What is Bitcoin?

Lots of digital ink has been spilled explaining the question “what is Bitcoin?”

As the price of bitcoin nears $100k, it’s a good time to explain it again. I find myself explaining it to a lot of people still, and find many people are still confused. It can be confusing!

I wrote about bitcoin it in my book, and part of the intro was this question:

What if the internet had money built in, that was distributed, and that nobody owned but anyone could use?

I have also been blogging about bitcoin and crypto since 2014 (post here on buying dogecoin, crypto/blockchain as one of my top 5-10 year trends from 2017, getting started resources, and more).

So what is it?

Bitcoin is a cryptocurrency secured by a network of computers that can only ever have up to 21 million coins.

• Cryptocurrency means it is an online digital currency.
• It’s distributed–there isn’t any one person that owns the network
• It’s secured by cryptography (math)
• Anyone who wants can have a copy of the whole ledger (blockchain)

Bitcoin doesn’t really fit a lot of existing mental models so it’s helpful to think of it in other ways. Here are a few different ways to think about bitcoin.

Internet money

First, bitcoin is internet money. Any cryptocurrency can really be internet money, but bitcoin was the first and is currently the largest cryptocurrency. Web pages don’t have the concept of a native payment system, but bitcoin is an open money system that anyone can use.

Digital gold

Bitcoin can be looked at as digital gold. Much like physical gold represents a store of value of a scarce and desirable resource that is hard to reproduce or forge, bitcoin has many of those properties. Some interesting properties of bitcoin is that it is:

• Scarce (only 21 million bitcoins will be created)
• Divisible (the smallest unit is 0.00000001 BTC, or 1 one hundred millionth of a bitcoin, aka a satoshi)
• Portable (easy to move, you just need your private key, or seed phrase, or just your phone)
• Fungible (individual parts are interchangeable- a bitcoin is as good as any other bitcoin, like a dollar is as good as any other dollar)
• Durable (Should last over time)
• Verifiable (you can tell it’s a legitimate bitcoin, or verify the value of a wallet, like you could verify if the gold is pure, or verify if a dollar is counterfeit).

The St. Louis fed lists some properties that important for money: “The characteristics of money are durability, portability, divisibility, uniformity, limited supply, and acceptability.” Bitcoin has many of these.

Bitcoin is still hard to get and hard to use day to day, and there are a few other properties to consider.

Store of value: Bitcoin has held and significantly increased its value so can be considered a store of value. However, it has a much shorter lifetime than gold or US dollars so has not been proven.

Medium of exchange: It could be used in this way, and possibly is for larger transactions but isn’t as common yet.

Unit of account: Bitcoin is very volatile in price and not currently in use in this way.

Blockchain
Bitcoin is a blockchain – a distributed immutable ledger. The way transactions work is that anyone can send out a transaction, and then they are grouped together in blocks. Each block is then added, or chained on to the prior one, and together these create a blockchain. Each additional block secures the network further and makes it increasingly infeasible and expensive to go back and change the history. These transactions are finalized by bitcoin miners, effectively large groups of computers running expensive math problems to add the new set of transactions to the ledger.

So this ledger is open–this means anyone can inspect it. For example here is a BTC explorer and here is a sample block.

Open source software

Bitcoin is also open source software. You can download the software, edit it, fork it (create your own version), run your own copy, run your own node, or just explore the code. Here’s the code https://github.com/bitcoin/bitcoin. Lots of new cryptocurrencies are actually just forks of bitcoin — someone made a copy and changed some variables and gave it a new name.

A New Macro Asset with a Set Monetary Policy

Bitcoin could be considered a new macro asset with a set monetary policy. Following the digital gold analogy, bitcoin and cryptocurrencies can be seen as a new asset class. Investors might invest in stocks, bonds, real estate, commodities, private equity, but cryptocurrency is slowly being added to that list (it is listed on the Wikipedia page for asset classes). Investors might look for non-correlated assets to diversify a portfolio. In addition, it might be seen as an inflation hedge. US inflation has been around 3% per year over the past 10 years, and 8% in 2022. A dollar from 1950 is worth $13.10 today.

Also, relative to many other countries, US has more manageable inflation. There have been many countries in the past with hyperinflation. There are many countries with inflation in 2024 over 20%. Anyone in these countries is rapidly losing purchasing power and could benefit a lot from storing value in bitcoin or cryptocurrencies.

The monetary policies of different countries can be highly variable, and countries can print lots of money and cause inflation. Bitcoin has a set monetary policy, the rate at which new bitcoins are minted is known, and the limit of the total supply of bitcoins is known. We don’t know yet how the monetary policy will stand over time, but it is more set than many countries.

Digital savings account

Bitcoin can be thought of as a digital savings account. Given some of the earlier properties, you could choose to save money in cash, or maybe stocks or a stock index, or property like a house. However, to keep up with inflation you have to own assets. This may allow for a new type of digital savings where people prefer to store some money in bitcoin rather than just in cash, which can lose value to inflation.

A Potential Reserve Currency or Treasury Asset

Bitcoin is gaining legitimacy in several new ways. There are now many ETFs that have over $100B in bitcoin.

There are many companies starting to hold bitcoin as a treasury asset, most notably Microstrategy.

Countries are holding $50B of bitcoin, some of them more intentionally like El Salvador or Bhutan. The US has talks of a “strategic reserve of bitcoin”–and while far off– the fact it is being discussed is very interesting.

What’s interesting here is that the game theory of it might suggest that as more countries get bitcoin, it becomes more validated, and it may lead to other countries trying to get bitcoin, and continue to make it more desirable and valuable.

Memecoin

Bitcoin is a memecoin. There are now thousands (or more?) memecoins, which have no value or purpose, but just are internet digital tokens. Bitcoin is a memecoin. It just is the strongest meme coin. It has a community, lots of companies, exchanges, tools, and software around it. We don’t know how many users but maybe there are 100 million holders, or rather hodlers. Bitcoin now has a market cap of $1.9 trillion. So there are a lot of people invested in the meme.

Philosophy of money – Bitcoin has value if people want it

Part of learning about bitcoin is learning about the philosophy of money, what is it and why does it have value? What is the history of money? One reason that is simple but also true is that something has value if people want it. People across the world want to hold US dollars because they believe they hold and will hold value. This is another valid reason to hold bitcoin. People believe bitcoin has and will continue to hold value. Why bitcoin and not any other coin then? This is a great question. It could be any other coin. But as more people buy into bitcoin, it may increase its perception of legitimacy.

But what if it all crashes to zero? (and other objections)

I guess it all could. That could happen to a lot of things, and it’s certainly still considered risky. But I think all of the reasons above are reasons it may not crash. “Where is the cash flow?” See reasons above why it may be valuable despite not looking like a normal company with profits.

What about the other cryptocurrencies?

There are thousands (or maybe millions, depending on how you count them?) of cryptocurrencies. What about all of the others? Many are random tokens that no one uses or cares about. But lots have apps, and users and ecosystems. Ethereum and Solana are several of the very popular large coins. These are arguably even a bit more programmable than bitcoin. So we don’t know which ones will win. Bitcoin for now is the largest and the OG, but anything could happen.

I guess we should check back in 10 more years!