The value of Bitcoin
How can Bitcoin be used to alleviate the problems of modern financial systems.
Bitcoin’s Arrival
In 2008 during the aftermath of the financial crash caused by the failures of centralized systems of power, the domain bitcoin.org was registered and the bitcoin white paper posted. In 2009 the opensource bitcoin protocol was released and the ultimate form of sound money was created.
What is Bitcoin?
The Bitcoin protocol is an opensource network which facilitates transactions of the digital asset Bitcoin. The protocol makes use of a Blockchain to prove the order of transactions and prevent fraud (double spending of coins) in a way that removes the need for trusted institutions. A consensus on the order of transactions is achieved via a concept called proof of work
How does Bitcoin work?
A hash function is an algorithm which maps an input phrase of arbitrary length to a non-random output value. The bitcoin protocol uses double SHA-256 [double Secure Hash Algorithm 256-bit = SHA256(SHA256(𝑥))]. This produces a 256-bit number — a number between 0 and (²²⁵⁶ — 1)
Each transaction on the bitcoin network contains transaction data, a timestamp, the hash of the previous block and a Nonce (number only used once). The data is combined into a string of information and the nonce is changed until the output of the function is lower than a target value. The target changes every 2016 blocks that are mined and is made less or more difficult to ensure that the average rate at which a block is mined stays at ten minutes. The current target is 20.6 trillion ~²⁴⁴. This means that each block has to guess a nonce which when combined with the data in that block begins with 212 zeroes. The double sha256 product of “hello” is “d7914fe546b684688bb95f4f888a92dfc680603a75f23eb823658031fff766d9” which in decimal form is, “97504006689031266106313558736195978061851485905106955345991800701364517431001”.
The miner who first guesses a solution gets to mine a block and attach it to the chain. They then receive the right to create new bitcoins and send it to their wallet as a transaction fee. Today the mining fee is 6.25btc. This fee halves every four years until the last bitcoin is mined in 2140 (mining fees will then turn to pure transaction fees). Sha256 makes it impossible to add false transactions to a mined block because, that would change its hash and alert the other nodes of an attack. In the case of forks (when a split occurs due to different user opinions on transaction history) the nodes on the network work on the longest chain. In order for a malicious agent to commit fraud, he would need to fork the network, and enter a faulty transaction, before catching up to and superseding the honest chain. This would require the attacker to have more compute power than all the nodes on the honest chain (about 83000 at $3000 — $10000 per node). Even if an attacker had that many nodes, why not just mine on the legitimate chain and preserve the currency’s value?
What is the Value of bitcoin?
Bitcoin’s value is its decentralization, portability, as well as its soundness and transparency in terms of its supply. There will only ever be 21 million bitcoins. The rate of inflation of bitcoin’s supply is scheduled and maintained by adjusting computational effort. All transactions are recorded on a distributed ledger available to everyone. It is the soundest form of money ever invented with a terminal inflation rate of zero%.
Money is freedom to do what you want, and central banks rob people of that freedom when they choose to print new fiat currency. Some will may say that inflation serves as a means to get people to use money however, that involves theft from everyone else.
The reason why gold is used as a reserve asset is because it is divisible, has a stable inflation rate, a finite supply, and a good geographical distribution. Bitcoin is better than gold in all those metrics and has greater portability.
Gold has a market cap of ten trillion dollars. If Bitcoin is at least twice as good a monetary technology than gold, what market cap should it be allocated?
