Knut Svanholm


Bitcoin — Common misconceptions about the invention of the century

What is it that sets Bitcoin apart from every other form of money that has ever existed? What makes Bitcoin unique and impossible to duplicate? Is a “flippening”, during which another cryptocurrency overtakes Bitcoin’s lead in terms of market capitalization, even possible and if not, why? What makes the Bitcoin experiment irreplicable? What does decentralization really imply when it comes to monetary policy?

In short — Bitcoin solves the Byzantine Generals Problem. That’s it. A problem most people never even heard of. The problem describes how hard it is to construct a network in which you can trust a sufficiently large portion of the participants to agree on a concise picture of the state of said network without knowing the other participants or their intentions. In other words — how to construct a network in such a way that no trust in any third party is required. Why is this important? Because it allows for digital scarcity or even mathematical scarcity to come into existence. After this invention, people are able to actually own a number in a finite set of numbers. This is very different from owning a number in a bank account. First of all, you don’t really own the numbers in your bank account, a custodian does. They can be freezed or confiscated by a third party at any time. Secondly, the set of numbers that your bank balance is a part of is far from finite. It’s supply can be inflated at any time by the whims of a central banker, diluting the value of your part.

The concept of actually owning a scarce number is very abstract and very new. It’s hard to conceptualize and it’s even harder to wrap your head around what it means for the future. The trustless nature of the network is still being evaluated by its users but despite this it is way ahead of its so called competitors, the altcoins. Altcoins are not scarce and they’re not decentralized. The altcoins are all influenced by leaders or committees. Their existence defies the very purpose of the true invention — Bitcoin. Sound money. Mathematically proven scarcity.

Another two dots that most people seem to have a hard time connecting is the relationship between scarcity and value. Whether you like it or not supply and demand are the two basic forces that assign value to a good and as long as there’s a demand for that good it will have a value higher than zero. The supply of Bitcoins is finite. Very finite. The demand is not nor will it be for any foreseeable future. So, in the long run, supply can only go down while demand has an unlimited upside. Draw whatever conclusion you want from these facts.

The idea that something as abstract as a number could have a potentially infinite increase in value is unthinkable to most people. The power of scarcity alone is in itself hard to picture. Scarcity is always defined by its context. It needs to be framed in order to exist at all. An example of this is Leonardo da Vinci’s painting Salvator Mundi that despite being quite ugly was the most expensive painting ever sold. Had there been a million da Vinci originals around instead of about ten it would have been a lot cheaper. It was not just a painting. It was a da Vinci. Its scarcity was framed by the limited existence of da Vinci originals.

In general, something not for sale is a lot more valuable than something for sale. In reality, there’s no such thing as not for sale since everything can be discounted if you threaten the owner’s life for instance. What not for sale really means is very, very expensive. In light of this, you can make something scarce very, very expensive by not selling it. In Bitcoin this is often referred to as HODLing. A common misconception about money is that it needs to be spent to be valuable. While this might be true for ever-inflating fiat currencies it is not true for Bitcoin or other scarce assets. Not spending Bitcoin is one of the most powerful things you can do with it as it limits the number of Bitcoins in circulation even further and thus raises the price. If fiat currencies had the same deflationary properties as Bitcoin does, piggy banks would be a lot more popular. Yet they’re not. This is because fiat currencies are designed to make us spend and work our asses off for those at the very top of the food chain. Bitcoin is not. Most people believe the opposite is true.

Time will be the ultimate judge for Bitcoin. Ten years from now articles like this will either be regarded as a laughable parenthesis from the early days of the internet or as clear sighted prophecies. I hope I’m still around to reflect on the outcome by then.

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