What is bitcoin and who needs it?

This is a very short note that gets to the essence of the what and why of bitcoin. Bitcoin is an elegant combination of 3 attributes and there are 4 broad groups of people who find it valuable.

The 3 key attributes:

1. A digital protocol for exchanging and settling value on the internet

Fiat currencies allow us to exchange value and the banking sector provides payments infrastructure. Bitcoin has these functions built into its protocol, allowing users to exchange value and execute payments on the internet, 24 hours a day, 7 days a week. Payments also settle with finality in under an hour in bitcoin, whereas the traditional financial infrastructure is reliant on credit lines and debt.

2. A non-state sound monetary commodity

Gold’s scarcity, monetary characteristics and network effects implies that it has served as a store of value commodity. Similarly, bitcoin’s scarcity and growing network implies that it serves as a digital store of value. Bitcoin’s price change is positive over all 4-year rolling periods. The ability to hold value over time is a stark contrast to fiat currencies.

3. An independent system of property rights

Current ownership rights are enforced through the banking sector and legal infrastructure. Bitcoin doesn’t require an existing legal system to enforce ownership. Rights are enforced through cryptography and transactions are irreversible. In this sense, it is its own system of property rights.

4 groups of people who need bitcoin

1. People who want to store wealth through time and space

Everyone fits into this category. Some people may have less investment opportunities, which increases desire for bitcoin. Like qualified investor restrictions, which exist in many countries or capital controls. Others could live under high inflation regimes (e.g. Venezuela), which creates acute demand for store of value assets. In reality, all governments debase/devalue their currencies over time so everyone has some demand for store of value assets.

2. People who suffer property rights infringements

Women can’t have bank accounts in some countries (e.g. Afghanistan) and political opponents are excluded from commerce in others (e.g. Belarus). Another example could be the inability of certain investors to purchase GME stocks in Jan 2021, which is also a property rights infringement.

But exclusion can also take place under more innocuous conditions. There are less people with bank accounts than cellphones in the world today. If you have access to the internet, no one can prevent you from exchanging bitcoin.

Tax provides another example; Wealth taxes, ownership laws, unrealised capital gains taxes, inheritances taxes and or property confiscation hinder productivity and freedom, creating a greater need for a non-state monetary asset where these taxes would be trickier to execute.

3. People who understand the consequences of unsound money

Unsound money mortgages our future, saturates society with debt, lowers our economic prospects, accentuates inequality, lowers social mobility, fosters social divisions, centralises power in the hands of politicians and encourages short-termism. People who understand these consequences may desire to invest in a sounder future for society, their children and future generations.

4. People who want to speculate on bitcoin undervaluation

Investors and or speculators who understand what bitcoin is and appreciate the number of people who may desire bitcoin in the future, can be compelled to buy bitcoin in the hope of price appreciation.

If bitcoin is as important as I suspect it is, and the market recognises its importance, then it will start to become risky for those who not own it so perhaps this group is bigger than you initially suspect and not merely confined to money-hungry trader types.

I wanted to keep this note short, so I will leave you to mull over that last point.

Good luck out there!

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