Understanding Bitcoin: Rooted in Decentralization
Part 1 in a series dedicated to explaining the fundamentals of free-market money.
Since it was conceptualized from mysterious origins, Bitcoin has symbolized different things to different people. True Believers see it as a way to break free from the stranglehold of an oppressive banking system and revolutionize person-to person payments across the world. They believe it has the potential to ultimately restore power and personal sovereignty back to the common folk.
Naysayers, on the other hand, admit that while Bitcoin may have ushered in a new class of technology that kicked off the cryptocurrency boom, they see it as more of a fad, bound to be replaced when better technology comes along. Still other smart people think it’s a Ponzi scheme.
To properly evaluate Bitcoin, we need to first understand how it started.
In 2008, the pseudonymous Satoshi Nakamoto published the Bitcoin whitepaper which outlines the motivation for the project and the technical aspects of its implementation. Since then, Bitcoin’s prominence has grown along with the value of its token, from worthless digits (or “bits”) in a computer, to $69,000 in November 2021. At the time of this writing, it’s trading at around $24,000.
The primary problem Satoshi was trying to solve was figuring out how to securely transact, peer-to-peer, without having to rely on (or trust) a bank which acts as a de facto gatekeeper to the financial world. That is, he was trying to eliminate the need to rely on banks to execute financial transactions.
The Problem With Banks
Before Bitcoin, payments made online necessarily had to rely on a trusted third-party to complete the transaction. Why is this a problem?
For one, banks, and especially central banks, inflate the money supply which devalues your currency. This is true of any currency throughout the world. Inflation is an especially insidious, hidden tax which has an outsized impact on the poor and middle class. (That’s an article for another day. Get notified here:)
Beyond that, some estimate that 5 billion+ people in the world — primarily in developing economies — are unbanked. That is, they do not have an account with either a financial institution or with a smartphone app-based mobile money provider. The unbanked can make in-person cash transactions just fine, but sending money online can be costly and difficult. They pay high fees for simple bank transactions like money transfers and, in many cases, are forced to invest additional time and money just to get to the nearest financial service provider (like Western Union) which could be hours or even days away.
Bitcoin solves this.
But Wasn’t Bitcoin Created to Launder Money?
Some suggest that the key motivation for creating Bitcoin was to avoid the banking system and have the ability to transact for illicit purposes. While we can’t know for sure, we can consider the other breadcrumbs Satoshi left behind to evaluate this assertion.
Hard-coded in the first Bitcoin block transaction is this cryptic message:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.
It is generally accepted that the referenced date was the official launch date of Bitcoin. And the text refers to a front-page newspaper article published that very same day in The Times of London.
That Satoshi didn’t reference an article on drug dealers, money launderers or other elicit activity is telling. The reference to this specific article suggests that Satoshi was not a fan of banks or bailouts, and that Bitcoin was his double-barrel middle fingers aimed directly at these parasitic institutions with the intent to disrupt them.
Other Design Hurdles Solved
Besides trying to create a trustless, decentralized platform for traditional bank transactions, Bitcoin also solved a number of other non-trivial problems that had to be overcome just to maintain the basic viability of the network, including:
The double-spend problem: eliminating the ability of a bad actor to spend the same token in two places at the same time
The Byzantine General’s Problem: authenticating network messages without having to trust the messenger
The computer clock time problem: since Bitcoin algorithms make use of a time interval, a novel way for the network to keep time was essentially invented to eliminate dependance on computer clocks
The circulation problem: how to incentivize network growth while also devising a way to programmatically put tokens into circulation without a central authority
The more one digs into the design of Bitcoin, the more one is amazed that one person (or perhaps even a group of people) came up with such an elegant but robust solution. For over a decade, people have tried to hack it to find vulnerabilities to exploit and so far, it has emerged unscathed.
Uniquely Decentralized
Lawrence Lepard, who runs an investment management firm, recently published an investor newsletter which included a lengthy discussion of Bitcoin. He succinctly summed up my own thoughts on Bitcoin so well that I wanted to touch on some of his key points. [Hat tip to Quoth the Raven for reproducing the newsletter.]
Lawrence says (emphasis added throughout):
It is important to distinguish between Bitcoin and all other crypto currencies. We strongly oppose all other crypto currencies, which when boiled down to it are just a bunch of middlemen trying to take their “toll” on the highway of the blockchain/Bitcoin by playing levered, fiat games.
We strongly believe in Bitcoin, and are what the world calls, Bitcoin maximalists.
In other words, a Bitcoin maxi is one who believes in both the long term viability of Bitcoin, and the long term unviability of all other cryptos.
What makes Bitcoin unique is that it’s the only cryptocurrency that is completely decentralized. No one person or group has outsized influence over the rules of the network. This is partly due to the way it was designed (using proof-of-work instead of proof-of-stake), but also due to the way Satoshi exited: by just disappearing.
He (or “she” or “they” — whatever the case may me) designed, created and implemented this impressive batch of computer code. He then jump-started it by producing the first, “genesis” block in the Bitcoin blockchain. Then, he just disappeared, never to be heard from since. *Poof*
[Note: Satoshi’s disappearance gains even greater significance when one considers the value of unspent Bitcoin that Satoshi mined early. Because all transactions sit on a public ledger, we can see that those early mined Bitcoin have sat there, still unspent to this day. It has been speculated that maybe Satoshi lost his keys to the wallet. Or maybe he’s waiting until Bitcoin’s value get’s astronomically high before spending it. Or, perhaps he’s just an irresponsible twit. Whatever the case, the enigmatic nature of Satoshi Nakamoto and the Bitcoin origin story adds to the mystique.]
The way Bitcoin came about — under the radar of governments and bad actors — is a scenario that is unlikely to ever be repeated. The cat’s out the bag. Any future attempts to create a cryptocurrency under the same structure will be defeated before it barely gets off the ground because that’s when it’s most vulnerable to attack. This is widely known only because of the lessons taught by Bitcoin’s rise to prominence.
In investment parlance, this gives Bitcoin a moat which prevents up-and-comers from challenging it. Bitcoin could very well be the only crypto that is ever completely decentralized.
It’s this decentralization that gives Bitcoin its edge over nation states. No entity or government is powerful enough to “kill” it. While legislation could be created to deter use or ownership within a given jurisdiction, they will not be able to completely snuff it out everywhere in the world. It’s free-market money created by the people, for the people.
And I suspect Satoshi Nakamoto is thrilled with the level of success his invention has achieved thus far.
Let me know what do you think! Agree or disagree? What else should I have covered? Share your thoughts and questions here:
Disclaimer: Nothing presented here should be considered legal, tax, investment, medical, or dating advice. Information is provided without warranty. I may own any and all assets mentioned. (Just assume that I do and evaluate my words accordingly.) Consider seeking the help of a professional who considers your unique situation and circumstances…. or don’t — it’s your choice!
Do not outsource your thinking to anyone, including this author. You are a beautiful, free-thinking individual with intelligence, free will, and inalienable human rights. Exercise them as often as possible to maintain them. And keep seeking truth.