated world. While a cup of coffee might be available for purchase using bitcoin, the price listed is not a true bitcoin price; rather it is the dollar price desired by the merchant translated into bitcoin terms at the current USD/BTC market exchange rate. If the price of bitcoin were to drop in dollar terms, the number of bitcoin requested by the merchant would increase commensurately. Only when merchants are willing to accept bitcoin for payment without regard to the bitcoin exchange rate against fiat currencies can we truly think of Bitcoin as having become a medium of exchange and a unit of account.
Features Propagating Bitcoin’s Growth
a. Network Effects and Metcalfe’s Law
“When millions are buying to sell: bubble. When millions are buying to own: revolution” – Sahil Lavingia
Metcalfe’s Law states that the value of a communications network is proportional to the amount of users on the network squared. As of February 2021, Bitcoin had roughly the same number of users as the Internet had in 1997[53]. What’s more, Bitcoin is currently on a faster growth trajectory than the Internet at an equivalent stage. If this continues, there will be one billion Bitcoin users by 2025, same as the Internet in 2005.
Every time a new user joins the Bitcoin protocol or purchases bitcoin, they not only increase the value and security for existing long-term participants (HODLers) but they also enhance the credibility and proposition for non-users to join the network.
b. Bitcoin as Religion
“You recognize this as a religion — a story we all tell each other and agree upon. Religion is the adoption curve we ought to be thinking about. It’s almost perfect — as soon as someone gets in, they tell everyone and go out evangelizing. Then their friends get in and they start evangelizing” – Leigh Drogen
The religious fevor of Bitcoiners is a feature, not a bug. Remember, every institution and system (including money) is an arbitrary figment of the human imagination collectively agreed upon en masse, unless and until that story breaks down. The institutions which have lasted the longest – the Catholic Church, Ivy League colleges, the US Constitution – are held together by their acolytes that will (in many cases, literally) die for the ideals embodied by the narrative and story upholding the institution.
It takes an enormous amount of energy to break a monetary paradigm as ossified as the one we find ourselves living in. Only a comparable degree of opposing religiosity can break that, yet as soon as a critical mass of diamond hands turn to paper hands, and people stop HODLing in order to make a quick buck, the game is over.
“While the comparison to religion may give Bitcoin an aura of irrational faith, it is entirely rational for the individual owner to evangelize for a superior monetary good and for society as a whole to standardize on it. Money acts as the foundation for all trade and savings, so the adoption of a superior form of money has tremendous multiplicative benefits to wealth creation for all members of a society”. – Allan Farrington
c. Elite Derision
“Bitcoin’s surface layer provides it with a subtle camouflage. The first hour or two of learning about Bitcoin triggers a multitude of scam red flags. For the business and financial elite, who have honed their heuristic abilities for filtering out the deluge of noise they sift through on a daily basis in order to be effective in their professions, these red flags are a non-starter. For their entire adult lives, they have been reinforced to think within the box (often while calling it “out of the box thinking”). The odds that a new piece of information comes along, for which an hour or two of investigation creates more confusion than answers and yields several red flags, but actually turns out to be an outstanding investment are vanishingly small. A typical member of the yuppie elite flags Bitcoin as garbage to be ignored upon their first investigation of its merits, and because of the groupthink of yuppies only paying attention to what other yuppies are interested in, that’s where Bitcoin remains[54]” – Croesus, Citadel 21
Bitcoin comprises an unusual and perplexing community of individuals: “some of the smartest people in the world think Bitcoin is going to boom, but so do some dumbasses[55]”. Croesus[56] has brilliantly analyzed this community and splits it into what he calls:
A. Bitcoin ‘moonism’ – individuals who believe that Bitcoin is going to the moon largely because they believe that past performance is indicative of future results; and
B. Bitcoin ‘maximalism’ – individuals who have come to understand the game theoretic inevitability of Bitcoin’s continued rise in the context of central bank money printing, the deterministic price mechanics of quadrennial supply shocks via Bitcoin’s halvings and the market psychology that programmatic price appreciation precipitates, and the winner-takes-all implications of an absolutely scarce store of value asset.
“Cryptocurrency: highly overrated by insiders, highly underrated by outsiders” – Matt Huang
Croesus’ distinction between deeply researched, very intelligent Bitcoin maximalists and (also very intelligent) elite insiders is trust in the system. Elite insiders are the people in the know with access to the best information, the best education, and the quickest knowledge of and access to trends. In their minds, there is no way they or their peers could all be so wrong about Bitcoin.
"We've got a concept. It's a new form of money. You can't buy much with it. Its value fluctuates wildly, so it's a bad place to store wealth. It's mostly interesting to criminals and political extremists. And oh by the way... creating it is enormously polluting. Get me some!"[57] – David Frum
The establishment skepticism of Bitcoin is one of the most fascinating aspects of these developments. There are countless examples of institutional investors dismissing Bitcoin, and then subsequently eating humble pie and offering the financial product to their clients. When a petrodollar alternative and tool that millions of people inside authoritarian regimes are using to peacefully achieve freedom is being mockingly derided by establishment gatekeepers, there is a lot of signal to be extracted from those assessments.
Conclusion – Gradually, Then Suddenly
"There are decades where nothing happens; and there are weeks where decades happen"--Vladimir Lenin
I hope that you come away with a greater appreciation for the hypothesis that Bitcoin is not only practically superior as a form of monetary energy, but that it is morally superior to fiat currencies for its potential to liberate oppressed people from political and monetary tyranny. That is a vitally important realization and needs to be emphasized much more in public discourse.
“Bitcoin’s mere existence is an insurance policy that will remind governments that the last object the establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future[58]” – Nassim Nicholas Taleb (22 January 2018)
Unfortunately, the plethora of scammers and snake oil salespeople operating in this space is doing an incredible disservice to the true message of Bitcoin – not to mention bad faith articles written about Bitcoin, in particular FUD about its so-called excessive energy consumption. Hence, I wrote this essay to try articulate some of the basics and extract the signal from the noise.
This transition will not be easy, and there will be many hurdles and challenges to overcome along the way to mainstream adoption. Individually, the journey towards understanding is complex but worthwhile. Collectively, the benefits ought to be self-evident. In the words of Nick Szabo:
“Bitcoin is not easy to learn, either conceptually or in setting up businesses and individuals with the software (and preferably also the secure hardware) to accept it. This is especially the case in a capital controls climate where the traditional bitcoin exchanges and retail payment companies, with their consumer-friendly front ends, as they normally operate in developed countries, likely can't effectively operate. To take advantage of bitcoin [people] will have to use the Bitcoin blockchain directly…once the learning curves have been surmounted, the participants in specific cycles educated, bitcoin has great potential to address problems with capital control in many other parts of the world where such financial restrictions designed for a pre-digital era have been imposed[59]”.
Enjoy the process and, remember, HODL.
References
[1]Bitcoin is Antifragile - Unchained Capital (unchained-capital.com)
[2] A common area of confusion when talking about Bitcoin is the use of the uppercase “B” versus the lowercase “b”. Bitcoin with a capital “B” is typically associated with the Bitcoin protocol and payment network. Bitcoin with a lowercase “b” is usually associated with bitcoin as the currency. For the purposes of clarity, I will predominantly be using ‘Bitcoin’ to refer to the ecosystem as a whole.
[3]Bitcoin Is Not Too Volatile - Unchained Capital (unchained-capital.com)
[4]A whirlwind tour of Ethereum finance - LessWrong
[5] Twitter polls
[7] Credit to the great Michael Saylor for this conception, as enunciated in The Saylor Series on YouTube
[8] Allen Farrington, Bitcoin is Venice
[9] Ibid
[10] Stallings, William (3 May 1990). Cryptography and Network Security: Principles and Practice. Prentice Hall. p. 165.
[11]https://bitcoin.org/bitcoin.pdf
[12] Andreas Antonopoulos
[13]Unenumerated: Bitcoin, what took ye so long?
[14]https://satoshi.nakamotoinstitute.org/posts/bitcointalk/126/
[15] Knut Svanholm, Bitcoin: Sovereignty Through Mathematics
[16] The Bitcoin blockchain has placed a 1-megabyte limit on the size of each block, which allows it to be run on individual computers but restricts its processing speed.
[17] The Bitcoin Whitepaper https://bitcoin.org/bitcoin.pdf
[18] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking (pg. 218)
[19] Bitcoin Whitepaper https://bitcoin.org/bitcoin.pdf
[20]Bitcoin Is Worse Is Better · Gwern.net
[21] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking
[22]Shelling Out: The Origins of Money | Satoshi Nakamoto Institute
[23]The Bullish Case for Bitcoin. With the price of a bitcoin surging to… | by Vijay Boyapati | Medium
[24]$9 Trillion in Stimulus Injections: The Fed’s 2020 Pump Eclipses Two Centuries of USD Creation
[25] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking (pg. 128)
[26] Economists like Carl Menger, Ludwig von Mises, Friedrich Hayek, Murray Rothbard et al
[27]Playing the Bitcoin Long Game - Unchained Capital (unchained-capital.com)
[28]Bitcoin is Antifragile - Unchained Capital (unchained-capital.com)
[29]Bitcoin is Antifragile - Unchained Capital (unchained-capital.com)
[30] Parker Lewis, Unchained Capital Bitcoin is Antifragile - Unchained Capital (unchained-capital.com)
[31]https://www.ft.com/content/c139596c-92b7-45bd-88b9-175d7881604f
[32]Bitcoin Dissidents: Those Who Need It Most - CoinDesk
[33]https://www.businessinsider.com/paul-krugman-says-bitcoin-is-a-bubble-2017-12?r=US&IR=T
[34]Bitcoin Is Protecting Human Rights Around the World – Reason.com
[35]https://feministcoalition2020.com/statement-mar-12/
[36]Bitcoin Dissidents: Those Who Need It Most - CoinDesk
[37]Economic downturn fueling Argentine crypto craze (msn.com)
[38]Unenumerated: The Greek financial mess; and some ways Bitcoin might help
[39]Bitcoin Is Protecting Human Rights Around the World – Reason.com
[40]The Bullish Case for Bitcoin. With the price of a bitcoin surging to… | by Vijay Boyapati | Medium
[41]Bitcoin and Other Cryptocurrencies Are Open About Being at Risk - Bloomberg
[42]Bitcoin is the Great Definancialization - Unchained Capital (unchained-capital.com)
[43]Bitcoin is Antifragile - Unchained Capital (unchained-capital.com)
[44]SEC Chairman Gary Gensler: More investor protections needed for bitcoin and crypto (cnbc.com)
[45]Gradually, Then Suddenly - Unchained Capital (unchained-capital.com)
[46] The Black Swan
[47] The European Central Bank states “Our main aim at the ECB is to keep prices stable.” See https://www.ecb.europa.eu/mopo/html/index.en.html
[48]Bitcoin is Antifragile - Unchained Capital (unchained-capital.com)
[49]Unenumerated: Bitcoin, what took ye so long?
[50]https://www.ecb.europa.eu/mopo/html/index.en.html
[51] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking
[52] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking (pg. 237)
[53] Willy Woo Greyscale On-Chain Analysis /photo/1
[54]https://www.citadel21.com/why-the-yuppie-elite-dismiss-bitcoin
[55]https://www.citadel21.com/why-the-yuppie-elite-dismiss-bitcoin
[56] Not the Persian king of Lydia born in 596 BC
[58]Forward to The Bitcoin Standard
[59]Unenumerated: The Greek financial mess; and some ways Bitcoin might help