Over time, things tend to change a lot.
Earth was once devoid of life, and then one day, it wasn’t.
Horses used to be a normal form of transportation, fast forward a hundred years, and we now have half a million pounds of metal to sit in as we soar 400 miles an hour through the sky.
We used to slowly go blind, then we figured out that with just the right amount of glass placed in front of our eyes, our vision could be restored.
These things seem kind of insane at first glance, but most life changing inventions tend to have that effect on us.
Bitcoin is one of those things.
To help us understand just how drastically things have changed over time, we need to understand the concept of "phase transitions." During phase transitions, properties of whatever the underlying is can change quite radically. Let me explain.
Take water for example. Water exists as a solid, it melts, and turns into water as a liquid. Boil water on a stove, it turns into a gas. The same thing happens in the world of finance. This is a US dollar, but the dollar hasn’t always been the same. It’s undergone plenty of change over the course of it’s short history, and it’s inevitably going to continue to change.
We started off with gold coins, that then turned into pieces of paper backed by gold, to now, where the piece of paper that is known as a US dollar is backed by literally nothing. Our definition of “value” is literally just a piece of paper.
Over time, people begin to prefer different methods of payment, and our very definitions of "money" and “currency” evolves with time. After long enough, certain methods of payment just don’t cut it anymore.
“Bitcoin: A Peer-to-Peer Electronic Cash System” is a 9 page paper published in 2008. The author, Satoshi Nakamoto. In recent times, I’d say this is one of the most important documents to have ever existed. You don’t need hundreds of pages, graphs, and sources; just 9 pieces of paper that could potentially change the financial system of the entire world. If you don’t believe me, I’ll show you. Let’s break it down.
I'm going to paraphrase things a bit, but let's figure out exactly why Satoshi Nakamoto created Bitcoin... in their own words.
The root problem with conventional currency is all the trust that's required to make it work.
Central banks 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 yet they lend it out with barely a fraction saved in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. But yet, that still happens.
20 years ago, multi-user computer systems had a similar problem. Before strong encryption, users had to rely on password protection to secure their files, placing trust in the system administrator to keep their information private. Privacy could always be overridden by the admin based on their judgment calls, weighing the principle of privacy against other concerns.
Then strong encryption became available to the masses, and trust was no longer required. Data could be secured in a way that was physically impossible for others to access, no matter for what reason, no matter how good the excuse, no matter what.
It's time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.
One of the fundamental building blocks for such a system is digital signatures. A digital coin contains the public key of its owner. To transfer it, the owner signs the coin together with the public key of the next owner. Anyone can check the signatures to verify the chain of ownership. It works well to secure ownership, but leaves one big problem unsolved: double-spending. Any owner could try to re-spend an already spent coin by signing it again to another owner. The usual solution is for a trusted company with a central database to check for double-spending, but that just gets back to the trust model, and we've seen how those have turned out.
Bitcoin's solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distributed timestamp server, stamping the first transaction to spend a coin. It takes advantage of the nature of information being easy to spread, but hard to contain.
The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of a P2P network, a blockchain, to check for double-spending.
Bitcoin is a global distributed database with additions being made only if the majority of other blocks agree and validate the block. You can view each “block” as a group of information in the overall database, which in our case is full of monetary transactions. When each block is full of validated information, it gets added to the end of the previous block, forming what we call a blockchain.
Whenever someone finds proof-of-work to generate a block, they are rewarded with the new Bitcoin they just mined. The proof-of-work difficulty, basically the amount of computational effort required, is adjusted every two weeks to target an average of 6 blocks per hour for the whole network. Lastly, the Bitcoin reward per block is cut in half every 4 years, or every 210,000 blocks. As time goes on, the proof-of-work difficulty increases, taking more and more power and time to solve, and we slowly approach the supply limit, with the last Bitcoin coming into existence in the year 2140.
This results in a decentralized network with a finite supply of 21,000,000 Bitcoin, which can be subdivided into Satoshi's, or 1 hundred-millionth of a Bitcoin. They are issued in a limited, predetermined amount. The blockchain provides a universal data set, a permanent ledger that every user can trust, even if the users don't know each other.
Bitcoin isn’t a person, it isn’t a company, it has no central figure or reserve. No matter how many people adopt Bitcoin as their store of value, even if all 8 billion humans on Earth chose to use it, there will only ever be 21 million Bitcoin.
There is nobody to act as a central bank or federal reserve to adjust the money supply as the population of users grows. That would have required a trusted party to determine the value, which defeats the entire purpose. In this sense, Bitcoin is more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes.
“As the number of users grow, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.”
And increase in value it did.
Remember phase transitions? Bitcoin also has phases. As time has passed, the way the world has viewed Bitcoin has continued to evolve. From a simple proof of concept, to becoming an efficient small payments network, to being labeled “digital gold”, to now today fundamentally changing the way we transact with each other worldwide. Since its creation, it's resulted in some of the highest annualized returns in the world, closing in on becoming one of the highest market-cap assets in the entire world.
Change is a good thing, and in our case, a necessary one.
While the market-cap of Bitcoin is constantly increasing, it still pales in comparison to the amount of actual "money" that exists in the world. There’s levels to it, and it goes further than you’d ever imagine.
To just put this into perspective, the value of Bitcoin as an asset has recently surpassed $1 Trillion, and while this sounds like a lot of money, it really isn't. The US government just passed a $1.9 Trillion COVID-19 relief bill. Essentially, the US government, overnight, printed $2 Trillion Dollars.
It's insane when you really think about it. To take this point further, roughly 30-40% of all US Dollars in existence were printed last year. On top of that, the purchasing power of USD has fallen by 97% since 1917, and I can only imagine where it will be in the next ten years.
Bitcoin, though, still has far more left in the tank.
But for Bitcoin to become a global reserve currency, hundreds of millions, if not billions of people will need to adopt it. Is it that far-fetched of an idea? Almost everyone that gets sucked into the Bitcoin black hole ends up on the other side of it, explaining to their friends and family that Bitcoin is some new and improved form of money. Sounds kind of like a pyramid scheme, right?
When Dell started selling PCs on its website in 1996 and everyone told their friends to get a Dell, was it a pyramid scheme? When Apple released the first iPhone in 2007 and everyone told their friends to drop their Blackberry's for it, was that a pyramid scheme?
Technological shifts often happen fast. Ten and twenty years later, smartphones and PCs are everywhere you look. It's all about the quality of the product and the incentive structure. Regardless if someone owned Apple stock or not, did it change the fact that the very product itself provided a real value proposition? Was there a direct benefit for telling people about a new technological innovation?
In pyramid schemes, the people selling the scheme are usually the scammers. They promise you huge future returns, and those returns come almost solely from recruiting more members to the pyramid scheme. It continues to waterfall; in a sense, when purchasing Bitcoin, you are the scammer, except you aren't. Whenever someone buys Bitcoin, they're mostly always trading a fractional reserve currency, like the US Dollar or the Euro, in exchange for an asset with a finite supply with a much greater monetary policy, Bitcoin. In the long term, it's an asymmetric exchange of value, and few realize this. Using history as an example, reserve currency status doesn't last forever, and almost all previous currencies ran the risk of debasement.
Bitcoin does not.
Consider this. Let's run a quick comparison.
The US Dollar, as previously stated, can be printed. The Federal Reserve could literally print pretty much any amount of money you could imagine, like they recently did. It's supply is, in theory, unlimited and unpredictable.
Bitcoin, on the other hand, has a fixed supply. There is no printing or duplication of coins, there's a finite amount that will ever exist. It isn't "created" out of thin air, Bitcoin are issued through a mining process that helps to secure the network, and the network adjusts to ensure that Bitcoin are issued on average every ten minutes; in its current phase, this equates to 6.25 Bitcoin being mined every 10 minutes. In 2024, this will be cut in half, with a new block reward of just 3.125 Bitcoin. Remember, every 4 years, the reward halves again.
To put this into context, think about gold mining operations where every mining company in the world starts finding half as much gold, but it only happens every four years. What impact would that have on the price? The amount of sellers would diminish, and the price would go up.
If more mining resources get added to the network, well the network just adjusts accordingly to prevent Bitcoin from being issued at a faster rate. More mining just means higher network security, rather than an increasing rate of issuance or increasing the total amount of Bitcoin that will ultimately be issued.
18 million out of the 21 million possible Bitcoin have already been mined, and many are lost forever. Some estimates say that as much as 20% of all Bitcoin in existence are locked up in lost wallets, with forgotten passwords or seed phrases or owners who are no longer alive.
But something big is happening. Since its inception, the amount of Bitcoin in circulation has consistently gone up year over year. There’s videos of people spending thousands of Bitcoin on things like candy bars, pizza, and stuff like that. However, over the last year, things have started to change. More and more institutional investors have been jumping on board the Bitcoin train.
In fact, they’re buying more Bitcoin each month than what’s being mined currently, and they aren’t selling it. Now if you think about this for long enough, you’ll realize that this actually limits the amount of freely circulating Bitcoin on the open market. If they’re buying faster than it’s coming into existence, well that limits the supply. As of right now, there’s only about 4 million Bitcoin in constant circulation through most exchanges. This ultimately pumps the price even higher.
It’s pretty simple to understand. If there’s ever only going to be 21 million Bitcoin and people with tons of money pour their billions of dollars into Bitcoin, well that takes up some of the supply. And the more and more banks, companies, and similar institutions that get involved with Bitcoin, well that just cuts the available supply further, which drives the price up even more.
In this situation, it really is “the early bird that gets the worm.” Once the world starts pouring in, you can only imagine where things could go. It’s a positive feedback loop, and this means everything. In fact, this is exactly what Satoshi envisioned, in his exact words.
With every block mined, Bitcoin enforces it's monetary policy every 10 minutes; 6 times an hour, 144 times a day. The longer Bitcoin lives, the more people that get involved, the more valid the Bitcoin blockchain becomes. Overall, the more people that use Bitcoin, the stronger the underlying theory behind it becomes.
The value proposition of an innovation trumps all else. It doesn't matter how you learn about it; all that matters is whether the innovation provides utility. If it does, people will want to use it; if it doesn't, they won't. That is what makes a market.
So far, there seems to be a use for it. People are beginning to realize the long-term value.
Today and into the future, Bitcoin's utility is the ability to reliably store wealth in a monetary medium that can't be debased. It is a non-manipulable form of money, and it has the potential to be one of the greatest instruments of true financial freedom ever invented.
The success of Bitcoin isn't a given, but there is a possibility. At the end of the day, Bitcoin is a communication tool. That is the function of money. Bitcoin simply provides an alternative system, operating on a decentralized basis that no one controls. It is this lack of control which will allow Bitcoin to work more effectively than any pre-existing monetary medium.
Why? Because it’s proven to work. As time goes on, more and more people are starting to realize this.
In Sergio Lerner’s report, “The Well Deserved Fortune of Satoshi Nakamoto, Bitcoin Creator, Visionary and Genius,” he looked back to 2009. From block 0 to block 36,288, Lerner was able to narrow everything down to a single entity. With just a simple mining rig, this “entity” was able to mine thousands of blocks on the blockchain, racking up over 1.8 million BTC in the process.
Of this 1.8 million BTC awarded, approximately 63%, or roughly 1.1 million BTC of it has never been spent. In the first seven months of its existence, it’s believed that it was Satoshi Nakamoto who mined the first 22,000 blocks almost entirely on their own. It’s thought that all of the rewarded BTC from that still remain in that original wallet.
Satoshi, whoever he, she, or they might be, has seemingly vanished off the face of the Earth. For the past 10 years, the creator of Bitcoin, the visionary behind this monumental step in history, has been nowhere to be found, and honestly, that's deserving of an entire video on it's own.
There’s much more to come.
The future is limitless, and all we can do... is wait.