Bitcoin is an alternative financial system governed by an automated, decentralized, global computing network, instead of by central banks. To understand Bitcoin, it is necessary to gain a deeper understanding of money itself. This new form of free market money is what the Austrian school of economics calls hard money. Often when people first look into Bitcoin, they get distracted by the technology, and fail to see the big picture. If you want to understand this thing, you need to gain awareness of the monetary economic context. Nick Szabo's 2002 essay, Shelling Out: The Origins of Money, explains how and why money emerges and evolves in human societies, and will help you understand the reasoning behind Bitcoin.
Money has taken many forms over the millennia, usually changing from easier forms of money (less scarce, easier to create) to harder forms (more scarce, harder to create). Gold became the global monetary standard for this reason. When governments removed the convertability of dollars to gold in 1971, paper money became fiat money, whose value is simply declared by government, and whose supply is not connected to any commodity, but is expanded or contracted by a central authority. Like gold, bitcoin is sound money, whose value is determined by free markets, and whose supply depends on costly physical effort by decentralized free agents, rather than central authorities.
Hard money is scarce because it is difficult to create and cannot be replicated. To create hard money in digital form, it was necessary to solve a long-standing problem in computer science, the Byzantine General's Problem. The solution provides a way for information to be shared over a hostile network with confidence that the information is not altered. This allows for the possibility of unique digital assets that cannot be counterfeit: secure digital money. This achievement is made possible through an ingenious combination of cryptography, distributed computing, game theory, and economics.
There is no central authority of Bitcoin. No company, organization, or government is in control. There is no official website. It's pseudonymous inventor (or inventors) published this paper along with some open-source computer code, so anyone can download and run the Bitcoin software. Bitcoin is a protocol. It can be implemented in many ways, by anyone with the programming skills to do so. The paper was published in 2009, as a response to the global financial crisis, and soon after, the author(s) disappeared. The creators believed that the endless cycle of economic booms and busts is a consequence of the flawed idea that economies can be effectively managed by central authorities who manipulate the money supply, interest rates, and other so-called economic levers.
The problem with the modern idea of centrally managed economies is that they require the population to trust a class of people to act in their best interests. But power corrupts, and the global financial system is rife with fraud and corruption. Bitcoin's financial model removes trust in people from the system, and replaces it with mathematical verification that anyone with a computing device can perform. This removes the possibility of fraud and corruption from the money itself. Money is the foundation of our species' ability to cooperate with strangers – it is essential that we have a monetary system that we can rely on, if we are to survive and thrive together. Government money is proving to be unsuitable for the task.
The fact that there is no identifiable creator of Bitcoin turned out to be an essential feature of it's decentralization. By being a globally distributed, decentralized network, there is no single part that anyone can attack to disable the network, and there is no person that can be dragged before government committees and be subject to demands. There is no person or group of persons that participants of the system are required to trust. Anyone can send and receive bitcoins with each other, everyone can verify the integrity of those transactions, and nobody can stop transactions or seize bitcoins. The network has been online continuously since 2009, making it one of the most reliable computing systems ever to exist.
When the Bitcoin network first launched, bitcoins had no market value. Nobody was selling bitcoins. Programmers were testing the technology, and anyone was (and still is) free to "mine" new bitcoins. A year after the official launch, someone traded 10,000 bitcoins for 2 pizzas, establishing the first market value of bitcoin at about US $0.003 each. Since then, its price is continually discovered by free market forces – a property of sound money. As of the time of this writing, the USD to bitcoin exchange rate is about 10250% (US $10250 per bitcoin).
All currencies fluctuate in value on the international money markets, but bitcoin's valuation is particularly volatile, with a distinct upwards trend. Volatility is not surprising for a new, global money that has risen from zero to the 8th largest monetary base in the world, in only a decade. Bitcoin surpassed the Russian ruble's monetary base this summer. Almost every year since it acquired market value, bitcoin's lowest price has been higher than its lowest price the previous year. It has a long way to go as it gains global monetary dominance, so expect continuing volatility for some time.
There is a reason why Bitcoin has gained such prominence as a monetary asset, above all other options, and it has nothing to do with technology. It is economic forces that lead a thing to become a dominant form of money over other forms. Gold became the dominant monetary asset in the world not because it was the shiniest metal on Earth, or because of other physical properties it has, but because of economic factors such as stock to flow ratio and saleability. It is factors such as these that are relevant to monetization, and that Bitcoin exemplifies above all other options.
A Concise Definition of Bitcoin
Bitcoin (with a capital "B") is a global, decentralized, cryptographic network protocol that provides an extremely reliable platform for the secure exchange of value between any two parties in any locations, without the need for trusted third parties. Value exchanged on the Bitcoin network is represented by an unforgeable cryptocurrency called bitcoin (lower case "b"), which has a known finite supply, and is extremely divisible*. Bitcoin transactions are open, borderless, neutral, decentralized, and censorship resistant. Money is the first, and primary application of the Bitcoin network, but there are many other potential uses.
* One can transfer as little as 0.00000001 ₿. The smallest unit of bitcoin is called a satoshi, or "sats".
Bitcoin Supply: Mining
New bitcoins are created by running the Proof of Work algorithm, in a process called "mining". Like mining gold, mining bitcoin is difficult and has real-world costs. This contributes to its scarcity, and its "hardness" as a monetary asset. There is a lot of confusion about what Bitcoin mining is, how it works, and what its purpose is. The largest misconception is that mining is for "processing transactions". Not exactly. Non-mining nodes also process transactions. The primary purpose of mining is to provide security for Bitcoin, by incentivizing miners to compete for a reward of new bitcoins, thus also fulfilling the function of new supply.
To explain how mining adds security to the Bitcoin network, and generally how it works, I wrote a whole article on the topic: Bitcoin Mining. For now, the take-away is that new bitcoins are created through a computationally heavy process called mining. The difficulty of the computing task is intentional, and is artificially set by the Bitcoin network (the difficulty adjustment) – the more computing power used, the more difficult and expensive it is to attack the Bitcoin network, and the greater the hardness of the monetary asset. At its current rate, there is not enough computing power on Earth to mount a successful attack against Bitcoin. It is more secure than Fort Knox.
A consequence of the mining process is that every bitcoin is mathematical proof that a given amount of work was done to create it – establishing a link between the physical world and the digital asset. The last and 21 millionth bitcoin will be mined in the year 2140.
As discussed in my Bitcoin Mining article, mining has no impact on the speed of transaction processing. There could be zero transactions or thousands of transactions per block, with the same amount of mining. Mining could be reduced to a single node, and the same rate of transactions would be processed. Transaction rates and mining are completely decoupled.
Some people are concerned about Bitcoin's transaction speed being too slow for global payments. Compared to sending international money wires through the banking system, Bitcoin's 10 minute settlement time is orders of magnitude faster, and cheaper. But in order for Bitcoin to become suitable for small retail purchases, it needs to be much faster than that! That is why developers are building "scale-free" layer two technologies, that can do millions of instantaneous transactions per second. Despite still being in an early stage of development, there are already many people using the Lightning Network. Given Bitcoin's already dominant position as an alternative global money system, the maturation of its second-layer payment systems in the coming years is likely to render any competing cryptocurrencies completely irrelevant.
Coming to understand the many aspects of Bitcoin is a significant undertaking, no matter your background. Even people who have been studying it for years are constantly learning new things about it and its implications for humankind. This is because it involves several fields of study, including economics and monetary history, social science, politics, computer science, game theory, computer networking, and cryptography. Money is one of the earliest human technologies; it underpins many aspects of human society. Changing it on a global scale is a big deal. It is hard to understate the magnitude of this project.
When I first discovered Bitcoin, like most people, I disregarded it as a crazy idea by a cult of nerds making "Magic Internet Money". Then in 2016, the press coverage was making it too hard to ignore, and by mid-2017 I was compelled to look into it more seriously. As a technologist, I was initially distracted by the technical aspects of "how it works", and was persuaded by proponents of "blockchain technology", in all its myriad forms. Compared to the scale and scope of the new global monetary system that Bitcoin offers, "blockchain" projects are practically irrelevant. I continue to educate myself on this world-changing new form of money and its consequences for civilization.
If you are a technical person, I recommend that you set aside the technology at first, and focus your research on the economic side of this topic. A great place to start is by reading "The Bitcoin Standard: The Decentralized Alternative to Central Banking", by economist Saifedean Ammous. Andreas Antonopoulos also has a lot of great material, including his book, The Internet of Money.
If you are new to the topic, check out this talk by Andreas Antonopoulos, "Introduction to Bitcoin":
If you want to get started using bitcoin, your first step should be to get yourself a bitcoin wallet. I provide an explanation of what a wallet is, and links where you can download in my article, What is a Bitcoin Wallet?.
Once you have a wallet, you'll need to acquire some bitcoin to add to your wallet. You can exchange some fiat (government) money for bitcoin, or trade some goods or services in exchange for bitcoin. There are many ways to do that, and they vary depending where in the world you are. In Canada, I recommend Shakepay. In the USA, the CashApp is very easy. In Europe, this website has a lot of options, listed by country. Wherever you are, you can find options by doing a Google search of "how to buy bitcoin in [your country]". LocalBitcoins, the Bisq Network, and HODL HODL are peer-to-peer options. There is also a growing number of Bitcoin ATMs all over the world.
Once you have acquired some bitcoin, you should transfer it to your personal wallet. You don't truly own it, until it is under your control, without 3rd parties. As they say, not your keys, not your bitcoin.