How to explain what Bitcoin is in relatively simple terms... and Why it will probably be important to you later?

Preface: The One Paragraph Quickie - The Executive Summary.

The word Bitcoin is used to describe aspects of a newer digital financial system that, throughout history, humans would have simply referred to as the latest version of "money." Bitcoin is often referred to as "digital gold" (much to the disdain of auramaniacs like Peter Schiff) because the rare commodity (gold) was previously considered the "apex" asset class to store monetary value for thousands of years. Bitcoin's best use case in 2024 is as a digital store of monetary value that is quick and cheap to move online as needed. Currently, in the United States, Bitcoin is not used as an everyday pocket money or "cash," but often instead as a savings or a capital reserve asset, reminiscent to the age when holding actual gold bars served that purpose. Comparatively, Bitcoin for many can be thought of as a "cyber-safe," which protects your digital money, while it increases in value over time. In some developing countries however, like El Salvador, Bitcoin is actually used as the country's local currency (tax-free transfer between parties like spending cash) since El Salvador chose to discontinue its own government-issued currency due to negative price treatment by the world banks. Thereby El Salvador has already embraced Bitcoin as its legal tender for all purposes, which is a little scary for some of us to contemplate for daily purchases. Currently Bitcoin's global adoption is still growing so rapidly that it often exhibits large daily or weekly price swings, which makes Bitcoin difficult to rely on for people simply wishing for a steady exchange rate just to purchase basic physical goods from week to week. Being completely digital and also built and distributed using no central governing body, Bitcoin has proven to be the foundation of the first successful person-to-person financial system that by its basic nature is indestructible (It can't be stopped from operating), incorruptible (It can’t be stolen/hijacked electronically), immutable (It can't be censored by a third party), impenetrable (It has never been hacked since its inception in 2009), and immortal (It can sit in "stasis" at a zero maintenance cost for decades, centuries and possibly millennia while most likely gaining even more value just due to the passage of time. It is a Duracell battery that holds "digital energy" with a half-life of forever... In other words, the first "perfect" money. Bitcoin is also unique because it does not necessarily require you to reveal your personal identity to buy or sell it, when transacted in its native form, though all transactions are actually stored publicly and "cyber" transparent, displayed "pseudonymously" (basically remaining anonymous unless a party reveals additional information that references back to their personal identity). Bitcoin is metaphorically the "orange pill," in reference to the 1999 movie, The Matrix. Bitcoin would be the "orange pill" you swallow to break out of this world's "government-simulated" money schemes. Bitcoin's network is effectively a fully self-sovereign money system. Bitcoin exists and operates without needing to ask for permission. Later I'll explain in greater depth why it is "perfect" money, but for now, let’s discuss some historical uses of the word “money.”

A Hair More Background:

Since the beginning of recorded time, humans have used a “money” of some design to transfer value back and forth between two parties. Thousands of years ago the valuable items we used were beads, hundreds of years ago we used gold, today we still use paper money (mainly US dollars).? All these types of money also had their own "network" or system of standardizing the qualities and measures for that type of money. I suppose there was always some sort of bank, bankers, or “minister of coin,” who kept the accounting in each past “money system.”

What can seem confusing as you begin your journey learning more about Bitcoin is hearing other people refer to “Bitcoin” as something that is not what you originally thought it was. Bitcoin is polysemous [A word or phrase that has multiple meanings]. Most people you talk to likely don't fully understand Bitcoin either. Everyone’s confusion stems from some combination of where they first encountered Bitcoin along with what they learned about Bitcoin most recently. They were not likely given the broader summarization like you are reading today.

To realize what Bitcoin is [overall] we must first understand how the word, Bitcoin, is used by people with varying levels of Bitcoin knowledge.

Most people use the word to describe one of the following: the Bitcoin network, the Bitcoin blockchain (the blockchain is simply a sequential list of monetary transactions that are kept synchronized across the computers of all parties who participate in the Bitcoin network), a digital money system, a digital currency, or as a digital asset / digital commodity.

All those descriptions are correct since the generic term “bitcoin” can be used to depict both the technology and its use cases. Did you notice in the previous sentence I left the word bitcoin [lower case].? That was on purpose.? The only correct usage of the word Bitcoin [upper case] is when you are referring to the Bitcoin network (the distributed blockchain network in its entirety).? I used Bitcoin [upper case] (most times incorrectly) in the beginning of this discussion on purpose.? From this point forward, bitcoin will remain lower case unless specifically meaning to reference the entire Bitcoin network.

So now you may better understand why at times you may hear bitcoin described as the Bitcoin network (digital money system) or referenced to as a stock/equity (exchangeable asset) or a unit of measure like a “coin” - I have 6.1522 bitcoins in my wallet. Often confusion stems from the same word [bitcoin] being used for so many different reasons, but we must admit that even the world’s current “loose” definition of the word "money" lacks clarity too, since we most often think of money as cash in our wallets, or the balances of our bank account or brokerage account.

Today, in the United States, the IRS treats bitcoin as an asset (accountant nerd-speak), which is taxable upon sale, the same as owning real estate or stocks. This is mainly because bitcoin, when it first began in 2009, was handed out as a reward for a person's computer doing work for the Bitcoin network; therefore, it originally appeared to the IRS to be something that was earned, like a stock option or a share of a company, not necessarily a payment of money (in US dollars), because originally there were no official bitcoin exchanges to trade bitcoins for US dollars. The government did not actually understand Bitcoin then, and still today not that much better, so they never realized Bitcoin was destined to be the 21st century's new version of money, not just a new asset type.

The previous paragraphs tell you basically what Bitcoin is. You can stop reading here if you just want and say to your friends that you know what Bitcoin is, but If you want to know the reasons why Bitcoin is considered by many people to be the most important change ever to occur to money, you will need to take the "orange pill" by choosing to read the remainder of this article and learn why Bitcoin is "perfect money..." Cheers!

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The Fuller Explanation: Answering in deeper terms clarifying the why in WTF should this be important to me?

Index:

This Bitcoin explanation is split into a few subsections, so hopefully everyone can stay engaged to finish the article.

1) How we currently keep and use our Dollars - The 20th Century banking options versus the different options available for people to hold bitcoins.

2) Several use cases as to why a person today might want to own bitcoins?

Frequently Asked Questions:

Question #1 - Why would it be better to use bitcoin as a store of value rather than a popular 20th century currency like the US dollar?

Question #2 - What exactly is currency inflation of the US Dollar, why does it happen, and what does it really mean to us. Does Bitcoin provide us a way out?

Question #3 - When is Bitcoin’s price too high to buy?

Conclusion - Bitcoin price predictions and our future.

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1) How we keep and use Dollars - The 20th Century banking options versus the different options available for people to hold bitcoins.

When referring to the “20th century” version of money, the banks (called central banks) control the “money network” in each country. Each large country’s central bank issues a paper currency for people to use to transfer values between each other as needed. We will come back to the concept of central banks issuing paper currency later when we get closer to wrapping up the explanation why bitcoin is "perfect" money.

Currently, local banks in first-world countries offer people the ability to “bank” with them, which means the people can deposit their money into a bank intending for the bank operators to hold the money until they ask for it back.? There is also another type of 20th century banker called an investment banker, who handles the investment of people’s money into a company, registered asset, or security / stock to potentially benefit over time from a gain in monetary value for their money invested.

People who own bitcoin as an asset (store of value), though they may have bought their bitcoins (or a small fraction of bitcoin called Satoshis) from a Bitcoin ATM machine or through some type of online broker, do not keep their bitcoins in a traditional “bank account;” however, there are private companies that can custody your bitcoins for you (like Coinbase Exchange, Strike or Cash App ), much like a traditional 20th century bank does for your checking or savings accounts. [FYI: It appears that the traditional banks (like Chase, Wells Fargo or BOA) are likely to receive approval soon from the SEC to custody bitcoins for their banking customers.] But as of today, “bitcoiners,” people who own and use bitcoin regularly, have what is called a bitcoin wallet (accessible through a secure app on their phone or computer).? Bitcoin wallets are basically bank accounts that are stored electronically on the Bitcoin blockchain.? In other words, you simultaneously created a Bitcoin “bank account” of sorts when you first bought some bitcoins. With your purchase, a transaction was written to the ledger (spreadsheet) that is stored in a distributed fashion among all the network participants who also own bitcoins on the Bitcoin network. The distributed ledger is also referred to as the blockchain (the Bitcoin blockchain).

So, contemplating what has been explained above, the idea of owning some bitcoin, for most people, who live in a first-world country, is often a topic of interest to discuss while hanging out socializing, but why would most people in the world want to bother learning how to buy bitcoins or even believe they actually needed to own bitcoins?

2) Several use cases as to why a person today might own bitcoins?

Bitcoin’s importance can vary greatly depending on a person’s life situation.

• If you live in a third-world country whose currency often dramatically swings due to government manipulation or live in a country with a hostile dictator, who likely wants to take assets from the people, you need the security of bitcoin to protect the value of your money and also offer you the opportunity to flee, so when you reach safety, you can regain access to your bitcoins that are still always safely stored on the blockchain. ?(i.e. live in Venezuela or Lebanon or Zimbabwe or Turkey)
• If you are a fairly wealthy traveler and wish to travel to many countries, instead of carrying money with you to be changed to different currencies as you travel, you can own bitcoins and access your bitcoin wallet from your phone and exchange money into the local currency to use, if locally they do not have a method to accept bitcoin natively.? Effectively, you are acting as your own bank.
• If you are a person who wishes to have some of your personal wealth stored in a private account [a safe] that no other person or government can forcibly take from you (like people in the past who felt that keeping cash in a safe under the floor of the house was important), then owning bitcoins natively achieves that goal.
• Some people see bitcoin as an investment opportunity since it trades digitally on the open cryptocurrency markets daily 24/7. Bitcoin trades with a high volume and volatility, which makes it a very attractive investment opportunity for many investors. Moreover, since January 2024 when the US securities and exchange commission approved the formation of Bitcoin ETFs. Now anyone with a brokerage account can own a broker-custodied derivative of bitcoin instead of needing to learn how to buy bitcoins and hold them in a private bitcoin wallet themselves. Let's call the ownership of that type of bitcoin as "institutional bitcoin." As of today, any person residing in the USA has the ease of obtaining institutional bitcoin by instructing their regular investment broker to buy into a Bitcoin ETF.
• For people who wish to store very large sums of value (like corporations that typically hold millions or billions of dollars of US treasury bills as a corporate board approved harbor of safe investment), bitcoin provides a method of storing very large sums of value on the Bitcoin blockchain in an indestructible and immutable investment vehicle that is a pure inflation hedge against the world’s inflating government securities, since the Bitcoin network’s algorithmic protocol limits the total bitcoin supply from ever exceeding 21 million bitcoins.? Therefore, bitcoin is not inflatable by any outside means.? When Federal banks print more money inflating their own currency and prices, bitcoin only appreciates in relative value and scarcity.
• Some wealthy people hold bitcoins for investment appreciation instead of holding gold or real estate. Bitcoin is currently a superior asset to gold because it is digital and is secured through the inherent secure design of the Bitcoin blockchain, at no additional cost to the bitcoin owner, and it can be transferred across borders in a matter of seconds at almost zero cost.? Gold is heavy and slow to move and expensive to protect/secure from theft and the global gold supply inflates by approximately 2% per year due to continued gold mining activity.? Real estate is a well-known asset class, and local governments have already established periodic taxation on real estate since physical land and buildings cannot be moved that easily to avoid tax. It is also relatively easy for the State to enforce local taxation and abscond the property if the owner does not continue paying the property taxes.? Furthermore, real estate requires annual insurance costs and regular maintenance costs for upkeep.? Currently ownership of bitcoin within the USA is like owning a city block in "Cyber-Manhattan," but the property requires no, as in zero (0), annual operating expenses to the owner and is only subject to capital gains tax upon sale of the property.

FYI: The fact that the IRS currently classifies bitcoin the same as other financial securities rather than a liquid currency like the US dollar, using bitcoin to buy your Starbucks coffee each day is not feasible because with the purchase of your daily latte, you are creating a taxable event from the IRS’s point of view.? So, most people won’t use bitcoins like cash in the United States until the IRS changes its view on bitcoin transactions.

Frequently Asked Questions:

• Question #1 - Why would it be better to use bitcoin as a store of value rather than a popular 20th century currency like the US dollar?

The total number of US dollars available in the world is dictated and manually changed by a board of governors at the United States Federal Bank (FED).? The FED can choose to issue [print] more dollars and put them into circulation when the US government requires more money supply to pay for government activities. In other words, when the US annual budget requires the expenditure of more money than the annual revenues the government actually receives, the FED must print more money for the government to use to make up the difference.

Okay, so the FED has a printer at home that can print money when the government needs it? Why is this a bad thing since the government needs the money to pay the bills?

First off, we are not playing the game “Monopoly.” The banker cannot just print money without the negative effects that occur from going into debt.? The FED’s money printer is much like us buying stuff on a credit card. The higher the credit card balance, the more interest we must pay annually until we pay off all the outstanding credit card debt.

The newly printed US Dollars enter circulation in the US economy usually through the issuance of US treasury bonds. International companies and other countries with billions of dollars buy these new US treasury bonds, which guarantee that about a 2 to 4% annual interest be paid back on them, based on the prevailing interest rates set by the FED bank.

• Question #2 - What exactly is currency inflation of the US Dollar, why does it happen, and what does it really mean to us. Does Bitcoin provide us a way out?

What is often not clearly recognized by the public pertaining to currency inflation, though fully understood by the politicians in DC, is that the US money supply must increase by at least 2-4% each year just to pay all the treasury bond annual interest payments, because the US government continues to outspend all incoming government revenue each consecutive year. Remember the media crying each year in December that Congress still needs to vote to increase the debt ceiling, so government employees will still get pay checks and government health benefits will get paid? Other than government payroll, the bigger problem is that since the government typically greatly overspends revenues the next year, the overall US budget deficit skyrockets even higher, and the result is not just the 2-4% inflation for the year. It becomes more like 8-12% inflation for that year.? Since COVID19, the annual inflation has averaged about 8-10% per year.? Unfortunately, the overall government debt load has now grown to where it has entered a phase called a “debt spiral,” which means that the government has passed the tipping point to which it no longer has a clear pathway to repay the national debt through the normal growth of government revenues. The US government must come up with a novel approach to attack the current debt crisis before the remaining countries in the world completely lose faith in the US’s ability to restore a neutral value to the US Dollar. (Search Google about the US Bitcoin reserve)

Though you might not see your bank account balance go down each month while the government continues to overspend each year, what does happen is that all your personal expenses get adjusted by free-market forces and the things like food and activities that you buy every day begin to cost more money.? Inflation is seen personally over time by the fact that all prices continue to rise against your monthly earning capacity.

When we are living in a world using the US FED’s “Monopoly money” printing approach, the government's overspending is effectively slow bleeding the value of our existing money with every new dollar they print and add to circulation for government use. The FED bank is effectively excising an invisible tax on our bank accounts when we leave our money sitting as cash in a regular US bank account. Do you remember reading about the Boston Tea party? Taxation without representation. This new obscure form of taxation has been happening since Nixon took the US off the gold standard in 1971. It just happens to be such a “slow bleed” that many people often don’t realize that the bloodletting is killing them financially. In other words, we should all think about finding another financial vehicle to store our life savings, so we can retire someday knowing there could still be some money left after we are gone, the possibility for a legacy.

Bitcoin - Absolutely perfect money...

What exactly did I mean in the first paragraph that Bitcoin is the first “perfect” money. As of today in 2024, the supply of bitcoins in existence is approximately 19.9 million bitcoins. The Bitcoin network’s supply algorithm controls ALL the production of new bitcoins. No person or government can “print” or create and issue more than 21 million bitcoins total [ever]. No one will ever be able to slowly bleed the value of your bitcoins away from you. The algorithm is hard coded into all the servers participating in the Bitcoin network. ?The algorithm states that the supply growth of new bitcoins will be cut in half every 4 years until the 33rd halving in the year 2136 when the final halving occurs. In 2140, all 21 million bitcoins will have finally been issued. From that point in 2140, the Bitcoin network will continue to operate merely to maintain the bitcoin transactions between parties.

Bitcoin is indestructible, incorruptible, immutable, immortal. It is money that exists for eternity and is even transferable through space and time as it sits in its native, unencumbered digital form, completely secure and free from any outside restraints. Perfect...

If you had money that could last forever, what would you want your money to do once you are gone? It's an interesting thought, isn't it? By owning bitcoin as your "forever money," you can entertain yourself thinking of ideas for your bitcoin to fund after you are gone. I bet some people will come up with fun ideas. As new technologies like AI expand in capability, you could possibly fund an AI bot that continues a hobby or personal project of yours for eternity. Wouldn't that be wild.

• Question #3 - When is Bitcoin’s price too high to buy?

Well, today in 2024 there are currently about 900 trillion dollars worth of assets in the world, so over a multigenerational timespan, Bitcoin will likely capture half or more of all global asset value. I would say the price might be considered too high when it gets priced closer to infinity divided by 21 million (∞/21m). That means it will not be priced too high and still worth buying more bitcoin over the next few generations of your family tree.

• Conclusion - Bitcoin price predictions and our future

Several well-respected experts on the topics of financial history, financial economics, business analytics and Bitcoin estimate conservatively that a single bitcoin will most likely be equivalent to $13 million US dollars (adjusted for inflation) by the year 2045.

[If you question that prediction, you need to see the calculations available for public dissemination in the Bitcoin24 project files listed online (many thanks to Michael Saylor and MicroStrategy, Inc). Search for the project on Google. You can play with the spreadsheets and adjust the numbers to create our own variations.]

In other words, everyone will eventually own bitcoin, and everyone will buy their bitcoin at the price of bitcoin the day they finally decided to own some. Even on that fine day, it will still not be too late to benefit from buying bitcoin...

If you think you have now been "orange pilled," spread the word about Bitcoin to others with passion and excitement, because now you know a lot more about Bitcoin. Do your best to avoid showing irritation, malice or disdain when sharing your excitement when it appears that people are disregarding you or don't care to hear about it. Expect that exact response. People will always initially resist what you are telling them about Bitcoin, and that's perfectly okay. If you are spending your time telling them about Bitcoin, then you obviously love them. "One day they will remember when you first tried to explain Bitcoin to them, so let's not leave that as a negative memory..." (Tim Heckler, 2024)

Everyone gets their bitcoin when the time is right for them.

Side notes:

1) What about the other cryptocurrencies.

All other Cryptocurrencies are not Bitcoin, and none of them to date resemble "perfect" money other than Bitcoin. Others might be a type of "smart" money (money that has traits of utility and can be programmed to do things.) Cryptocurrencies that do not currently run on top of the Bitcoin network (proof-of-work) are imperfect by design in one or multiple ways; therefore they not suitable to be classified as a digital commodity. The other cryptocurrencies better resemble securities in the stock market that must offer or produce work that creates additional value thereby making the stock value go up.

2) Why do some people own physical gold and speak negatively about Bitcoin, claiming it is a sham and will eventually be worth $0?

(This section is written to add fuel to the long debate between gold lovers and bitcoiners. I just thought to include it as an interesting side topic.)

Having listened to several talks (debates) covering the topic of elemental gold versus Bitcoin, I feel like I can accurately sum up the argument, though I am certain the "gold bugs" will still be dissatisfied with my explanation. What I see expressed in most arguments often includes a very clear bias (same as other people who mainly deal in gold) and buying Bitcoin in lieu of gold is bad for gold prices, hence bad for their business. Beyond that obvious reason, it is clear that they process their idea of money as being "purely analog" and assign zero (0) long-term financial value to anything that exists being "purely digital," because, in their minds, digital assets don't represent "hard value" like real "physical world" items do for them. They can see certain value in digesting music and books digitally for entertainment, but to them, those digitally stored assets can't have any permanent tangible value such as a "physical" commodity like gold. What most "gold bugs" are completely blind to is that after the Internet boom, human lifestyle (our daily existence and the reliance on continuity in our life) crossed a digital divide and entered a new digital age of man. For example, today's reliance on smartphones. It is truly akin to the past reliance on physical commodities like coffee, tobacco, and sources of other human addictions.

Once the advent of Bitcoin came along, we were literally "given" digital money. Money that is honest. A hard type of honesty. Hardened by physically proven mathematics combined with the science of digital cryptography. The world got Bitcoin as a gift, amazingly enough (Dumb luck for us). It is not a sham or a Ponzi scheme because Satoshi (the creator) disappeared/died before it ever became worth anything for him. (Even if he came back from the dead, he has been gone so long that the Bitcoin network has become too big. Bitcoin is no longer his to rule.) Most important though, is that people believe that this new digital money is for them, it works for them, and there is no going backwards from here as far as the next generation of humanity will be concerned.

Don't argue with mass belief systems, because the power of belief has fueled all theisms for a very, very long time; and this rapidly growing "peaceful" belief system is driven by providing the promise of financial sovereignty to every person on earth? (laughing) Hah, say excuse me, and get out of the way before you're trampled to death by the incoming mob coming to get their Bitcoin...

Once we start to build and use digital robots to do important stuff for us daily, the money the machines will have to spend and receive will all be digital money, duh. Do you want to argue with the owner of the self-driving car that is going to take you to dinner in 20 years that the digital money the car deposits into his bank account at the end of each day will amount to nothing because you think it's "fake" or a sham? C'mon, you are starting to sound delusional about the reality of digital commerce and its future "real" value statements to humans, who by their nature we know are lazy creatures that would always rather pay to be pampered if given the choice.

Oh, did you hear that? Did I say pay? The transfer of an agreed value between two parties for a service rendered, no matter what contrived version of money we agree to use? Yeah. Exactly.

The full network effect is already in play now. Every young person from today forward will grow up knowing (believing) that Bitcoin is the digital money that lives in the cloud accessed through their iPhone. All real-world systems of money operate due to a shared consensus. Whether contrived as analog or digital is semantics. It has not been relevant since the 1930's. Those old gold guys don't get that the fact that just because gold exists physically, and you can hold it, or touch it and rub it to know it's real; and Bitcoin is untouchable, invisible blockchain money that young people, who grow up learning digital technology in depth, will believe in their Bitcoin money technology the same way that every day American’s in the 1950’s believed in the government's updated version of the "greenback" dollars from the 1800s.

Bitcoin has proven to be the world’s new reliable money technology for the last 15 years. In the long term, Bitcoin will not fail because the next generation of digital thinkers and digital consumers will continue driving forward in the digital age, not reverting backward to previous centuries’ relics of money. Peter, just admit you own some Bitcoin and join "Team Bitcoin" already ;-) Keep your gold, too, just in case the rest of us are eventually proven to be the idiots you seem to enjoy portraying us to be. Cheers!

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