The Bitcoin network blockchain was first launched in 2009 by someone under the presumed pseudonym of Satoshi Nakamoto. He/she/they launched the blockchain with an accompanying white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The way Bitcoin operates is complicated, but in its essence, the blockchain is powered and maintained by a decentralised network, with no central management or control, but instead uses what is known as “nodes” and “miners”.
A node is a computer or device, managed and maintained by individuals, that stores and validates a copy of the blockchain – in turn verifying transactions.
Whereas miners are devices that take the nodes transaction information and solve complex mathematical equations in return for a payment in transaction fees and new Bitcoin – a system known as “Proof-of-Work”. Nakamoto understood that there had to be an economic cost, electricity in this case, when creating a new Bitcoin. Simulating that of traditional miners, Bitcoin miners play a vital role by taking the verified transactions from nodes, and processing them into “blocks”. These blocks stack on one another, creating the blockchain – an impenetrable transaction ledger. Mining rewards the most productive and efficient miners, so ever-increasing computational power is needed.
The protocol, or code, that first started the network in 2009 has largely stayed the same since its inception. This is because a majority of nodes, therefore individuals running those nodes, must agree on any changes proposed to the protocol, such as its rate of supply. This helps ensures a democratic process is maintained. As the numbers of nodes and miners increase and reach ever greater numbers across the planet, the likelihood of the network being centralised or the protocol being altered reduces by the day.
You may think that this is all well and good, but that since you cannot do anything with it, Bitcoin still has no “real” value.
This is where we get to the most interesting characteristic of Bitcoin – its supply is effectively written in stone, or in this case, code. There will only ever be 21 million created. Every 4 years the rate of Bitcoin rewards for miners halves – a process known as “the halving”. Due to this strict limit on monetary supply, which is, in effect, stricter than that of any precious metal, the Bank of Singapore has noted that “Bitcoin could replace gold as store of value”. Similarly, former Goldman Sachs partner and hedge fund manager Mike Novogratz has compared Bitcoin to “Digital Gold”.
For millennia, thanks to its scarcity, security, and interchangeability, gold has been used as a store of value. Bitcoin shares most of the qualities of gold, yet it is programmable (enabling anyone with the internet to access it) and easily transactable, unlike its non-digital cousin. True, gold does have the advantage of a rich history proving itself as the apex store of value for millennia. But then, it has not really had a serious competitor thus far. As Saifedean Ammous author of the book ‘The Bitcoin Standard’ notes, “History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.”
Price volatility is another concern often raised by sceptics who doubt Bitcoin’s suitability as a store of value, and so far, the sceptics have clearly been right on this point. However, as an emerging asset, price fluctuations are expected, enabling larger players to have a greater influence on the market. But with wider adoption increases, going from predominantly retail investors to international corporations such as Tesla and Micro Strategy, the volatility will reduce.
In terms of usability, we must look at the wider cryptocurrency market to get a sense of perspective. In the last few years, hundreds of alternative coins have been created all with different purposes and objectives. Some are coins/networks, such as Ethereum, that offer “smart contracts” which enable two individuals or organisations to have a self-executing agreement whereby the terms and conditions are written into the code. Others offer decentralised exchanges, known as “DEXs”, whereby there is no centralised exchange holding coin deposits, but it is instead based on a blockchain network, unlike conventional exchanges. But while these are alternatives to, and thus competitors of Bitcoin, paradoxically, they could end up boosting the adoption of Bitcoin rather than hinder it. One of their effects is that more people become familiar with the concept of cryptocurrencies in the first place, which enables their wider adoption, and increases their international usability. Some argue that one or more of the newer cryptocurrencies will surpass Bitcoin in the medium term. They believe that cryptocurrencies in general have a future, Bitcoin, in particular, has not. They may well be right. But we should not underestimate Bitcoin’s first-mover advantage as the first cryptocurrency.
One of the most valuable characteristics of Bitcoin is its ability to offer individuals in both developing and developed countries easy access to an anti-inflationary store of value. Millions across the world live in countries where governments and central banks inflate and print the population’s savings away. Extreme examples are Zimbabwe in the mid-2000’s or Venezuela today. But while not comparable in scale, the UK and the USA also used to suffer from the damaging effects of prolonged high inflation as recently as in the 1970s. We should not assume that inflation has been defeated for good. Just over 20% of all US dollars currently in existence were printed last year to combat the effects of the COVID-19 pandemic. Although possibly justified as emergency measures, it still demonstrates just how easily central bankers can create unimaginable quantities of money out of thin air.
Where inflation makes a comeback, cryptocurrencies can offer a more reliable alternative. Unless governments ban the internet, anyone can use them. As Nigerian Senator Sani Musa recently noted, “Bitcoin has made our currency almost useless or valueless”.
Cryptocurrencies ultimately move power away from central banks, and have the potential to lead a monetary policy revolution. Nobody who values economic and social liberty can ignore the possibilities opened by cryptocurrencies. Just like the technological innovation offered by Amazon in retail, Uber in transport, cryptocurrencies enable the same opportunities in finance. Whilst central bankers expand the money supply and bureaucrats create ever-increasing public deficits – we may very well be witnessing the early stages of a disruptive innovation that none of them, fortunately, will be able to control.