Knut Svanholm

@knut.svanholm

Concepts to grasp in order to better understand Bitcoin

Why Bitcoin? What makes Bitcoin so special and why is the idea still acting as a neodymium magnet for so many smart people all across the globe? In order to understand what’s going on we first need to understand Bitcoin. In order to understand Bitcoin we need to understand what makes it work so remarkably well. But where do we start? Here are some suggestions:

Code is speech

Bitcoin is a network protocol. A network protocol is computer code. Computer code is mathematics with a user friendly interface. Mathematics is a way of expressing abstract relationships. Expression is speech. Speech is one of the two tools human beings can use to resolve conflict and settle disputes. The other tool is violence. Free speech is therefore sacred in most countries and protected by the constitutional laws of most liberal democracies. If your country tries to ban Bitcoin in one way or another they are practically against free speech and it would probably be advisable to move out of it at one point or another. You are not living in a free society under such circumstances.

Metcalfe’s law

Metcalfe’s law states the effect of a telecommunications network is proportional to the square of the number of connected users of the system. It describes what is also known as the network effect. This applies to all sorts of networks and you need to get your head around this concept in order to understand how natural the parabolic price rise of Bitcoin is. Our inability to grasp exponential functions has been called “The greatest shortcoming of the human race” and rightly so as both national and personal debt levels keep rising across the globe despite the plummeting costs of both the production and the transportation of goods and services world wide.

Nash equilibrium

The Nash equilibrium is one of the foundational concepts in game theory and the Bitcoin blockchain is in a state of Nash equilibrium all the time. In such a state, all players in a noncooperative game benefit the most by not changing their strategy. In Bitcoin, this disincentivizes miners from trying to cheat the system. It also incentivizes users to use honest software. Despite this, people still try to attack Bitcoin. The most fashionable attack vector right now is social attacks on the network where the attacking parties try to besmudge the network on social media in order to attract attention to their altcoin or “airdrop”. It is important to remember that these con-artists are also motivated by greed and therefore more interested in hoarding Bitcoins rather than their own alternative in the long run.

Fractional reserve banking

The flaws of our traditional banking system is what triggered the invention of Bitcoin. You can’t really see the necessity of sound money without first understanding how unsound our current system is. The world economy is basically a game of musical chairs. Almost all the money in the world exists because of central bank counterfeiting. How money works should be the single most important topic for our children in school yet they’re taught almost nothing about it. Do your homework on this! Being curious about Bitcoin triggers a curiosity about money and value in general and this might be the most important side effect Bitcoin has. It makes people question authority.

Keynesianism and Austrianism

Did free market capitalism really win the cold war? Arguably not since fiat currencies are used in all western democracies. In a fiat based system, monetary policies are very centralized. Entire populations are in debt over their heads and more money can only be summoned into existence through new loans. This is the Keynesian model. It helps governments to quickly resolve crisis but the long term effects of these quick fixes are unknown at best. It is central planning. The opposite of Keynesian economics is Austrian economics. The basic idea of Austrian economics is that everyone benefits if everyone’s allowed to reap what they sow. Inflation and the influence of government in markets ought to be kept at a bare minimum at all times. This might sound like an extreme version of a free market economy but remember that we haven’t tried that yet, anywhere, since fiat currencies are used everywhere. The regressive inflationary model of Bitcoin is an offspring of Austrian economic thought.

I’ve barely scratched the surface of these subjects here and I strongly recommend that you dive deeper into each one of them. Knowledge is power.

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