An Accessible Explanation of Bitcoin

So, as you can see, the bitcoin ledger is no different from the banking system’s ledgers, except that the work of balancing and verifying the ledger are done by a bunch of volunteer computers on the internet. They are pretty significant disadvantages of bitcoin though. Bitcoin is a computer program called bitcoind. This is called a “double spend attack”. By summing the transactions for one account (called an “address”), one can determine that account’s balance. For one thing, it’s not particularly scalable. One would say that bitcoin uses Proof of Work (PoW) as its Consensus protocol. The bank takes a fee of 3% for the hard work of doing this math. That is, a new math that isn’t subject to Shor’s algorithm. However, quantum computers are getting better and better every year, and will soon have enough memory to run Shor’s algorithm to crack bitcoin private keys. The bitcoind code will need to be modified to use a different signing algorithm.

We don’t even really need cash because our banks keep ledgers. Most of what we think of as “money” exists only as numbers on ledgers in financial institutions. Cryptocurrency ledgers are called blockchains. There’s good reason to be suspicious that this will happen; after all, the developers are only human and have historically taken an “if it ain’t broke, don’t fix it” approach to maintaining bitcoind. Investors should definitely understand that when they hold bitcoin long term, they are trusting the bitcoind developers to make this major change. But there are other cryptocurrencies that use less-energy-consuming consensus protocols such as Proof of Stake. On the other hand, there are other cryptocurrencies that use other signing algorithms that are quantum-resistant. There’s more money than there is cash. You can buy a soda for $2 without exchanging cash at all. The private key can be computed from the address, but it would take the world’s most powerful computer many thousands of years. The address owner can sign new transactions with a password called a “private key”. In the short-term, bitcoin’s demand can be called hype. This is great for supply, but what about the demand?

Demand is harder to predict than supply. Bitcoin’s supply is capped at 21 million; no more coins will ever be “minted”. That is, nobody will be day-trading when each transaction costs more than the possible gains. This ledger is the same all around the world and is nothing more than a list of all bitcoin transactions in history. This network of computers runs computations together to verify a ledger. An explanation of how the network verifies the blockchain is outside the scope of this article but can be found readily online. I read an interesting (and bullish) article that proclaimed, with some merit, that bitcoin was the first liquid asset with a capped supply. Even with the transaction limit and energy usage, bitcoin lives on as an illiquid asset. Bitcoin was never designed to handle all the world’s transactions, and it has a hard limit on the number of transactions it can perform per minute.

This will cause transactions costs to increase and incentivize investors to hold their BTC for longer. Much like gold or collectibles, it can act as an investment and wealth-storage mechanism, even if it’s a poor means of transactions. A sudden cache of new gold in California, for example, made everyone’s gold-standard currency less valuable, just as if new money had been printed. Governments can print fiat at will, and gold can be dug out of the ground. Bitcoin is a deflationary asset because its supply is capped algorithmically: nobody has the power to print more, and no sudden cache of bitcoin will ever appear. An asset is valued by it’s demand divided by its supply. But if the demand is zero, the price is going to be zero no matter how capped the supply is. So how can we measure demand for bitcoin and is it going to go up or down? It still works, and it proved that blockchains can work, but as the first cryptocurrency, it left plenty of room for improvement. In the long-term, I believe bitcoin can be modelled by other collectibles. This is exactly what happened with Bitcoin cash, though it isn’t quantum-resistant either.

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