A Guide To Understanding Bitcoin
If you haven't been living under a rock for the past eleven years, you've probably heard about Bitcoin a few times right now.
"It's magic internet money"
"It's money for criminals"
"It's wasting all our energy"
"It's going to zero"
"It's a ponzi scheme"
That's what most people would answer if they got asked about Bitcoin. All these answers sound very negative and mysterious, that's because most people don't have a clue about what Bitcoin is. They hear about it in the news and immediately make up their mind, without ever doing their own research. They assume that the media is always right, because why wouldn't they? What if I told you that all these famous tv anchors and reporters don't have any idea either, just like you, what Bitcoin is all about. Their mission is to generate views and clicks. Actually telling the truth rarely increases the amount of clicks they get, so they don't bother doing it.
Luckily there exist some very sincere and knowledgeable people on the internet, from whom I've been learning about Bitcoin for the past 2 years. These people are heavily invested in Bitcoin, so they are financially incentivized to deeply comprehend what it is. With this website I want to formulate a better and more truthful
answer to the question: "What Is Bitcoin?".
After reading the page, I hope you'll start to have a better understanding of why it is that Bitcoin is such a big deal.
Why Was Bitcoin Invented?
To better grasp the many reasons why Bitcoin is such an innovative phenomenon, you need an idea of why Bitcoin was invented and which problems it aims to solve. The important thing I want you to take away from this section is that Bitcoin was never built to enable cheap and fast online payments. Don't get me wrong, when the time is there, Bitcoin will unlock new innovations for payments that we couldn't imagine were possible. But for now the current payment processors work just fine. The real reason why Bitcoin was invented is to offer an alternative to the current financial system. It's aiming to remove the trust required in central banks and give power back to the people.
Bitcoin aims to give back power to the people by completely changing how money works. In essence, money is just a ledger that holds information about who owns how much. In our current financial system both the reading and writing access to this ledger is in the hands of the banks and the government. In my opinion, it's time that people start asking some questions: Why do we need a single entity with complete control over the money supply? Why should a bank be able to decide with who I can and with who I cannot transact? Why aren't we free to choose the money we save and transact in? Throughout the past there have been some other attempts at creating digital money, but eventually the government shut them all down to protect their financial monopoly. Money is a way of communicating, and everyone should be free to decide with who to talk, what to say, and what language to use.
Bitcoin was invented to provide an alternative to the centralized financial system we live in today. It removes the trust required in central entities. It redistributes power, less for the elite, more for the people. If you want to understand how Bitcoin allows us to have money that's not controlled by anyone, I highly recommend you dive into the resources listed below.
What Is Bitcoin?
The coming sections will introduce you to some different approaches at answering the question: "What Is Bitcoin?". As you'll come to see, Bitcoin is relevant to a lot of different aspects of life. It doesn't matter if you are an Economist, Computer Scientist, Investor, Environmentalist, Goldbug, Human Rights Activist... Bitcoin is for everyone. I hope you resonate with at least one the approaches, and as a result start falling down the Bitcoin Rabbit Hole. Beware, the hole is deep!
Bitcoin is Better Money
Money is one part of every transaction. Everyone uses money on a daily basis, yet only a few people have asked themselves: "What is Money?"
We spend most of our time and energy at work, in exchange for money at the end of each month. From this point of view, money is just a way of storing energy and time. Anything that's scarce and hard to produce is valuable to us. Our mother and father are so important to us, because we only have one of each. That necklace you received from your grandma ten years ago is so precious to you, because it is unique. The air you breathe is free, because it is abundant. But when you're drowning in a pool, suddenly a little bit of air turns into a priceless asset. It becomes clear very quickly that scarcity equals value.
What's one thing that nobody can create more of, yet everyone wants more of? It's time. Time is the scarcest asset we know of today. No matter how much money someone has, it is impossible to live forever. Everyone has a limited set of days on this earth. If we could buy an extra year of life, the price of this year would be unimaginably high.
When you are working, you're essentially trading your valuable and limited time for money. This money used to be backed by gold, meaning there was a limit on how much could be created. Back then you were trading one scarce item (time) for another (money backed by gold), which makes sense. But these days, money is backed by nothing and can be created out of thin air by governments and central banks all over the world. Increasing the money supply diminishes the value that each individual unit of that money represents. So by printing more money, its value is decreasing. As you're storing your time and energy in this money, central banks are essentially stealing your time and effort through inflation.
We are trading our time, which is strictly limited, for a money that can be printed out of thin air with no cost or effort. In no circumstances is this a good deal, so people started looking for alternatives. They prefer assets that are costly to create, so it is certain that their part of the total wealth stored in this asset remains about the same. Two obvious options that possess this 'unforgeable costliness' are real estate and stocks. It is no wonder that since the activation of the money printer a lot of value started flowing into these assets, as these are two of the very few options to protect your wealth.
A lot of people have benefited greatly from these alternative "monies", but it is not for everyone. The majority of the world's population can't afford a house or doesn't have the knowledge or time to become an expert in the stock market. These people need something that's more accessible.
These people need Bitcoin, they just don't know it yet.
Bitcoin is often called digital gold, because for both mining is the method by which new units are introduced to the supply. But when you compare gold and Bitcoin, the winner is clear. Every year, the supply of gold increases by about 2 percent. However, what would happen if the price of gold started rising unexpectedly fast? A lot of new mining businesses would be created, driving up the supply, diminishing the value of each unit of gold. And what if we discovered a way to mine the sea bottom, or asteroids, or even other planets, for gold? Gold would lose a big part of it's scarcity. As a consequence, your stored time and energy would recede in value.
With Bitcoin, the scarcity is set in stone. There will never be more than 21 million units. The creator of Bitcoin, Satoshi Nakamoto, made this possible by using a beautiful mechanism: "The Difficulty Adjustment Algorithm". As more and more miners enter the space, you would expect the supply growth to increase, as with gold. As miners turn off their machines, you would expect the opposite, as with gold. You couldn't be more wrong. Due to the difficulty adjustment algorithm, the amount of new bitcoins issued every day is indifferent to the amount of miners. It just becomes more difficult or more easy to mine new units, depending on the amount of active miners. This beautiful mechanism ensures that inflating the supply of Bitcoin beyond the expected rate is impossible.
In adddition to this, every four years, the amount of bitcoin that gets added to the supply every ten minutes is cut in half. This event is called "The Halving", and it will keep on taking place until the amount cannot be divided anymore. At that moment, somewhere around 2140, the supply will have reached the magical amount of 21 million. Bitcoin is as scarce as time, because they are the only two assets in this universe with a fixed supply.
By now, I hope you understand that money is a way of storing your time. Your time is scarce, and therefore valuable. Not even Billionaires like Steve Jobs were able to buy themselves extra time, because it is priceless. When you go to work, you're exchanging money for time. You are trading the most valuable asset in your possession, for something that can be created out of thin air at absolutely no cost. More and more people started to realize that this trade is not fair. They were being robbed of their time. As a consequence, the money started flowing into scarce assets like stocks, real estate and gold. Unfortunately these assets are not for everyone, they have their downfalls, and they are not nearly as limited in supply as time. This is why Bitcoin was invented. Bitcoin is the best storage mechanism for your limited time.
Bitcoin is a Human Right
Throughout the last decade, the internet has become part of our daily lives. Most of our actions are somehow connected to an app or website, accessible through the cloud. Every action generates a tiny bit of information about you that will be stored on a central server for years to come. As time passes, these tiny bits of information turn in to one giant pile of personal data that is stored on computers all over the world.
As people realised that all this data could be used to control them and spy on them, they started to protect themselves. All over the world, people started deleting their facebook accounts, encrypting their messages and reducing the overall amount of personal data they left on the internet.
It's clear that in general, people have become very concerned about their online privacy. This should not come as a surprise since privacy is an important human right. As we further digitize our world, money is becoming more and more digital as well. In countries like Sweden and China the use of cash is almost non-existent, almost all payments are made with a smartphone or credit card and are thus digital. As a result, all of our transactions are now stored on some server or computer somewhere on earth. This collection of transactions is our financial data and is directly linked to our identity. As concerned as people are about their online data, as clueless are they about their online financial data. However, this data contains a lot of information about you. It can reveal what you are interested in, where you are going and when you are shopping. In contrast to our other data, we seem to have no problem handing over our financial information to banks and payment processors. We shall not forget that government will take any chance it can get to increase their control over our lives.
Digital files can be sent to different people multiple times, while always keeping a copy on your own computer. The same is true for digital money, that's why we need third parties that act as a referee to make sure that you can only spend your money once. These third parties provide us with security while taking away our privacy. When Satoshi presented Bitcoin to the world, he provided us with a solution to this tradeoff. Bitcoin is the invention of decentralized digital scarce money. This means that it allows digital money to work without requiring trust in banks as a referee. This trust has been broken too many times. Bitcoin is the only kind of digital money that's compatible with privacy.
In its current form, Bitcoin isn't always as private as you might expect it to be. But at least it gives us the framework on which private digital money can be enabled. The last few years developers have made a lot of progress towards that goal.
We're moving into a cashless society, that's inevitable. If it wasn't for Bitcoin, a society like this wouldn't be possible without giving up our privacy. One of our human rights would get taken away for the sake of "progress".
China is a perfect example of how it can go wrong. They have already achieved a cashless society, but unfortunately not through Bitcoin. All the payments in China are made with their national superapp "WeChat". The enormous amount of data that's gathered in this app is directly available to the Chinese government. This has enabled them to implement a social credit system throughout the country with which they control their citizens. You're constantly being monitored and one misstep can restrict your access to jobs, loans, insurance and freedom. A cashless society doesn't have to look like the one in china. Bitcoin gives us an alternative future in which our right to privacy is protected.
Besides giving back our privacy, Bitcoin is also protecting the right to our own things. This right states that nobody should take your things from you without a good reason. Deciding whether something is a good reason or not is very subjective. A good reason for one person is not necessarily a good reason for another person. It's obvious that in some situations this subjectivity can be used against you. Therefore it's important that there exists an asset that nobody can take from you, whatever reason they might have. All the assets you think you own, aren't actually yours. If the government doesn't like you it will find a reason for you to give up what you think is yours. Government can create extra income by passing new laws and seizing assets from the people that break them. Only when Bitcoin was created have we been exposed to an asset that is truly unconfiscatable. This is because owning Bitcoin is equal to owning a private key. This key is the only thing you need to retain full control over the value stored in your bitcoin. If you choose to write down this key on a piece of paper or store it on a hard drive, then it isn't any safer then gold or cash. However, a private key is just a sequence of 24 words. As long as you can remember these words, you can access your bitcoin. Essentially, this means that you can store value in your brain. Bitcoin allows you to fly to the other side of the planet while carrying a million dollars right inside your mind. As long as you remain silent, nobody will ever be able to take this away from you. Bitcoin is giving us back the control over what is and should be ours.
Bitcoin is a Measuring Stick
An economy is a very complex system of interactions between buyers and sellers. Buyers get information from sellers and vice versa. This information is presented to them not in words, but in prices. The price of a good determines how much a producer is willing to produce and how much a customer is willing to consume. It should be noted that prices dot not only influence market decisions, market decisions are shaping prices as well. These prices are thus an aggregate of all known market information. If demand for a certain good goes up, its price will follow as more and more money flows towards it. This results in less money flowing into other products, eventually lowering their prices. Prices are a tool that enables businesses and humans in general to allocate their resources in the most efficient manner as they reveal which products the market prefers.
In the famous piece I, Pencil, Leonard E. Read beautifully highlights how no single person on earth is capable of producing a pencil on his own. if you think about it, this makes sense. A lot of resources and cooperation is needed to complete even the simplest of products:
All these building blocks need to be produced, processed and finally put together to form a pencil. All the cooperation that was needed to complete this complex process was not centrally planned. It is not possible for one single entity to dictate how to allocate resources at every step of the process. This collaboration is rather made possible by the information contained in the prices of all the needed components.
There are a lot of companies involved in delivering the necessary components for the pencil. Every single one of these companies uses the price, which is an aggregate of the market's preferences, to deploy its capital in the most efficient way.
By now it should be clear how vital of a role that prices play in the economy, and how no single entity could gather enough information to centrally plan the economy. This task is much better handled by a free and organic system of prices. This is were our centrally money supply ruins everything, since prices are not free nor organic. Prices should perfectly represent supply and demand, going up when demand increases or supply decreases, going down when supply increases or demand decreases. But in reality, prices are distorted by central banks because they have complete power over the money printer. The supply of money can be increased and decreased (although this rarely happens) as they wish. What's the modern solution for a recession? Print Money. What to do when inefficient companies go broke? Print Money. It is believed that by printing money the economy can be saved, without considering how badly this distorts our pricing system.
When the supply of money changes, so do our prices. When you increase the amount of something, its value decreases, as explained in previous sections. Prices of products and services are expressed in a currency with a varying supply. As a consequence these prices no longer reflect the preferences of the market, but rather become a function of how much the money supply is being manipulated.
Coordination between companies is based on the information provided by these prices, but as this information gets tampered with, the cooperation relying on it breaks down. Imagine a good with a very stable supply and demand, in normal circumstances the price of this good would be stable and businesses could allocate their capital efficiently as prices gave them the needed information. But what happens when the money supply gets artificially inflated? The price goes up, signalling an increase in demand to the producers, causing them to ramp up production. This will result in a surplus of the good, which lowers the profits the company in question makes. The problem with this should be clear: There never was an actual increase in demand, however through the manipulation of the money supply it seemed like there was. As all prices in our economy are denominated in the same manipulated currency, all market information loses its meaning. As companies lose the signals they need in order to allocate their resources efficiently, everything starts falling apart.
In most parts of the world, like Europe and America, the money supply is increased at a relatively slow pace. This doesn't distort the price signals significantly in the short term. However this pace is just fast enough to steal people's money without them noticing. If you take a look at countries like Venezuela, it becomes clear how important a stable money supply is. Even though they are blessed with huge amounts of natural resources, their economy has completely collapsed since the government started printing money at an astronomical pace. Shelves all across the country are empty and people are starving, all because efficient coordination between suppliers and producers is not possible anymore. You should be aware, since this can happen in every country where government controls the money supply, yours included.
This is where Bitcoin comes to the rescue. As you have come to understand by now, Bitcoin has a fixed supply of 21 million units. This means that nobody can cause unexpected inflation, essentialy providing us with prices that cannot be distorted, assuming that Bitcoin is used as a unit of account.* Using a currency of which the supply is constantly altered is analogous to using a ruler of which the length constantly changes. It's impossible to do efficient calculations with it because you cannot compare measurements through time. Imagine building a house with a ruler like that! This is exactly the reason why we have invented standardized measurement units for weight, length, time, temperature, etc.
Another analolgy can be made by comparing money to language. What if the vocabulary and grammar of a language was changed on a very frequent basis. In order to keep communicating properly you'd have to constantly adapt and update the way you speak. This learning process would take away costly time that could have been used to increase your productivity. The same is true for money since companies always have to take into account the changing money supply when doing economic calculations.
The world needs robust frameworks for society to build complex systems on. Nothing great has ever been build on a shitty foundation. This is why we have languages of which the rules are set in stone and measurement units that are uniform across continents. Wouldn't it be logical to also have a stable measuring stick for value? Instinctively we should agree, but since our currencies have been manipulated for such a long time, we have forgotten how useful this can be. This is why we need Bitcoin.
*It's important to understand that Bitcoin has not yet reached a stage in its evolution yet where it can provide stable prices. However, as more and more people start to grasp what Bitcoin is, the volatility will get smaller because a larger amount of value is stored in it. Once Bitcoin reaches the same magnitude of users as the current financial system, it's fixed supply will be able to provide the economy with much more informative price signals.
Bitcoin Is The Currency Of The Internet
As technology is evolving exponentially, the world is becoming more and more connected. The internet acts as a second reality for a lot of younger people. It enables us to chat with friends, watch our favourite tv series, attend zoom meetings for work, play games, consume the news, and so much more. Data has become digital and therefore it can now be transferred instantly to anywhere in the world. This is allowing us to have a much more productive and convenient life.
I want you to think about something: Why is it that I can stream a video directly to the other side of the planet with almost no latency or cost, yet when I try to do the same thing with money it takes "3-5 business days" and costs me 5% in fees. This doesn't make sense, and the only reason this evolution hasn't taken place for money yet is because banks have created a monopoly over our money. In the process of protecting their power they are introducing excessive laws and regulations to kill the competition. Until 2009, there had never been invented an alternative form of money that couldn't be stopped by this centralized power. Then there was Bitcoin. We are now eleven years later and they still have not managed to stop it, because Bitcoin is unstoppable.
Bitcoin will make possible the same things for money that the internet made possible for data. It allows you to send any amount of money to any person on earth, not caring about location, age, gender, background or anything else. Sending money will become as easy as sending a text message or uploading a video to youtube. The way we think about payments will shift dramatically.
Paying for netflix won't be a monthly subscription anymore, instead of this, a stream of money will start flowing into the wallet of Netflix as soon as you start watching your favourite tv show. The moment you decide to stop watching, the stream will be stopped. Monthly subscriptions for digital content will be replaced by streams of money that get initiated as soon as you start consuming. This concept of streaming money can be applied to Netflix, news sites, mobile data, electricity, etc. Money will no longer be owned by humans exclusively, machines and computers will gain the ability to transact in it. Imagine a future in which self driving taxis visit the gas station on their own and get filled up by a robot, picking up the next customer afterwards. These events would require transactions between computers. Currently that's only possible in sci-fi movies, but Bitcoin has the capabilities of bringing these movies alive, since it allows anyone or anything to create a wallet and start receiving and sending transactions immediately without having to provide any personal data.
The internet has evolved the way we consume information. As long as you have a smartphone and an internet connection all the data in the world is available at your fingertips. This data is delivered to you in real-time with no cost. The communication of value, enabled by money, has not yet gone through such an evolution, because banks don't allow it to. But thanks to Bitcoin, sending money over the internet can become as easy as it is to share a picture or video today. Machines will be able to do financial transactions without the authorization of humans whatsoever. We are not yet capable of understanding all the new applications that this innovation will enable. Just as almost nobody predicted 50 years ago that the internet would completely change our lives. Bitcoin is the logical next step in the digitalisation of the world
*It needs be to mentioned that Bitcoin itself is not suited for fast payments, streaming of money, or strong privacy. It is however the technology that's being built on top of Bitcoin that's going to make these things a reality. Bitcoin is the base layer of a completely new monetary system, on which additional layers will be built, revealing new ways of using and thinking about money along the way. It's important to understand that these innovations will never be possible in our current financial system due to all the regulations and central authorities.
Bitcoin Is The Best Performing Asset In The World
If you've ever considered investing in Bitcoin it probably started with you looking up a chart of its price. Depending on your timing, you may come to the conclusion that the price of one Bitcoin has lost almost 50 percent of its value over the past few months. This seems like the worst investment you've ever seen, so you start asking your friends for advice. They tell you that it's a bubble and that it is too volatile. This conforms with the very little research you have done and thus you decide not to invest a single penny. The next month, you see the price go down another 20 percent. You think to yourself: "Wow, I'm so happy that I listened to my friends".
Five years have passed, and by now you've finally saved enough to afford yourself a brand new car. On christmas eve you visit your family and show off your car for which you have been saving so long. The main dish was a great success and now everyone is eagerly waiting for the dessert. While you take a sip of your wine, you overhear your uncle babble something about Bitcoin. You want to make sure he doesn't lose any money with this scam so you ask him if he's been investing. To your surprise, he actually is, and he is making money too. Over the past three weeks he doubled his intital investment. Full of disbelief, you tell him to be careful and only invest what he can afford to lose.
Eventually the family gathering comes to an end and you decide to go to bed. As you drank a little bit too much wine, it's difficult to fall asleep. You pick up your phone and remember the conversation you had with your uncle. You wonder if he was telling the truth and decide to check the price of Bitcoin, remembering it to be around 300 dollars back in the days. The site finishes loading and you can't believe your eyes. One Bitcoin is worth 7000 dollars right now, that means the price has increased more than 20x since you last checked it five years ago! You realize that with an initial investment of as little as 1000 dollars, you could've completely paid off that brand new car you bought last month. Instead you had to put aside 250 dollars every month for the past 5 years. This sucks, you wish you would have taken the risk back in the days, instead of listening to your friends. But surely it's too late to start investing right now, the peak has been reached. You decide to regularly update yourself on the price to confirm your thoughts. As you expected the price doesn't increase any further and stays relatively stable, at least for now. You lose interest and come to the conclusion that you missed your chance. This is a process that a lot of people have went through, all making the same mistakes:
They don't understand that this is the wrong way of evaluating Bitcoin as an investment. Bitcoin isn't a "get rich quick scheme", but rather a "get rich slow scheme". The latter sounds a lot less attractive right now, but over a longer period of time it's worth the waiting. The most important thing one should do is zoom out. Instead of looking at the price performance over the past weeks or months, have a look at what the price has done over the last few years. You can look at the chart below to draw your conclusions.
This chart shows you the returns you would have made if you held Bitcoin for a period of four years. If the multiple on the y-axis equals 10, this means that an investment of 100 dollars, that was made four years ago, would now be worth 1000 dollars. The multiple tends to fluctuate around 20, always staying above 5 even during pullbacks. I challenge you to find any asset in the world that comes close to this performance.
Out of the last 10 years, Bitcoin has been the best performing asset 8 times. Again, if you look at the other assets in the picture above, the returns that these assets generate are much smaller overall. Surely this must be too good to be true? Well as you can see in the table, there were some years in which Bitcoin didn't perform that well. As expected, during these years Bitcoin lost a big part of its value. It lost 60% of its value in 2014 and 72% in 2018. These big dips have the potiental of scaring people away from Bitcoin.
Based on these pullbacks that occur every so often, Bitcoin can be considered a very risky asset. While this might be true if you're looking to invest in the short term, as mentioned above, during the bull runs, you can more than make up for the losses you made during the bear markets.
To quantify the returns of an investment relative to its risk, investors often use the Sharpe Ratio. In comparison to other assets like stocks, treasury notes gold it's clear that Bitcoin is performing on another level. Even though Netflix, Apple and Amazon all have similar risk to Bitcoin, their potential returns are way lower. We can conclude that although the volatitlity in the price of Bitcoin can be quite crazy, compared to the returns it offers this is a very small tradeoff.
Furthermore, Bitcoin can be a great addition to almost any portfolio. Investors and portfolio managers are always looking for a way to remove risk from their portfolios. They often do this by aqcuiring assets that are uncorrelated to the assets they currently own. This is not an easy task since there are a lot of assets that are completely depending on the state of the economy for their returns. One option to hedge your portfolio against a downturn in the economy has always been gold. As we're speaking Bitcoin is setting itself up to accompany gold in this role. If you look at the data below, Bitcoin shows very little correlation with other assets. This means that it could be a very useful tool to generate returns when all other assets are failing to do so. As more and more professional investors come te realize this, Bitcoin will get included in almost every portfolio.
If you're being really critical, you might still point out that past performance does not guarantee future performance. While this is a correct statement to make, there has been done a lot of research to generate a model that predicts how the price of Bitcoin will evolve over time. Out of this research the 'Stock-to-Flow Model' was born. This model has found a statistically significant relationship between the price of Bitcoin and its Stock-to-Flow ratio. The stock of an asset equals the existing supply, while the flow represents how much of it is produced. If you calculate the ratio of these two values, you're left with the time it will take for the supply to double given a constant flow. The larger the ratio, the more scarce the asset. As time passes, the flow of Bitcoin will get smaller and smaller until all bitcoin are mined, eventually arriving at a flow of zero. Using this knowledge, you can calculate that the Stock-to-Flow ratio of Bitcoin will converge to infinity. The model provides us with a function that takes the S2F ratio as an input and spits out price as an output. As this ratio is known far into the future, we can use it to predict price performace. According to the model, Bitcoin could reach a price of 1 million dollars before the end of this decade. Keep in mind that while the relationship between the S2F ratio and the price may be statistically significant, it still doesn't guarantee that the model will hold, neither should you use it to do exact price predictions. For a more in depth overview of the model please read the article "Modeling Bitcoin Value With Scarcity" listed in the resources.
Since its conception, Bitcoin has been through periods of upside and downside. This journey might seem volatile and scary if you look at it through a magnifying glass. However, when you zoom out you'll soon realise that there has been far more upside than downside. People do not notice this initially, since our brain is programmed to be very hesitant towards new technologies. Once more correct information is spread through the population, Bitcoin will be accepted as a new form of money more easily. While no one has a crystal ball to predict the future, chances are that Bitcoin's price will continue to increase over the long term.
Bitcoin Is Good For The Environment
One of the most frequently used arguments against Bitcoin is that it wastes energy that could be used for a better purpose. This section is dedicated to rebutting that argument.
Bitcoin uses a lot of energy. This is a fact and can therefore not be denied, however there are a lot of other things for which the same is true. If you are opposed to Bitcoin for this reason, you should think twice about your Christmas decoration next winter. It has been proven that, in the US alone, christmas lights are responsible for 6.6 billion kilo watt hours of electricity every year. That's more than the entire national energy consumption of some countries. Indeed, there are many activities that require great amounts of electrity, but we justify this cost because these activities are deemed useful or entertaining. Once you start understanding that sound money is incredibly valuable, you'll realise that Bitcoin is worth the energy because of the benefits it brings to society.
Bitcoin was born out of the financial crisis to offer an alternative for the failing financial system. A system that requires huge amounts of electricity to power banks, monetary policy research, money transport services, ATMs, payments processors and much more. The complete Bitcoin infrastructure however, can be powered by a single network of computers. In a world where Bitcoin gains reserve currency status, all of the national currencies and their energy hungry infrastructure would become obsolete. Energy usage worldwide would be reduced drastically.
When you're trying to bring down Bitcoin for consuming too much energy, you should first of all consider what sources of energy Bitcoin prefers to use. Bitcoin miners are responsible for securing the network, receiving newly issued coins by doing so. A lot of computing power is needed to do this. To stay in businnes, the miners need to get their hands on the cheapest electricity available to power their computers, otherwise their operations become unprofitable. The cost per energy unit is often the lowest for solar, wind and hydro energy. These energy sources are available for free in contrary to traditional sources for which you need to burn costly resources. Surprisingly, all the electricity sources that Bitcoin attracts are renewable and thus better for the environment then their alternatives. But if these renewable energy sources are so cheap, why aren't they used more often? That's because the power plants are often build in remote areas, further away from the population, bearing extra transportation costs to deliver the electricity to the customers.
Something unique about Bitcoin mining is that it can be performed at the exact same location as the energy source. There is thus no extra cost for transporting the electricity, giving companies an economic incentive to invest in renewable power plants located in abandonned areas. Another problem that these alternative energy forms cause, is an excess supply of electricity during non-peak periods. When you build a 50 megawatt plant in a place where they only demand 15 megawatts, this is to be expected. Since you cannot easily store or get rid of all this extra electricity, the more economic choice is to shut down your power plant. This results in freely available energy being wasted. Essentially, renewable energy production is not profitable because of the inconsisent amount of energy it provides. Bitcoin allows you to convert all this otherwise wasted energy into a cashflow by using it to power your mining rigs. By doing so, Bitcoin is converting excessive energy from a liability into an asset. Bitcoin makes investing in renewable energy production a lot more profitable, thus accalerating the innovations in this space. At least 50% of the electricity used to mine bitcoins is already provided by renewable energy sources, confirming the narrative explained in this section. As Bitcoin mining grows and becomes more mainstream, an ever growing part of the energy production business will get involved, forcing them to use renewable energy.
Bitcoin is a deflationary currency, resulting in it having a purchasing power that increases over time. This is encouraging you to save more and spend less. Our current society is based on a currency that is constantly losing value, not performing well as a savings vehicle. This drives people's time preference up, forcing them to prefer present consumption over future consumption. As a consequence, more and more non-essential goods will be bought, since spending your money is better then saving it. Products no longer have to be durable because you can just replace them when you feel like it. Inflation is the key driver behind our mass consumption culture. People tend to forget that all these products need to be produced and transported, requesting a lot of scarce resources from our planet. What if everyone used a money that increased in value every year? Essential purchases would still be made, but a lot of persons would start to prefer saving over spending, especially when thinking about buying something they don't really need. Why would you spend your money now, if you can be sure that it'll buy you more next month? Scarce money, like Bitcoin, makes consumerism too expensive.
Caring about the environment should always be supported, as long as it is done rationally. Criticizing Bitcoin for using too much electricity, without looking at how this electricity is generated, doesn't seem too rational. People do not yet comprehend that the positive impacts of Bitcoin heavily outweigh its environmental costs. Above all, Bitcoin is spurring innovation in the alternative energy sector by improving the profitability. Once people start to experience the joy of a money that increases in purchasing power over time, their time preference will shift. This process will take time, but it will eventually force people to care more about their future and the future of the earth. Bitcoin is good for the environment.
Bitcoin Is Key To An Abundant Future
Throughout history the economy has always gone through booms and busts. They are part of a constantly repeating cycle that's inherent to nature and this used to be widely accepted. However, at some point in history these cycles stopped being natural for some reason and people felt like they needed to stop them. After all, an economy that keeps on growing infinitely made much more sense. The people I'm talking about are the bankers and their weapon of choice is manipulation of the price of money. Their idea was that when the economy started to slow down, they could lower the interest rates and print money, resulting in more lending and more investing. This props up the demand for money and eventually increases the supply, which would cause inflation. It's not hard to imagine that people are willing to spend more when prices are rising. Central banks had essentially created a mechanism by which they could make people buy more stuff even when the economy was slowing down. Since economic growth is measured with GDP, more consumption creates a 'better' economy. When the next recession arrived they opted to try out this new mechanism as a way of stimulating the economy instead of letting it go through its natural cycle.
Initially it seemed like this tactic was working and people started to trust the central banks with the responsibilty to 'save' the economy. Let's take a look at where is has brought us. Interest rates across the globe have reached zero percent, which has caused lending money to be preferred over saving money. Since lending money creates debt, we are now living in a world based on debt instead of savings. This has huge implications on the way we can cope with future downturns. In a savings based world people are prepared for periods in which their income decreases or disappears. In a system based on debt however, people need to continue paying off loans when their income is lost. This forces them to spend and borrow less. Prices automatically start to decline causing the money to gain in value. Since the value of debt is denominated in a currency that's gaining value, existing loans get more expensive. This forces people to cut down spending even more and soon enough we've entered a vicious circle. The only possible way to break of this negative spiral is by printing lots of money so that the inflationary powers defeat the deflationary ones. This would result in prices rising and the currency losing value which would eventually enable people, nation states and companies to pay off their huge amounts of debt. All this money printing that is necessary to save the economy, is at the same time destroying savings of the middle class. Central banks have created an economy that's hooked on inflation and can't continue without it. Because of the huge amounts of debt in the system, the economy cannot tolerate deflation as it would increase the value of that debt and make it so that nobody will ever be able to pay it off. Prices have to rise for this broken economy to function properly.
However, technology is enabling us to exponentially increase our productivity. You can think of any product and be certain that somewhere in the production process technology plays a part. This means that it will get extremely easy and cheap to produce almost anything in the future, which would logically allow prices to decline. Technology is creating abundance and you can already experience it with services like Netflix and Google. These are technology driven companies that offer an immense amount of content for almost no cost. As technology finds its way into different sectors of the industry it will create abundance everywhere and bring prices down overall. This should be applauded since people will have to spend less time working and gain access to cheaper products, all at the same time.
Unfortunately this abundant future is not compatible with the current monetary system. Everything will be done to tame the deflationary forces that are growing exponentially. Unimaginably large amounts of money will have to be printed to keep prices from falling, eventually causing the whole system to break. It's clear that we need a money that's compatible with deflation. It's not sure what kind of money this will be, but in my opinion Bitcoin is the best candidate. If we abandon the debt based economy we're currently living in and embrace a Bitcoin Standard, deflation would be our ally. People would fall in love with saving again as they saw their purchasing power increase instead of decrease. Debt would be far less common and downturns in the economy could be survived without central banks stepping in and devaluing our money. Recessions would be periods in time where inefficient companies go broke and their more effective competitors take over their market share. Exponential improvements in technology could be embraced so that production processes became more time efficient and prices of goods and services would fall, giving people more time and money to enjoy their lives.
Another way through which Bitcoin enables abundance is the demonitezation of other stores of value. People started storing their wealth in assets like real estate and gold once they realized their money loses value every year. As a consequence, the prices of these assets increased beyond their actual value. Gold and real estate were being used as 'money' and as a result their price gained a monetary premium. While this is beneficial to the people storing their value in these assets, it is rather detrimental for people in need of a place to live or for the price of electronics, as gold is often used as a conductor. As soon as more people start using Bitcoin to store value, other assets will lose market share. Housing and gold would become more affordable again, which would result in a larger part of the population gaining access to the benefits they bring. Bitcoin is not affected by these problems since it doesn't have any use cases except being money.
Technology is changing our lives for the better by allowing us to produce more efficiently and thus spend less time working. In a world that's based on debt the deflationary effects that this causes are posing a threat to the sustainability of the economy. Our current monetary system is not compatible with exponential technology and so an alternative should be considered. I firmly believe that Bitcoin will usher in an era of savings, increased productivity and decreasing prices. Bitcoin is the only form of money that's able to provide us with an abundant future.
Bitcoin Is Essential
We're living in the 21st century, an exceptional period of technological innvation and breakthrough. Our lives are changing for the better in almost every possible aspect. Yet the one aspect that's missing might be the most important one of them all. Money is the cornerstone of all collaboration, it forms the base for all social activity. Without a good or sound money, society comes crashing down. Right now, the money we use is enriching the elite at the expense of the middle class, creating social unrest around the globe. We're being robbed of our privacy, enabling government to tighten their grip on our lives. Our earth and our minds are rotting because of the high time preference that's created by the constant increase of the money supply. The ability to communicate our preferences through prices has been taken away, causing resources to be allocated inefficiently, thus reducing productivity. Our time and energy is getting dilluted, taking away our chance to save for future generations.
In short, every part of life is being negatively impacted by the money we use. It is about time the people rise up and try to stop this negative spiral. According to all the reasons listed on this page, Bitcoin seems to be the perfect candidate to fix all the shortcomings caused by the current monetary system. It's giving everyone on this earth a way to opt out, a way to improve their situation, and the situations for many generations to come.