Introduction
In this brief essay I will outline why I personally believe in Bitcoin and why it should be adopted as the standard world currency. Although “world currency” can have a totalitarian postmodern connotation, Bitcoin is fundamentally different in that it cannot be controlled by any central party. I will outline more on this below but I believe this to be the reason that the price of Bitcoin/USD has skyrocketed in recent years. Here are the three most important characteristics that make the case as Bitcoin as the ultimate currency. I want to note that there are many disputes on various definitions of what Bitcoin is and isn’t. In this article I will use the word “currency” to mean a reserve currency in which a person or institution can use to settle international transactions. Here are the three characteristics:
- Bitcoin’s decentralized nature
- Economics of Bitcoin as a scarce resource
- Proof-of-Work validation system
Decentralization of Bitcoin
Bitcoin’s creation has an almost Genesis like beginning. In the beginning, Satoshi created Bitcoin and poof the software was public. At that moment the Bitcoin network was controlled by one person making it extremely centralized. Since that point it has become increasingly decentralized. As the network has grown it has become harder and harder to have a controlling influence over it. This is crucial for the durability of the network because control over the money inevitably leads to the debasement of that money. I think it is obvious to say at this point the modern financial system, specifically the US Dollar led financial system controlled by the Federal Reserve has run into its functional limits. It causes great strain on the individuals due to the inherent one size fits all nature that the citizens must adhere to. Bitcoin allows any individual with an internet connection to voluntarily opt in to a completely separate system. This approach is the antithesis of modern central banks which are led by a small group of people who make decisions that affect billions of people. Compare this to Bitcoin where the software is the rule maker and in order to use the network you must voluntarily adopt the rules of consensus. This voluntary opt-in creates a more decentralized and less coercive monetary ecosystem.
Economics of Bitcoin as a scarce resource
The second most important property of Bitcoin is its scarcity. Most people know by now that only 21 million Bitcoins will ever be mined. Due to this artificial scarcity, as demand for Bitcoin increases the value of each coin and the network also increase as a function of the fixed supply. This makes Bitcoin uniquely different from other commodity-based currencies like Gold. Although Gold has a limited increased supply it is not finite like Bitcoin. I believe that this scarcity will allow a whole economic and financial system to be built upon it because the economic measuring stick will be predictable. More exactly, since the money supply is finite and auditable it will allow the economy to better calculate general prices instead of having to assume built-in inflation. The long term effects of the fixed money supply is unknown but the lack of inflation would encourage the time preference of individuals to be lowered and allow for natural equilibriums in the market to be discovered.
Proof of Work
Bitcoin uses a proof-of-work system in order to validate transactions which create blocks on the blockchain. I won’t go into too much detail but the main premise is that a miner needs to identify a new block and hash it until the number that it produces is less than the target number. Since this hashing is done various times, it consumes a lot of energy to run these algorithms. This process has garnered criticism recently due to the massive energy consumption. I believe the mining process (proof-of-work system more precisely) is essential to the survival of Bitcoin and the network for future generations. As the world becomes more and more digital and web-based, we have to understand that the we are still constrained to the physical world. No matter how much we move our lives on-line we are still subject to the laws of nature, specifically energy. Why this POW system is so important is because it anchors this digital asset (bitcoin) to the physical world (energy expenditure). No matter how much effort is asserted the process of bitcoin mining cannot be sped up. There is no fake energy expenditure. We can guarantee that no matter how big the network gets and how digital our society becomes miners will always need to expend real world energy in order to validate the Bitcoin blockchain. With this natural energy expenditure becoming more powerful it will make the Bitcoin network more resilient to attacks and more trustworthy over time.
Conclusion
These are the three most important properties of Bitcoin that make it valuable now and even more desirable in the future. There are many other characteristics of Bitcoin that one can analyze and dissect but I wanted to consolidate this brief essay to only three. As long Bitcoin maintains these attributes then it will continue its dominance as the best digital store of value and will hopefully evolve into the world reserve currency.
