Bitcoin for Beginners

In just 12 years, Bitcoin has evolved from an experimental technology operated by cypherpunks to a resilient, thriving global network on which users exchange an average of $12.8 billion in daily volume

Alon ShvartsmanAlon Shvartsman
Time to Read Article 6 minute read
Article Published Date April 9, 2021
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More and more people are beginning to realize the unique characteristics of Bitcoin that make it the soundest money ever created.

Despite its meteoric rise, Bitcoin still has a way to go before it becomes entrenched in the mainstream.

According to Glassnode, there are currently around 36 million Bitcoin wallets. If we make a generous assumption that each wallet has a unique owner, that would mean that less than 1% of the world’s population have engaged with the Bitcoin network.

The number of unique addresses holding a positive (non-zero) amount of coins
The number of unique addresses holding a positive (non-zero) amount of bitcoins

As Bitcoin continued its rise to prominence over the first decade of its life, many people found themselves asking this fundamental question in an attempt to understand the real value proposition behind Satoshi Nakamoto’s invention.

History of money

In prehistoric times, people relied on barter to conduct their business. A caveman specializing in hunting deer would exchange his deer meat for some fruit collected by the neighboring tribe.

Trading and bartering during the Stone Age
2.6 million years ago during the Stone Age, people traveled in search of food and shelter, trade was conducted in relatively smaller scale, within small communities

Eventually, the cavemen realized that for commerce to scale, they would need a universal means of representing wealth that would allow them to buy and sell as they wish, without having to rely on direct barter.

Shells, beads and other collectibles began serving as the way in which value was transferred.

People soon evolved into exchanging salt, grains, weapons, cattle, tools, clothes, and practically everything else, based on their perception of the exchanged items’ comparative value.

The Incense Route
The Incense Route was used to transport frankincense and myrrh which was used as oil, perfume, incense, and medicine, which was only found in the southern end of the Arabian Peninsula

When gold came around in the fourth millennium BC, the shiny metal quickly displaced other forms of money as the preferred store of value, first in raw form and eventually as minted coins.

Evolution of gold coins

As a precious metal, it is not surprise that gold served as a reliable store of value and medium of exchange given its characteristics. Gold is durable, does not corrode or decay easily, highly malleable, and its extremely high stock-to-flow ratio.

The Stock to Flow (SF or S2F) model is a way to measure the abundance of a particular resource. The ratio is the amount of a resource held in reserves divided by the amount it is produced annually.

Gold Stock to Flow compared to other commodities
Gold’s Stock-to-flow ratio at 65 vs. other commodities

Gold was considered precious because the annual production is so low relative to the stock.

Eventually, bankers began to realize that they could issue notes that represented gold bars locked in a vault, making money easier to transport and exchange.

This fundamental change revolutionized money because it created second-layer monetary instruments such as bills of exchange, gold deposits, and other promises to pay precious metal.

This system caused one major problem. It allowed governments to establish a monopoly on second-layer money and this was used it to their own benefit.

"Gold is money. Everything else is credit." —J.P. Morgan to United States Congress in 1912
Layered Money Pyramid
Layered Money was inspired by the Inherent Hierarchy of Money which Perry Mehrling, a professor of economics at Boston University, published in 2012

In 1944, world leaders gathered at a hotel in Bretton Woods, New Hampshire and formalized that all currencies besides the dollar were forms of third-layer money within the dollar pyramid.

Bretton Woods Conference, July 1944
Bretton Woods Conference, July 1944

The US dollar was established as the world economy’s denomination: barrels of oil were priced in dollars, trade agreements were struck in dollars, and international bank balances settled in dollars.

However, in 1971, US President Richard Nixon decided to unpeg the dollar from gold, creating the world’s first free-floating fiat currency.

Bretton Woods Conference, July 1944

The problem with fiat currency is that, absent a tangible commodity that serves as a peg, its supply can be endlessly inflated by reserve bank governors who are prone to political pressures and misjudgments.

“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” – F.A. Hayek 1984

Bitcoin is evolving money

Bitcoin represents the next phase in the evolution of money - a fixed, scarce, corruption-proof digital asset with a predictable supply schedule that can be sent anywhere in the world without the help or control of governments and banks.

Unfortunately, the abstraction of money brought about by Bitcoin is hard to grasp for most. Many people, especially those raised in earlier generations, have trouble understanding how something intangible can have any monetary value.

Even though most fiat money itself exists merely as digital 1s and 0s on a bank’s ledger, bills and coins give us a physical reference point to which we can ascribe value.

To begin understanding Bitcoin, it's important to understand the nuances of the technology.

Bitcoin, with a capital “B,” refers to the protocol and technology as a whole. With a lowercase “b,” bitcoin refers to units of the digital cash system.

Bitcoin vs bitcoin (uppercase B vs lowercase b)

Bitcoin is most easily explained as a network of computers (nodes) that record the transfer of value over a shared public and decentralized ledger.

Bitcoin, touted as the world's only "digital gold" is a monetary technology not only disruptive to fiat, but to gold as well.

Bitcoin vs Gold visualized

Furthermore, even for those who can conceptually understand Bitcoin, the journey to buying, transferring, and storing (or even trading a futures contract) is unfriendly to beginners.

New users exposed to Bitcoin for the first time are overwhelmed by the difficulties of navigating the various wallets, exchanges, and merchants in the space.

In addition to the natural challenges associated with exploring entirely new technology, Bitcoin freshmen must contend with a significant number of disreputable sites and products that seek to exploit their ignorance for illicit financial gain.

With the price of Bitcoin increasing some 200% since yearly lows, it's only a matter of time before the next cohort of users discovers the unique qualities of Bitcoin.

As the next wave of adopters join the existing Bitcoin user base, an information portal that simplifies the complexities of the technology becomes ever-more crucial.