Today, a friend asked me: What is Bitcoin?
I think she was expecting a long answer. Every explanation of Bitcoin I’ve ever heard has gone deep into cryptography, blockchain, mining and Satoshi Nakamoto, the cryptocurrency’s semi-mythical creator.
Instead, I gave my friend a short answer.
What is Bitcoin?
It’s money.
It’s just that, unlike the dollars we’re more familiar with, it’s not issued by a government.
It’s issued by an algorithm.
That’s it.
—
You’re still here?
I already gave you the answer!
Bitcoin is money that’s issued by an algorithm, not a government.
—
Still here?
OK, OK.
I’m really not going to go into cryptography, blockchain, mining or Satoshi Nakamoto, but I will go a little deeper into what it means that Bitcoin is money that’s issued by an algorithm, not a government.
Disclaimer: This is not investment advice. Tangled Web is about tech, not investment. It’s for information purposes only and you should not base any investment decisions on it. Do your own research.
Security, who cares?
Suppose my friend had asked me: What is the Canadian dollar?
It would be weird if I started with security.
I mean, there’s a lot of security involved in keeping track of the Canadian dollars in my bank account.
Some of it involves cryptography.
When I log into my bank’s web site to check my balance, for example, my information is encrypted before being sent to and from my bank’s computers.
I’m grateful that my bank has taken care of security for me. But honestly, I don’t really care how my bank has taken care of security, just as long as my bank has taken care of security.
I wouldn’t answer the question: What is the Canadian dollar? by saying: well, Transport Layer Security uses long-term public and private keys to generate a short-term session key to encrypt the data flow between a client and a server authenticated using an X.509 certificate...
So I’m not going to answer the question: What is Bitcoin? by talking about security, either.
There’s a lot of security involved in keeping track of the Bitcoin in my wallet.
Honestly, I don’t really care how Satoshi Nakamoto took care of security, just as long as Satoshi Nakamoto took care of security.
Distributed, who cares?
Similarly, it would be weird if I began an explanation of the Canadian dollar by insisting that there’s no single computer that keeps track of how many Canadian dollars everyone has.
I mean, it’s true, there’s no single computer that keeps track of how many Canadian dollars everyone has.
The Canadian government has does some questionable things, but keeping track of Canadian dollars on a single computer is not one of them.
Imagine if that were the way we kept track of Canadian dollars. What would happen if the computer crashed? Would Canadians have to wait for it to be rebooted before they could pay for their groceries? What would happen if the hard drive failed? Would every Canadian suddenly be broke, their net worth reset to zero? Could an egalitarian activist eliminate all disparities of wealth in Canada by hacking into a single computer?
Obviously not.
I wouldn’t answer the question: What is the Canadian dollar? by saying: well, countless computers keep track of how many Canadian dollars everyone has; some of them are owned by banks, some by brokers, some by the Canadian government; these computers aren’t all in the same place, they’re distributed all over Canada.
So I’m not going to answer the question: What is Bitcoin? by talking about distribution, either.
The computers that keep track of how many Bitcoin everyone has are distributed all over the world.
Obviously.
Mining, who cares?
And it would be weird if I began an explanation of the Canadian dollar by saying that banks, brokers and governments need to buy computers to keep track of how many Canadian dollars everyone has, as well as electricity to run those computers, so they need to cover their costs by charging fees, commissions and taxes.
I mean, it’s true, banks, brokers and governments do need to pay for computers and electricity, so they do need to charge fees, commissions and taxes.
But I wouldn’t talk about any of that in my answer to the question: What is the Canadian dollar?
The same goes for my answer to the question: What is Bitcoin? I’m not going to talk about how Bitcoin miners are compensated for the cost of the computers and electricity they use to keep track of how many Bitcoin everyone has.
What is the Canadian dollar?
The Canadian dollar is money.
It’s a token for things people value.
Some people value my ability to design software. If I design good software for them, they’ll give me Canadian dollars.
I value my local coffee roaster’s ability to roast coffee and my local brewery’s ability to brew beer. If they roast good coffee and brew good beer for me, I’ll give them Canadian dollars.
Why are the brewer, the roaster and I so foolish as to exchange our valuable beer, coffee and software for a token called the Canadian dollar? I mean, most of the time, this token doesn’t even take so tangible a form as a coin or a bill, it takes the intangible form of numbers on computers.
Well, we’re willing to exchange our beer, coffee and software for Canadian dollars because we trust that other people, too, will accept those Canadian dollars as tokens for things we value.
We’re all willing to exchange things we value for Canadian dollars because we’re all willing to exchange things we value for Canadian dollars.
Where does this extraordinary trust come from?
Well, it comes from the issuer of the currency.
We trust that the Canadian government, which decides everything there is to decide about the Canadian dollar, will make responsible decisions.
For example, the Canadian government decides how many Canadian dollars to issue, and we trust that it won’t abruptly decide to issue millions more. After all, such an irresponsible decision would abruptly reduce the value of the Canadian dollars for which we’ve all exchanged our beer, coffee and software.
What is Bitcoin?
Bitcoin is money.
It’s a token for things people value.
Full disclosure: I once bought some Bitcoin. I exchanged some Canadian dollars for it.
Why was I so foolish as to exchange my valuable Canadian dollars for a token called Bitcoin? I mean, this token doesn’t even take so tangible a form as a coin or a bill, it takes the intangible form of numbers on computers.
Well, it’s because I trust that other people, too, will accept Bitcoin as a token for things we value.
Many of us are willing to exchange things we value for Bitcoin because many of us are willing to exchange things we value for Bitcoin.
Where does this extraordinary trust come from?
Well, it comes from the issuer of the currency.
No, not Satoshi Nakamoto.
The issuer of Bitcoin is an algorithm.
By the way, an algorithm is just a precise set of instructions. You can program a computer to execute an algorithm, and it’ll follow those instructions. The Bitcoin algorithm is a precise set of instructions for keeping track of how many Bitcoin everyone has.
We trust that this algorithm, which decides everything there is to decide about Bitcoin, will make responsible decisions.
For example, the algorithm decides how many Bitcoin to issue, and we trust that it won’t abruptly decide to issue millions more. After all, such an irresponsible decision would abruptly reduce the value of the Bitcoin for which I once exchanged my Canadian dollars.
Bottom line
So that’s it.
Forget about cryptography, blockchain, mining and Satoshi Nakamoto.
Here’s what you need to know:
Bitcoin is money that’s issued by an algorithm, not a government.
Are you feeling lucky?
There’s only one question left to answer.
Money requires extraordinary trust.
So which would you trust more: a government or an algorithm?
To answer that question, we should probably look at the track record.
The Canadian government?
Well, over the last couple of years, the Canadian government abruptly decided to issue millions more Canadian dollars. Actually, hundreds of thousands of millions more.
It’s not an outlier, as far as governments go. At the same time:
- the UK government abruptly decided to issue hundreds of thousands of millions more pounds Sterling;
- the US government abruptly decided to issue thousands of thousands of millions more US dollars;
- European governments abruptly decided to issue thousands of thousands of millions more Euros.
The numbers are mind-boggling.
Not such a great track record for governments, then.
The Bitcoin algorithm?
Well, the Bitcoin algorithm has decided to issue 21 million Bitcoin.
Not thousands of thousands of millions, just 21 million.
And that’s not 21 million over the last couple of years, it’s 21 million ever.
There will never be more than 21 million Bitcoin.
If you’re used to governments, you may be thinking: sure, that’s what the algorithm’s saying now, but what happens after the election, how many Bitcoin will the next algorithm issue?
Well... when it comes to Bitcoin, there are no elections. Governments change. Algorithms stay the same.
You don’t have to trust that the Bitcoin algorithm will issue no more than 21 million Bitcoin. You can prove that the Bitcoin algorithm will issue no more than 21 million Bitcoin.
But if that were true...
I know what you’re thinking.
If what I’m saying is true, then it’s blindingly obvious that we should trust the Bitcoin algorithm more than the Canadian government, when it comes to money.
If what I’m saying is true, then we should all be far more interested in exchanging our valuable beer, coffee and software for Bitcoin than for Canadian dollars.
If what I’m saying is true, then how much we value Bitcoin as money should increase dramatically in comparison to how much we value the Canadian dollar as money.
Well, again, we should probably look at track record.
A decade ago, we valued a Bitcoin 30 or 40 times more highly than a Canadian dollar.
These days, we value a Bitcoin 30 or 40 thousand times more highly than a Canadian dollar.
That looks like a pretty dramatic increase to me.
Seems we really are beginning to trust money that’s issued by an algorithm more than money that’s issued by a government.