Bitcoin: To my Grandma

Bitcoin is digital, decentralized, finite, fair, safe, improving, elegant, unstoppable, and risky. 

Bitcoin is digital:

Bitcoin is a single, growing ledger of transactions that are hosted by computers all around the world.” It is referred to as a blockchain, and it can be thought of as internet money or a network of computers verifying the same transactions together. 

Bitcoin is a decentralized network: 

Bitcoin is a single ledger or transaction history, that is shared through a network of miners, nodes, and users. Miners and nodes are just specialized computers. Miners solve math equations in exchange for Bitcoin; they take a long multiplication product and try to predict the two prime factors. Sometimes the fastest, most powerful computer wins and mines new bitcoin, but not always. The probabilistic nature makes Bitcoin’s network safer. 

Bitcoin is also hosted on nodes, or computers that download the transaction history, and continue to host the transaction history to bolster the network. Most people run a node for little to no economic benefit, just their own privacy and security, and to add antifragility to the network. 

While Bitcoin is decentralized, it does have a founder, Satoshi Nakamoto. No one knows who he/she/they are. They are probably dead because their online communication stopped years ago. Their Bitcoin holdings are still known because everything is known on the blockchain. Satoshi’s address holds 1.1m bitcoins, or ~$65 Billion. This makes Satoshi one of the richest individuals on earth, if still alive. 

Bitcoin is finite: 

Only 21 million Bitcoin will ever be mined. This is in the code. Miners are competing in an increasingly more competitive arena for a shrinking number of bitcoin. The very last Bitcoin will be mined around year 2140. Miners use a lot of energy to run powerful computers. Their financial outlay relates to the value of the network. 

The value of the Bitcoin market capitalization will continue to increase to support every Bitcoin transaction, but no more Bitcoin will ever be created. Bitcoin goes out to 8 decimal places so even tiny transactions are supported. 

The 21 million unit cap for bitcoins is inherent in Satoshi’s plan. When Bitcoin was quietly released in 2009, the financial world was in shambles, and trust in the system was at a major low. Bitcoin was meant to be an alternative to modern capitalism.

Bitcoin is fair: 

Bitcoin is the same whether you are in Venezuela, Russia, Iran, France, or Turkey. If you are connected to the internet, you can convert your currency to Bitcoin and save in something scarce and transparent. Only about 2 billion people are accustomed to transparent central banks and deposit insurance. Most currencies are at the whim of unelected autocrats and hidden corruption. 

Bitcoin is becoming the number one remittance system in the world. Folks anywhere can use the Bitcoin network (or lightning) to send their hard-earned cash to their family instantly in any other currency at a very low cost. 

People are not trusting. Our media, politicians, central banks, corporations, and the Pentagon lie to us, and it seems the populace is more than faintly aware these days. Were all our wars warranted? Did they create value? I’m patriotic and frankly, I think the military needs some secrecy and autonomy, but not absolute autonomy.  Enter Bitcoin: Global, decentralized, and not controlled or manipulated by central banks or the military-industrial complex. 

Bitcoin is secure: 

Depending on how you interact with the network, Bitcoin can be infinitely secure. Since it’s a single ledger of transactions, everything that takes place is recorded and it’s not lost. The way it’s compromised or lost has to do with how and where you store your keys. 

For best results, run your own node, have a hard storage device, and an extensive encrypted password. For the vast majority of us, just keep your Bitcoin with a prudent centralized entity such as Coinbase. Keep in mind, there’s also no federal deposit insurance so research the reputation of the third party you hire to watch your Bitcoin. 

I keep my Bitcoin in six different places. Purists would tell me I’m a fool for not keeping it all in cold storage. Cold storage is when you move your bitcoin to a hardware wallet and take it offline. People keep their hardware wallets in safes, safety deposit boxes, etc. I mitigate my risk by keeping it at six centralized businesses that hold my keys, and I only need to worry about my passwords. But even if I lose my password, I could provide my personal information and get access to my account again. Purists are against this because they say that Bitcoin is all about leaving the centralized institutions and becoming “your own bank.” 

The only risk to my approach is the US government gets extremely threatened by Bitcoin and decides to attack the likes of Coinbase and BlockFi. I’m 99% certain this will not happen. These firms have tens of billions of dollars of value under management. Not to mention, Fidelity, Goldman Sachs, Morgan Stanley, BNY Mellon, Blackrock, Mass Mutual, Square, PayPal, and Tesla have many, many billions of dollars invested in Bitcoin, and are working closely with regulators. These powerful lobbying firms would not have made the investment if the US government wanted to ban, instead of regulating Bitcoin. 

The randomness in mining block rewards means that no single entity can control the mining of new Bitcoin. This means that even if you commandeered enough energy to rival the amount of energy already built into the Bitcoin network, there’s no guarantee you could control the network. 

Bitcoin Improves: 

Bitcoin Core developers are all around the world. They collaborate on improvements to the current Bitcoin protocol by majority rule. All changes have to be backward compatible, meaning they easily integrate with everything that’s happened in the history of the Bitcoin blockchain, but improve something going forward. 

Bitcoin is elegant:

Bitcoin is a consortium of many fundamental technologies. The math equations behind Bitcoin are not new. Decentralization is not new. Proof of work is not new. Economic incentives certainly aren’t new. Taking all these ideas and combining them into the revolutionary notion of a blockchain is divine brilliance on the part of Satoshi Nakamoto. Bitcoin is eleven years old, over $1 Trillion in value, and becomes less fragile every day. 

Bitcoin is unstoppable:

Bitcoin’s geographical distribution, sovereign independence, seamless wiring, and incredible amounts of developer manpower mean it’s here to stay. Game theory suggests that governments are foolish to try and stop the Bitcoin network. It’s like saying they won’t participate in the internet, it puts them at a severe disadvantage of other citizens and governments elsewhere that decide to embrace it. 

Bitcoin is already a store of value somewhat akin to gold, however, it’s better in every way. It’s easily divisible, costs almost nothing to transact, its supply is not at all contingent on the demand, it’s as finite as the acreage on earth, and costs nothing to store (in fact, you can earn interest easily). 

Bitcoin is internet money, an entirely new framework that developers are building on top of. I believe Bitcoin will be the backbone of the global trade, remittance, and payments system that undercuts the likes of Petrodollars, eurodollars, Visa, Mastercard, PayPal, American Express, and Square. It’s pristine collateral. 

Bitcoin is Risky:

10% daily swings in the USD price of Bitcoin, even at a trillion-dollar valuation are common, and to be expected. 

The government can control the periphery of Bitcoin, such as taxes and overbearing know-your-customer (KYC) and anti-money laundering (AML) regulations, as well as onerous taxes. But, going back to game theory, governments and municipalities are wise to allow their people to use and embrace it. Why not let wealth accrue within your own borders? 

I think Bitcoin will eclipse the market capitalization of gold (~$10 Trillion), and go on to rival the market caps of global currencies and collateral assets (hundreds of trillions of dollars). This will probably take decades and there’s going to be many 50% drawdowns along the way. 

I suggest investing a little bit with the intention of letting it grow or consider dollar-cost averaging i.e. investing ~$1,000/month. 

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