“The Times 3/Jan/2009 Chancellor on brink of second bailout for banks.”
With this message coded into what came to be known as the ‘genesis block’, Satoshi Nakamoto created a new piece of software that enabled an individual to send a new currency -- Bitcoin -- from one address to another, over the internet. This was remarkable. For the first time, a value exchange had taken place digitally without requiring a trusted third party or intermediary. No banks, no governments, not even Google or Facebook. Something new had entered our world: an open-source, distributed, peer-to-peer, cryptographic digital currency. To put it simply: a new kind of money was born.
A common first reaction to Bitcoin is to dismiss it as a Ponzi scheme. Mainstream economists have generally ignored Bitcoin, often calling it a ‘bubble’ and comparing it to tulips. Most bubbles pop and fade away, but Bitcoin has done something different. It has experienced at least five different price bubbles but has come back stronger each time. Bitcoin has the remarkable distinction of having more than 350 premature obituaries written about it in its young 11-year life. Fortunately, and to paraphrase Mark Twain, “rumors of Bitcoin’s death are greatly exaggerated.”
Monetary regimes do not change often. The last seismic shift in monetary history was the abandonment of the gold standard and the Keynesian revolution, almost 100 years ago. Fiat currencies have value because they are “backed by the government,” which in practice means the government can demand tax payments in that currency.
But something deeper underpins fiat currency: Citizens have to trust their governments not to debase their currency. Sadly, 20th century history is littered with examples of what happens when citizens lose faith in fiat currencies because governments cannot keep their hands off the money printer. The Weimar Republic, Hungary, and more recent examples like Zimbabwe and Venezuela show that hyperinflation can have ruinous effects on millions.
Despite this, over time, a consensus view emerged: Money is a product of the State and the central bank shall manage money creation as well as the price of money (interest rates). We had been living with this consensus view of what money is for almost a century.
Then, something changed. In 2008, central banks and governments around the world were forced to take unprecedented action in response to the global financial crisis. Whether by default or by design, this was a perfect juncture to introduce a competing idea of what money can be and challenge the consensus worldview.
Bitcoin is the first viable private digital currency that has captured the mindspace of millions around the world who began to ask existential questions about the nature of money, prompted by the financial crisis and the actions taken in its wake. It is no coincidence that Satoshi Nakamoto, Bitcoin’s creator, references a bank bailout in the message in the Bitcoin genesis block. Bitcoin strikes at the very heart of the existing monetary system, seeking to create a competitor to State-issued money.
Unlike fiat currencies, Bitcoin could not be willed or forced into the hands of millions. Bitcoin adoption has spread because of the things that make Bitcoin different from other kinds of money that exist today. It is provably scarce. Only 21 million Bitcoin will ever be mined. It has an algorithmically determined supply schedule. Some 18.5 million Bitcoin exist today, and 6.5 new Bitcoin are mined every 10 minutes. It can be transferred across the world in minutes, at a fractional cost of existing money transfer systems. It’s no wonder that Bitcoin has emerged as a kind of ‘digital gold’. A precious and scarce money that is digitally native and thus well-suited to our increasingly digital lives.
So, what does this mean for all of us? When you’re dealing with something as novel as Bitcoin, stay curious. Understand its implications for what money is today and what it can be tomorrow. Read the Bitcoin whitepaper: ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, by Satoshi Nakamoto. In just nine pages, using admirably clear prose, Satoshi set out the basic idea behind Bitcoin and how it works -- a set of ideas at the intersection of economics, monetary history, game theory, computer science and cryptography -- and as fascinating as the mystery of who Satoshi Nakamoto is. Better still, you will understand why all the chatter about blockchain technology -- and the applications being touted -- is absurd and misplaced.
“I have moved on to other things,” the mysterious creator of Bitcoin wrote in an e-mail in April 2011. He has not been heard from since. But Bitcoin is here to stay, and I dare say, will lead the money revolution of this century. If you own any, bequeath them to your grandchildren, it will likely go down in history as the work of genius.