Bitcoin haters have never been hard to find. Here's what some of the best and brightest had to say about the big ฿ over the past few months:
The first wave of cryptoassets, of which Bitcoin is the best known, have so far failed to provide a reliable and attractive means of payment or store of value.
-Bank for International Settlements, October, 2019
Cryptocurrencies basically have no value. They don't produce anything...It doesn't reproduce, it doesn't deliver, it can't mail you a check, and can't do anything.
-Warren Buffet, February, 2020
I can trade bananas easier as a commodity than I can trade bitcoin. And I can still eat that banana before it goes bad, and get all my potassium for my workouts!
-Mark Cuban, April, 2020
Haters gonna hate but they're not wrong. For everyday purchases, using Bitcoin is more trouble than it's worth. Why go through the pain of buying a coffee with bitcoin when Benjamins are so damn good for buying coffee?
Buying Coffee: Sats < Benjamins
They're missing something though. Bitcoin has unique properties that create new ways to use money. In a small number of cases, for a small number of people, those new ways of using money are worth the pain of using Bitcoin.
Small # of Cases for a Small # of People: Sats > Benjamins
I know, you're not impressed.
The point is those small number of cases for those small number of people are growing. Here are the number of active Bitcoin addresses over time from glassnode. The increase shows that either more people are using Bitcoin, using it in more ways, or both.
Why is Bitcoin activity increasing?
Bitcoin is open-source software. That's geek-speak meaning anyone can help build it and it's made to be built into other software. What happens as more work goes into Bitcoin and Bitcoin related software? It gets easier to use and there are more ways to use it.
The world is also changing. Let's be real. It's getting weird out there. As it gets weirder, Bitcoin's unique properties could become more useful to more people.
Play these two trends out and eventually even the biggest haters will have to give the big ฿ their respect. Even if we're still using Benjamins to buy coffee!
To make this case, in this post I'll first give a rundown of what Bitcoin is, the unique properties that make it useful, and the costs of using it. If you've already been around the Bitcoin block, feel free to skim or skip it.
In the following posts, I'll dive into the different ways Bitcoin is used and how it could be used in the future, starting with traditional commerce:
- Coffee for Dessert: The history of Bitcoin commerce epic fails and false hopes.
- Coffee? Where we're going we don't need...coffee: The new commerce possibilities enabled by Lightning Network micropayments.
- In Lightning Data We Trust (comming soon): Lightning's potential to create the private and secure internet we were promised.
We'll then work our way into other ways Bitcoin is used as money.
First, what is Bitcoin?
Thousands have tried to answer the question but mostly in a way that doesn't make sense to normal people. Here's a straightforward approach from 99Bitcoins:
"At its core Bitcoin is a transparent ledger without a central authority."
Also, have you noticed that sometimes ฿ is capitalized other times lowercase? It's not because Bitcoiners are sloppy. Bitcoin refers to the transparent ledger (or network/software) while bitcoin refers to the unit of money that is accounted for in the transparent ledger. In other words, the coins.
If these statements make your head spin, take no shame in checking out this real talk from Nik Custodio: Explain Bitcoin Like I’m Five.
For our purpose of understanding what makes Bitcoin useful, we'll focus on the properties that emerge from what Bitcoin is. The grouping and labeling of these properties are another topic of hot debate in the Bitcoin world (spoiler alert: Bitcoin is one big hot debate). I've adopted my list from Bitcoin Wiki.
What are Bitcoin's unique properties?
Bitcoin is:
Borderless: Bitcoin lives in the internet. The imaginary lines that humans draw on maps and the rules that people have to follow on different sides of those lines don't matter to Bitcoin. It costs the same and takes the same amount of time to send bitcoin across the room as it does halfway around the world.
Disinflationary: Only 21 million bitcoins will ever exist. The amount of bitcoin created with each block decreases every 4 years in an event called "the halving". Today, 12.5 bitcoins are created with each block. After the next halving in mid-May 2020, that number will half to 6.25 bitcoins.
Here's an explanation of Bitcoin's supply and a visual of the creation of those 21 million bitcoins (we've moved a bit further along it since) from Phillip Nunn.
Divisible: Bitcoin's smallest unit of transactable value is called a Satoshi or a sat. A single Bitcoin is equal to 100 million sats. As I'm writing this, there are 142 sats in 1 US penny. The point is Bitcoin can be transacted in tiny amounts of money.
Immutable: The Bitcoin blockchain is maintained by independent computers (likely over 1 million), known as miners and nodes that add and verify new batches of transactions, called blocks. Once a transaction is added to a block, it can only be reversed if a large percentage of those computers agree to remove the transaction's block and every block that has been mined since. This means it is really expensive to reverse transactions (Jameson Lopp gets into the nuance here if you're interested: Bitcoin: The Trust Anchor in a Sea of Blockchains). For the real world, this means you can't call your Bitcoin exchange to ask them to reverse a transaction like you would call your bank to reverse a credit card payment.
Permissionless: Unlike the traditional banking system, you don't need an account to interact with Bitcoin. Anyone can run Bitcoin's software and transact bitcoin without anyone's permission. This also means that no one can stop you from using Bitcoin. In other words, Bitcoin is censorship resistant.
Portable: Once you have bitcoin in a wallet, you just need your private key to spend it. There are a bunch of hardware and software solutions to securely store and spend bitcoin. But a Bitcoin wallet can also be accessed by simply memorizing 12 words in a certain order. Once stored on your phone, computer, USB stick, or in your head, you can take your bitcoin and access it anywhere.
Programmable: Because Bitcoin is digital, it can be programmed into software. Similar to how Uber sends a car to pick you up with the press of a button, software developers can program bitcoin transactions into their apps in any way they dream up.
Pseudonymous: Bitcoins are stored in wallets that are associated with a seemingly random sequence of characters called an address. Anyone can create a wallet and receive bitcoin to their wallet address without giving up their identity. The simplest way to understand this is to generate a Bitcoin paper wallet.
Transparent: All Bitcoin transaction and address activity is publicly displayed on the blockchain. Anyone can search and view blockchain activity in a Bitcoin Block Explorer. This transparency makes it easy to track and audit the movement of bitcoins among addresses.
As we'll see in our examples, Bitcoin is most useful when more of these unique properties are used.
What is the cost of using Bitcoin?
The cost of using Bitcoin is all of the extra effort, cost, and risk that come with using it instead of Benjamins.
No need to be a Bitcoin OG to call those out. In a nutshell, if you want to use Bitcoin in any meaningful way you have to:
- Find an exchange or person to buy bitcoin from
- Send them fiat currency and receive bitcoin from them without getting ripped off or giving up sensitive personal information
- Store your bitcoin without losing it or having it stolen from you while being exposed to extreme price fluctuations
- Find someone who will accept it as a form of payment for some special something that you want to buy
- Send them bitcoin in exchange for that special something at the risk of getting ripped off (again) and triggering a capital gains event
- Pay a wildly fluctuating fee to complete the transaction
- Wait 10 minutes to 2 hours, constantly refreshing screens, hoping you didn't input the wrong address
- Potentially live with purchase regret if bitcoin's price increases 10x after you spend it.
These costs can be summed up in the following categories:
Capital Risk: The risk of losing your money from getting hacked, losing your private keys, sending bitcoin to the wrong address, bitcoin's price tanking, transaction fees, and capital gains tax.
Effort: The time and frustration involved with researching the right hardware and software solutions to use, dealing with terrible user experiences, and waiting for transactions to complete.
Network Effects: The challenge of finding people and companies to buy bitcoin from and sell bitcoin to.
Opportunity Cost: The risk of missing out on sick gains if bitcoin's price increases after you spend it.
Fantastic!
Given the collosal hassle, it's a miracle that anyone uses Bitcoin at all. They must really love those special somethings. We'll explore the special somethings that are worth the hassle (as well as those that are not) in the following posts.
First up: Coffee for Dessert