In the first article of the series, we explored why Bitcoin deserves attention as an asset class. In the second and third articles, we discussed the nature of money, its properties, its evolution, and the flaws in our current monetary system—laying the groundwork for understanding Bitcoin.
Any revolutionary technology faces skepticism. It took time for people to embrace ordering everything from groceries to shoes on Amazon, though the concept was relatively easy to explain. Some technologies, however, are much harder to articulate.
Imagine trying to explain the internet to a child who has never seen a computer. Is it a vast library, an information highway, or a network of connected machines? Each description holds some truth, yet none fully encapsulates its essence. Despite using the internet daily, have you ever tried describing it to someone who has never encountered a computer?
Let us revisit the parable of the blindfolded men and the elephant which originated in the Buddhist folklore before delving into Bitcoin. In a distant land, six men heard about a peculiar creature known as the elephant. They heard that elephants could trample forests, carry immense loads, and frighten people of all ages with loud trumpet calls. Essentially, the elephant was a majestic animal.
They were also aware that the King’s daughter rode an elephant. They pondered why the King would allow his daughter to be near such a dangerous creature. They debated whether the elephant was a colossal and ferocious entity or simply a graceful and gentle creature. They desired to examine the elephant and understand it through touch. They were blindfolded and touched a different part of the elephant, then described the animal based on their limited perception.
The person who touched the ear claimed the elephant was like a giant fan, while the man who touched the side likened it to a massive wall. The blind man who touched the trunk compared it to a snake, the individual who touched the leg described it as a tree trunk, the person who touched the tail said it was like a rope, and the one who touched the tusk saw the elephant as a spear.
Were any of them incorrect? But is that truly what an elephant is?
Any explanation should be lucid when encountering something unfamiliar because it attempts to relate it to something known.
Certain things, like the unseen elephant to a blindfolded man, cannot be comprehended by merely understanding one part of it. One must observe it in its entirety. Sometimes, you can only explain the function of an entity without fully understanding the object itself.
The same principle applies to bitcoin. How do you explain it? When you embark on learning about Bitcoin, you are akin to the blindfolded man touching different parts of the elephant. You will provide an unrelated explanation depending on which aspect of Bitcoin you are learning. It requires a different perspective to perceive Bitcoin as a unified entity or a phenomenon.
Bitcoin was the first cryptocurrency or referred to in short as crypto. Understanding bitcoin is required to truly understand the crypto space.
Technically it is a chain of digital signatures but what does that explain to a layman?
Nothing!
To the layman it can be explained as virtual digital money, or it can be used as money but then his question will be is: Is it like gold or paper money that a common man is used to for centuries?
It is digital money but all our known and used form of money today the Dollar, Rupee, Euro, etc. are all digital.
What is the difference of bitcoin to the digital Dollar then?
It does not require a central entity to produce, distribute and verify it. But is the above statement fully true?
None of the above explanations really explain what bitcoin is but they are all true to an extent at least. These are some of the explanations going around but does any of this explain bitcoin to the uninitiated completely especially about its infinite possibilities.
It is virtual or just 1’s and 0’s distributed and stored in multiples machines.
The general criticism has been that it is not real money since you cannot touch it. And therefore, it must be a scam and a Ponzi scheme.
Just because one cannot touch it does it mean it is a scam?
Email is virtual or 1’s and 0’s compared to snail mail which was tangible. Does intangibility make an email any less real? Email has information, it is stored somewhere and we can read this information using a mail client on the browser. It is virtual but real. It conveys the information and that is all email or snail mail is required to do.
Bitcoin serves as a digital representation of value hence it functions as money. Bitcoin balance can be viewed on a digital wallet on our phone or computer, like how we check your bank balance. Bitcoin can be sent to other people as payment, making it function much like traditional money in a digital wallet or bank account.
A Ponzi scheme, named after Charles Ponzi, is a fraudulent investment scam that promises high returns with little or no risk but uses the funds from new investors to pay returns to earlier investors.
Unlike Ponzi schemes, Bitcoin does not promise any returns. It is more akin to gold or other commodities. When you buy Bitcoin, you simply have a Bitcoin in your wallet. Its price can fluctuate greatly; it might increase tenfold or drop to zero.
Consider buying an ounce of gold for two thousand dollars today. There is no guarantee of any return. The price of gold might soar to ten thousand dollars or plummet to zero. The only certainty is your ownership of an ounce of gold.
Similarly, when you buy Bitcoin, the only guarantee is that you own a Bitcoin. Its future price remains uncertain, but your ownership does not. This intrinsic characteristic makes Bitcoin an asset with a price on an exchange, subject to the same market dynamics as any traditional commodity.
If something digital is money, why is a digital photograph not money?
Anyone can make innumerable copies of a photograph at zero cost and send it around. It is no different from the original. If you can easily replicate something and keep making as many copies cheaply it cannot be money as it is of little value.
Bitcoin, despite behaving like a digital image, its ownership can be transferred online and everyone can verify it and multiple copies of the original cannot be created.
Bitcoin is a digital 1 and 0 that cannot be copied and pasted and claim this copied version is the original. You can only transfer ownership to someone. That is facilitated by the brilliance of the underlying technology and all the distributed participants in this bitcoin protocol and network.
There is an owner and only he can send it or assign the ownership of that cryptocurrency to someone else.
Philosophically bitcoin is the greatest socio-political-economic experiment in the history of mankind.
Technically it is a protocol or a chain of digital signatures.
Protocol means a set of rules.
Bitcoin is software code end of the day.
When presidents of two countries meet, protocols or rules decide who should sit first or walk in front. Same way, in software systems, protocols define how a system should interact by coding it into the system.
Bitcoins are like bearer assets. Whoever holds it is the owner of the asset and can give it to anyone else. Physical currency or cash is a bearer asset. Whoever holds it is the owner of the asset.
There are registered assets like a car. When you buy a car, you register its ownership in your name at the Motor Vehicle department in its ledger. If someone takes your car, just because they have it in their hands does not make them the owner.
The cash in your pocket if it falls on the road and someone else picks it up. They are essentially becoming the owner.
Bitcoin is not backed by the government or a metal like gold. It exists only because the people who use it believe in it. Its adoption relies on the belief network effects.
By that logic, fiat currencies are not backed by anything either. The value of fiat paper money solely rests in people’s belief in the institution that prints the money which is the government. Any asset for that matter its value and price exist because people believe in it and have demand for it.
The brilliance of the technology or of bitcoin is that you can send this digital image to someone else anywhere in the world 24×7 365 days a year without having to rely on a bank or payment gateway or check if they are open, the system is up and running or not. You cannot send money from US to Japan after 5 pm on Thursday as Japanese wire system will be closed. You cannot send any amount of money small or large from India to Thailand without getting the permission of your bank or central bank eventually. Remember there are still three billion people in this world who do not have a bank account but they do have a phone and can have a crypto wallet on that phone and can receive or send money.
And the exceptional part is no bank or country can stop you from receiving or sending bitcoin to anyone else.
Bitcoin software and the underlying technologies made it possible for value to be sent over the wire without a centralized intermediary. That was the revolutionary piece
Traditionally banks have been used for depositing cash and sending it to the person who needs it on our behalf as we need to be compliant with many local and state and federal laws of money transmission. Banks invest in infrastructure to have offices in different parts of the country or even internationally to facilitate this transaction. They incur heavy costs for facilitating this and they charge us for that investment plus their profits.
In the next set of articles we will show how this magic takes place under the hood.
News Summary in the Crypto Space this week worldwide
Once again Welcome to the world of crypto volatility. The markets once again proved trading crypto is not for the faint hearted. The price of bitcoin went from 78,000 to 94,000 and fell to 82,000 and then went back up again to 91,000 and too all in one week. Talk about Volatility. This is the swing traders dream.
Trump tweets that he is planning to create a crypto strategic reserve.
SEC is closing cases one after the other where it went after crypto companies and exchanges.
Lazarus has laundered the hacked bybit coins from last week through Thorchain
Terror outfits in India are raising money via crypto in India.
Nithin Eapen is a technologist and entrepreneur with a deep passion for finance, cryptocurrencies, prediction markets and technology. You can write to him at neapen@gmail.com
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