I’ve talked a lot about money thus far: what it is, which features make it good or bad, and the negative impacts of creating more of it.

I haven’t really mentioned Bitcoin yet. If you’re largely unfamiliar with Bitcoin, you might not understand why some Internet currency that can’t be physically touched is relevant to a discussion about the incredibly important tool of money. If you’re skeptical, you’re in good company. Most people are skeptical of Bitcoin when first introduced to the concept, and rightfully so: it’s a completely new form of asset. Some try to grasp Bitcoin by relating it to things they’re familiar with like stocks or real estate or dollars. But the truth is, Bitcoin has many more differences than similarities when compared to most traditional assets.

If we are considering all the possible assets that one could purchase, the closest comparison for Bitcoin is gold. Gold has been used as money by humanity for centuries, primarily because it takes an immense amount of work to find more of it: gold is highly scarce. Because of its scarcity, the supply of gold is quite stable which allows it to maintain its value over time far better than other monetary options. Gold is also easily transportable, divisible into smaller units, and difficult to counterfeit, among other features that make it the best form of money

Bitcoin is a technologically improved version of gold, which automatically places it in the running for humanity’s best form of money. This is a hugely bold statement, but before we compare it to gold we must first go over what exactly Bitcoin is.

Bitcoin is a digital form of money that is backed by a globally decentralized network of computing power. Because it is globally decentralized, no single person or entity controls Bitcoin. Millions of people across the world have dedicated their computing power to secure the Bitcoin network. Thus, if there was a power outage in New York City or Tokyo, Bitcoin wouldn’t miss a beat.

This all sounds nice in theory, but how exactly is Bitcoin ‘backed’ by ‘computing power’? The technical details are a bit complex, but simply put, Bitcoin is digitally mined. Much like gold is mined from the earth by spending physical resources, Bitcoin is digitally mined by spending computing power. Here’s how Bitcoin mining works: first, a miner groups various Bitcoin transactions together, verifying that these transactions meet all the requirements of the Bitcoin network (e.g. no bitcoins are duplicated). Then, the miner is presented with a difficult math puzzle. The only way to solve this math puzzle is to guess the answer over and over and over again until she hits on the solution. Whenever a miner solves the puzzle, she submits her solution to everyone else on the network. The rest of the network ensures that the rules of the puzzle have been met and the group of transactions is valid. Once the network provides verification, the miner who solved the puzzle is rewarded in bitcoins and the process repeats. This Bitcoin mining process has been happening for over ten years, like clockwork. At first, it was a small group of people mining on computers. Today, it’s tens of thousands of people across the globe using specialized Bitcoin mining rigs.

Put more simply, the only way for Bitcoin miners to earn a profit is to play by the rules. If a miner submits an invalid transaction, the rest of the network will reject it and the miner will miss out on her reward. Thus, at any given moment, tens of thousands of Bitcoin miners across the world are securing each transaction made with Bitcoin. A single bad actor (or even many multiple bad actors) will simply be rejected by the network, and other miners will earn the reward instead.

That’s a lot to digest if you’re unfamiliar with Bitcoin, so I’ll wrap this up. The takeaways are:

Bitcoin is a globally decentralized form of money

Bitcoin is secured by the most powerful computing network in the world

Each of these two facts are potent in their own right. Combined, they create an asset unlike anything humanity has ever seen before.

Talk soon,

Mitch

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