What You Must Understand First, Before You Can Truly Understand Bitcoin
Updated: Aug 19, 2019
That’s a long title, isn’t it? In fact, leaving the title long wasn’t an oversight – no, it was a necessity for three reasons:
Though long, the title perfectly describes the objective of this article. I am attempting to defuse preconceived notions many people still seem to have about Bitcoin in 2019 (and later if you are a novice reading this in the future). Bitcoin is over a decade old as of this writing, and yet, one of the greatest remaining barriers to mass understanding seems to be how quick most humans are to disregard something that’s truly new. One cannot understand Bitcoin, without first understanding that they probably have no clue what it actually is in the first place, or at least what makes it special. It is much more than “Magic Internet Money.”
More importantly, some people seem to just ignore anything that requires more than a little thought, or a little extra effort, and I don’t care if those people decide not to read this article for its long title. Bitcoin is not complicated, but it also isn’t exactly “simple,” either. What Bitcoin demands is respect, and the comprehension that sometimes, a little bit of work goes a long way. If you are the type of person who always refuses to put in that little extra effort in order to obtain more than a little extra gain, Bitcoin is not for you (and that is honestly OK). Modern life is complicated for everyone, and Bitcoin will be here in 10 years, when you finally have to use it…
The title includes “before you can truly understand Bitcoin” to make it clear this is not for people who have mastered it already. This article is not for Jimmy Song, for example. Many technical details are simplified, ignored, or even sometimes outlined in an almost incorrect manner, so as to make the key fundamentals of Bitcoin easier to explain. Think of this article like those Planetary Diagrams of Atomic systems you learned in grade school. Real atomic structures are far more complex than just a bunch of electrons rotating in perfect circles, but Quantum Mechanics is hard – and we will pretend just like that, from time to time.
But if you are still reading, that means I have either intrigued you, or at the very least failed to bore you quite yet. You are someone who indeed doesn’t mind digging a little deeper than most. So, let us dig, let’s get into the five fundamental things I believe someone must understand… if they are not to misunderstand the future of Money.
I. Bitcoin Belongs to No Ideology. Bitcoin Is Built to Reject Ideologies.
It may sound contradictory, but I would argue that Bitcoin is a standard that could prevent either an Authoritarian Nightmare or a Corporatist Dystopia from ever taking root. That’s because Bitcoin inherently does not belong to one person or group, and it maintains this existence through an incredibly ingenious set of self-perpetuating checks and balances. This is how it works:
Think of the ledger, or chain of blocks, as a stack of papers. Each sheet of paper represents a single “block.” Every 10 Minutes a new sheet is placed on top of the stack, and each sheet of paper has records of every single transaction sent in those 10 minutes. The taller the stack, the harder it is to reach into it and pull out a sheet (block). Eventually, it just takes too much effort to lift up that heavy stack.
It is the Miners who verify that these sheets (blocks) are legitimate before they are stacked. They give a “stamp of approval” to the newest sheet every 10 minutes. If you are a miner, you don’t care if one person wants to change the rules – you just want to be paid as much as possible for mining. Your greed incentivizes you to accept only those who follow the rules, unless you can make more money from those who want to change them.
Then there are the Node Operators. If you operate a “full node,” you are someone who wants to make sure no one is cheating you, and thus you verify honesty by keeping an entire stack of the network’s transaction history for yourself. You hoard the networks entire transaction history because you are paranoid. But because you have this stack, you also help out the overall network by “checking other people’s work.” Your selfishness keeps everyone else honest.
As long as there are plenty of nodes recording all of the transactions for themselves, as long as the node operators check each other’s work for their own peace of mind, and as long as the miners continue to be paid – it doesn’t matter who sent Bitcoin, or who received it. The system was built to reward individuals for not trusting anyone, and everyone is trustworthy because no one trusts each other.
As you can see, no one is in control, and yet no one is allowed to do whatever they want. Because every node holds a copy of the rules, no one can change said rules unless literally everyone agrees on the change, or the dissenters break away from the overwhelming majority in an attempt to outcompete the main chain with their, supposedly superior, set of rules – a very risky proposition.
This is different from Socialism because even a majority of the network cannot make decisions for everyone, and different from Anarcho-Capitalism because nobody can make their own rules without disconnecting themselves from everyone else. Bitcoin inherently makes tyranny of the majority and runaway capitalism almost impossible.
II. Bitcoin Makes it Easy to Monitor One Entity, and Nearly Impossible to Control the Masses.
A lot of people also seem to think that Bitcoin either makes it impossible to hold people accountable, or conversely, could be used as the basis of a surveillance state. The truth is actually neither:
Remember the “stack of paper” metaphor for the blockchain? Imagine trying to find the wallet addresses (similar to bank accounts) of one specific person in a single stack. Sure, you could metaphorically use “Ctrl + F” to find the person of interest if you knew their address, but you would need to know it ahead of time, or through methods that have nothing to do with Bitcoin. Making things even more complex is the fact that new addresses can be used for every transaction even in the same wallet. So yeah, you can track someone’s transactions – but if you are able to do so, you probably already have an incredible amount of data on the subject anyways. Bitcoin won’t be the thing that “gave them away;” it’s actually the least of “their” concerns when it comes to being tracked.
Conversely, it is entirely conceivable that Bitcoin would make it possible for millions of citizens to monitor every action of a substantially smaller party. It’s hard for 1000’s of people to shine a spotlight on millions, but it’s very easy for millions of people to shine a light on 1000’s, or even fewer. In fact, I would argue this attribute of Bitcoin is the biggest threat to authoritarian regimes in the long term.
In summary, it would take an enormous amount of effort to track millions of people that utilize a network which allows its users to create pseudo anonymous addresses with a single click of a button. But if you are someone in power who uses the rhetoric of accountability, you have no excuse for having a pile of Bitcoin addresses that are hard to follow. If Bitcoin became mainstream, a politician who says “You can trust me” could immediately be asked “OK, what are your Bitcoin addresses?” If the politician doesn’t disclose them, then they cannot espouse accountability. Total openness wouldn’t be an abstract concept used in talking points anymore, it would be a concrete achievement for anyone who says they wish to be transparent.
There would be absolutely no argument for public institutions and transparent companies to use anything but Bitcoin if it were the standard, and if they did so, it would be hard to hide shady dealings. Everyone in the public could see exactly where their tax dollars are going, and any individual could verify the work of public officials whenever they please. No matter how convoluted the transaction chains at these mega entities became, they would have little hope of hiding it from the millions of cyber vigilantes that would undoubtedly track what their own tax payments went towards. You could see in real time how exactly your income tax is being used!
Oh, and even if a government or shady corporation managed to obfuscate their problematic dealings for a while – whistleblowers would be much more dangerous to those in power with Bitcoin as a standard. Remember the “Panama Papers”, which exposed the shady dealings of over 200,000 offshore entities in 11.5 million documents? Imagine if we could track where every cent went not just from the original bank accounts in question, but also where the money went after leaving those accounts – and on, and on.
III. Bitcoin Is Not a Technological Innovation, it is a Monetary Innovation.
The Bitcoin whitepaper consists of 3219 words. You may notice this article contains 3569. That’s because actually, there isn’t that much to say. Bitcoin was above all else just a new idea. From a technological perspective Bitcoin is comprised of nothing new.
Duplicating info for redundancy in decentralized databases has been done since we had databases. In fact, one could argue we had them for thousands of years in the form of duplicated libraries. What is new with Bitcoin is Proof of Work and the elaborate incentive structures built into the network. It’s the fully realized concept of Bitcoin itself that is the innovation – an unstoppable settlement network. This itself is blockchain’s true innovation.
Bitcoin is a philosophical and monetary innovation. Satoshi invented a brilliant system by which a person could not duplicate digital ownership, and that is what Satoshi deserves credit for. One should think of Bitcoin in a similar manner to Facebook: Facebook didn’t invent anything – they just assembled already existing technology in a clever way that changed the world. Facebook did it in a highly successful manner, and they did so first, and thus they became the standard Social Network.
Bitcoin could have been created 50 years ago, but the there wasn’t any need for borderless, hard money – until recently, of course. The 2008 financial crisis is the first economic collapse in the modern era to be even remotely comparable to the devastation that took place in 1929. The 2008 crisis was the necessary catalyst required to get someone to finally think about how modern technology could be used to create a new, borderless form of hard money. Bitcoin was invented in 2008 not because of recent innovations in computing, but because of recent innovations in monetary failure.
IV. Bitcoin’s “Killer App” Is Not Anonymity or Speed. It’s above all else: Unconfiscatable Wealth One Can Send Immutably.
By now it has been outlined that Bitcoin is really just a standard, and one that is stable enough to be built upon. Yet there are still many who obsess over a lack of desired features in this base protocol. These people tend to think it is the speed, the anonymity, or some other buzzword gimmick that matters most to a blockchain. But this is a misunderstanding of what makes good money, one which is understandably common when you realize the world hasn’t had good money for decades.
Currently in Venezuela, US dollars are desperately sought after as a means to store value for food and other essential bills. But it is not because paper Dollars are any easier to hand over than paper Bolivars. No, it is because USD is harder money than Bolivars. USD simply holds its value longer. Yet in the United States, retirement accounts typically consist of precious metals, real-estate, bonds, and stocks in major corporations. That is because these commodities are even harder money than USD. The US Dollar used to be very Hard Money when it was pegged to a gold standard, but it is no longer. Credit cards are already fast, borderless Hard Money is what needs an upgrade.
Stability is really all that matters in any form of money. Extra features in the base protocol of a cryptocurrency add nothing, but increase the chance of bugs. You can add apps and features on top of Bitcoin, but otherwise the base needs to be as simple, and bug free, as possible. You wouldn’t want your “Magic Internet Money” to lose its magic because of a bug. Bitcoin is not missing features, it consciously chooses to not have them, so your money can’t be lost to a bug.
If a given money holds value over long periods of time (like gold used to), people will prefer that money over others. If people want that money, they will find ways to transact it quickly. Like gold, it took years for people to agree they wanted Bitcoin, but now that they finally have, they will find an efficient way of exchanging it. For Gold it was bullion-backed paper money, and for Bitcoin it is the lightning network.
Other features can be utilized on Bitcoin through simple app design. Even without the lightning network, proper wallet design can add a high degree of anonymity for anyone who uses said wallet app. You don’t need to make a new coin to make a new kind of wallet.
At this point one might say: “OK, I get that it’s not about the speed at the base layer, nor other gimmicks we can always add on top of the protocol; but how is Bitcoin-backed currency any better than if we, say, went back to the Gold Standard?” The answer is simple: unlike Gold, nobody can take your Bitcoin, unless you let them, and once you send money, it is permanently sent. Bitcoin transactions are immutable, Gold can be stolen back.
A tyrannical government can easily take your home, liquidate your bank account, or, of course, take your life. But it is up to you if they get your Bitcoin. They may have killed you, but with Bitcoin they don’t get to add the sum of your bank account to theirs anymore. In fact, if they do kill you, they will be sure to never get access to your Bitcoin (assuming you took the proper precautions). Yes, there are still problems with you surviving their torture, or keeping track of your keys, but at least it’s completely within your control now. That is the advantage of Bitcoin over a gold standard.
Furthermore, while they can certainly arrest you after you buy something, they cannot reverse the transaction after it is complete. A starving citizen in an oppressive regime may need to worry about punishment if they buy food, but at least with Bitcoin the punishment now comes after the food is bought. They could certainly kill you for buying rice, but once the money is sent, it is final, and it will always be sent because the network is stable, and reliable. Stability, Unconfiscatability, and Immutability is what matters in money. This is what only Bitcoin currently brings to the table with its 10+ proven years of reliability.
V. Finally, You Need to Double-check Your Knowledge of how the World’s Banking System Actually Works…
Henry Ford once said: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Do me a favor and Google “Is the Federal Reserve a part of the US Government?” – and then come back.
The Federal Reserve isn’t really a part of the federal government, despite having “Federal” in its name. The “Federal” Reserve banks are actually part of the private sector, and thus in reality, the dollar isn’t backed by the “might of the US government and military” – although I admit that sounds pretty cool. No, in fact, it would be more correct to say that the might of the US government and military is being backed by private banks.
To be clear, I am not suggesting there is some grand conspiracy per se, only pointing out one example of how modern monetary systems work in entirely different ways than most of us are led to believe in grade school (if it is touched upon at all). What I would say is the system itself is simply outdated so much that it looks like a conspiracy. A conspiracy without any conspirators, a system that needs to be fixed. The bankers are usually just regular people desperately trying to bale water out of a sinking ship. That’s really all I will say about modern banking in this article, it’s up to the reader to educate themselves on how the world works – and then decide for themselves if Henry Ford was right.
Final Words – Altcoins and Further Reading
I do have to say a few words about altcoins before I release you from my clutches. Believe it or not, there was once a time where most of my crypto holdings were not Bitcoin. The names are not important, but the overall conclusion is that you either die an altcoiner, or live long enough to become a Bitcoin Maximalist.
Luckily, I did live long enough to finally see the light(ning) at the end of the tunnel for myself. But I have to say that I just recently fully realized what made me become a “Bitcoin Standard Bearer.”I begrudgingly realized that while my preferred altcoin seemed better than 99% of the other projects, quality rarely determines how much money an altcoin makes.
Think about it. Let’s say you begin to really like Pascal Coin (PASC), for example, and then you see Bitconnect become one of the top ten coins. You will likely say to yourself: “If that scam can do so well, PASC will likely do even better!” – but then it doesn’t, and so you pick a different altcoin hoping this one is the right one. The mistake you are making is assuming the rules of success that applied to Bitcoin also apply to shitcoins. They don’t. Bitcoin is the standard, and as such stability and usefulness are what determine its success. Conversely, it should be abundantly clear by now that altcoins seem to have the greatest success if they are the greatest scams. Just admit it to yourself – that’s what’s going on here, most of the time.
It doesn’t matter that your favorite project isn’t a scam, or that its developers “just put their heads down and work.” The reason Ripple is so successful is because it spends so much time on bullshit press releases (Proof-Of-News), and so much of its own, self-printed money on bribing companies for “partnerships.” It is sad, but you just have to admit that no matter how good a project is, its success is governed by “Proof-of-News,” and not “Proof-of-Work” like Bitcoin. Don’t get caught in the cycle of comparing your favorite project to scams that made tons of money. Just because one scam garners a 1000x gain in a year, does not mean your “better” project will ever gain any value at all.
Hmmm, so I guess this final advice is kind of just a repeat of points #3 and #4 – Bitcoin is the blockchain innovation. Focusing on stability and truly good code were conscious choices by Bitcoin’s developers. They chose stability over gimmicks because that is what matters long term when it comes to good money. The argument for Bitcoin Maximalism is hence not a tribal one, but a logical one.
There are still so many people out there in 2019, who misunderstand the point of Bitcoin, and most of it is based on preconceived notions and assumptions. The purpose of this article was therefore to remove as many of said preconceived notions and roadblocks as possible… with any luck, I succeeded. If you got this far, I suspect I did get through to you at the very least, and if I did, you have a lot more reading to do.
Removing those roadblocks hopefully opened you up to continuing on the long journey of understanding just what the future of money could be, and I will give you some more help, by providing multiple links below to others, who I believe do a good job of teaching the ins and outs of Bitcoin.
For those I still couldn’t get through to, I am not sure of what else I can say. Bitcoin is going to be here in 10 years whether you like it, or not. So maybe you should keep trying to understand it, before you get left behind. Either way, I will close with my favorite Satoshi Nakamoto quote:
“If you don’t believe me or don’t get it, I don’t have time to try to convince you, sorry." -Satoshi Nakamoto, July 29th, 2010.
1. The best place to start for beginners, and podcasters: Stephan Livera Podcast
2. Check Out Jimmy Song, however he does get technical sometimes.
3. Tone Vays is an odd cat, but he has a lot of good knowledge deep down!