Bitcoin - Without the Bullshit

A starter guide to using Bitcoin in your day to day life

I don't proclaim to be a Bitcoin expert, even though I have interacted with Bitcoin for a decade. I don't have very much money in Bitcoin - but I have enough to feel that I am exposed to this very important asset class.

At its core, Bitcoin is just a protocol that has been adopted by a few different categories of participants. It's literally just clients (like you on your mobile phone or computer) and miners (people with specialized servers, showing that energy has been spent).

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In practical terms, Bitcoin is just using the same encryption and public/private key cryptography the entire internet is built on in order to provide a validation mechanism for value passing from one party to another. Essentially, your wallet - and you can have many wallets - is just a balance which you alone hold the keys to spend. The other participants in the Bitcoin network, along with the miners, validate your spending of that Bitcoin. It is a trustless, permissionless system with the purpose of answering only one question - was this transaction initiated by the rightful owner?

Of course, this is a powerful - and dangerous - idea. In a world full of people who think that your money is rightfully theirs, what is a man who states that only he has a right to decide how the money he earned is spent? The world is filled with people who believe that you shouldn't be able transact without them receiving a piece, not because they added value, but simply because they have squatted in front of a bridge like a troll.

All sorts of excuses and scare tactics are used (KYC, AML, terrorism, blah, blah, blah), to dance around a fundamental point - they - the takers - believe that the value to freely transact with others is a right reserved only for the most powerful people, at the top of the system. All of the "little people", must endure daily transaction limits, wait in line at western unions, justify every $500 transfer to a mean spirited bank employee - after all, they could be doing something illegal. In their eyes, the right to transact with others must always be subjugated to the approval of the authorities and the top down decision that whatever purchase you want to make, for whatever reason, conforms to their top down idea of what is for the common good.

This sort of model is obviously inefficient - it slows down the velocity of money exchange, which is the single most important metric in economic growth. When trade is easy, people tend to trade more. Money velocity in the US economy peaked decades ago and has been steadily falling. There are many reasons for this, but I believe it is no coincidence that velocity peaked soon after The Patriot Act, which introduced many limits on free trade and ushered in an entire era of restrictions on moving funds around.

The trend for the last several decades has been a trend of stagnation and decay. While our government tells us the economy is still growing - we can see all of the signs that the corpse is rotting.

  • Historically high valuations
  • Deteriorating infrastructure
  • Large fiscal deficits
  • Conflicts erupting around the world
  • Higher inflation and stagnating living standards

While the government mouth pieces tell us that things just keep getting better every year - we have our eyes and our gut to observe that this just isn't the case. Pick other metrics - birth rates, homelessness, years of work to afford a university education, even life expectancy, which has risen for centuries, is at multi decade lows. On what metric are we seeing a more successful, happier civilization? Shouldn't we be seeing lower retirement ages, not higher, if we are prosperous? My theory is that current Byzantine restrictions on commerce are responsible for the world getting worse instead of better. Every layer of bureaucracy that is added within commerce slows down money velocity. Each person that needs to look at a transaction and ask questions slows down the number of transactions that can happen.

You can simplify the thinking above to imagine that only one person on earth had the authority to decide who was able to trade with who. Obviously trade would come to a halt. Civilization would virtually cease. It's an extreme example, but it illustrates the point. If only the mayor of your town could decide who could buy and sell, how prosperous would your town be? KYC/AML, when seen in this light, is shown to be the cancerous rot that it is. People who scream about terrorism financing should be busier finding actual terrorists than treating all of us like terrorists.

Anyway, back to Bitcoin. There are a few fundamental properties of Bitcoin which allow it to short circuit this entire mad house:

  • Transactions cannot be intercepted
  • Transactions cannot be reversed

Privacy advocates don't like the fact that entire ledger for Bitcoin is public. They don't like that anyone can see all the activity on the network. However, all you can really see is transactions between two addresses. You need a lot more information to tie those transactions to specific people or entities. This is something that even nation states hyper focused on a single person or entity struggle to do. At scale, it's an untenable problem. The only gate keepers in the Bitcoin network are the miners - and their only job is to ensure that the rightful owner of Bitcoin spent their funds. In an ideal world, is that not the only role the banking system should have?

There are many choices for digital currencies now, and I am not here to poop on or promote the others. Bitcoin is the most widely adopted chain. You may like another chain more. My focus in this article is on Bitcoin. Let's continue.