Before we jump down the Bitcoin rabbit hole, let’s make a distinction: Bitcoin (with capital B) refers to its money system – whereas bitcoin (lowercase b) refers to its units – the money itself.
Bitcoin was the first cryptocurrency to find a successful solution that ticks all the boxes of sound money with none of the risks of a single controlling authority.
Let’s explore how it achieves those two things.
Achieving Trust
By far the most revolutionary aspect of Bitcoin is that it requires exactly zero trust in a central authority – which as we’ve learned, has led to ludicrous national debts driven up by catastrophic financial crises (2008), and the impact of the Covid Pandemic (2020).
Bitcoin solves the trust issue by taking control of the monetary system out of one pair of hands – the central authorities’ – and into many hands of a wide network of dispersed users, none of whom have ultimate control. This is what the term decentralised means.
Of course Bitcoin did have a creator, (we’ll learn more about them in the next lesson) but the greatest gift they gave was to remain anonymous and relinquish any control, understanding that Bitcoin could only succeed as trusted sound money, controlled by the many, not the few.
All these users locally run some software that maintains the Bitcoin network, creating an ongoing consensus of every user’s balance of bitcoin. All Bitcoin transactions are final and can’t be arbitrarily reversed unless all users agree, so as the network grows, it becomes more secure.
These users (also known as Nodes) are incentivised to support the network and maintain its accuracy.
The use of cryptography secures transactions against fraud and theft, while allowing anyone to mathematically verify the correctness of all transactions in the system.
You can’t bribe maths. No matter how much you try to sweet-talk, massage, or threaten an equation, you won’t change its result. So in retrospect, it really shouldn’t be so surprising that maths – combined with computing – was the answer to the problem of trust in the money system.
Bitcoin’s design makes it impossible to freeze, seize, spend someone else’s coins, or to spend the same bitcoin twice. If you try to double-spend your coins, only one of the transactions will go through – any others will fail;
So when you want to send 0.5 bitcoin to your friend, you can use a smartphone app, a bit like your personal banking, and the network is incentivised to agree that your balance has 0.5 deducted and your friend, 0.5 bitcoin added.
Unlike national currencies, Bitcoin is a global money system, recognising no borders. It can be exchanged nearly instantly, at any time. There are no “Bitcoin banking hours” and no KYC.
But what about the principles of sound money, I hear you ask? Well Bitcoin has those covered too
- Scarce – There will only ever be 21 million bitcoin in circulation, and new ones are mined (the process by which new coins are created) at a predictable pace. This means that there won’t ever be a sudden tsunami of new bitcoin flooding the market generating inflation
- Durable – With so many users maintaining the network it would take an unimaginable catastrophe to knock them all out at once.
- Portable – It is just data after all so you can use your phone, a USB device, or even just a QR code on a piece of paper.
- Divisible – Bitcoin has its own special denomination to eight decimal places. Tick.
- Fungible – The beauty of a decentralised system is that no one can make special exemptions*; every Bitcoin is created equal.
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