Bitcoin. What is its core value proposition?

Other articles in this series:
Bitcoin: What is it?
Bitcoin: How does it work?

Bitcoin is decentralized. No single entity can control it.

And yet, by some measures it is the most secure network ever created, and thus the safest possible place to store value.

It’s monetary policy is deflationary, entirely predictable and practically impossible to change. Fewer new Bitcoins are created as time goes on, they are created in a predictable manner, and there is a hard cap limit on the total number that will ever be produced. The system was specifically designed so that Bitcoin will increase its purchasing power over long periods time.

It is a truly global, friction-less and permission-less payment system with a very low barrier to entry. Anyone with a basic internet connected device can store, receive and send unlimited amounts of value anywhere in the world.

There are several core properties that contribute to Bitcoin’s value proposition and while it certainly helps to understand the technicalities in order to appreciate the true value of Bitcoin, it isn’t absolutely necessary.

The above explanation is simplified and incomplete on a technical level, but even that may be too technical for some people. And that’s completely understandable. Not all of us are computer programmers, and neither do all of us have time to read and digest all this information.

It is possible to understand the underlying value propositions before (or without) fully understanding all the technical details.

First and foremost, Bitcoin is completely decentralized. This means that no single entity controls the issuance of money. Thus no government can decide to depreciate the value by printing more of it. The value of Bitcoin depends entirely on demand for the asset.

Bitcoin is also a completely self sovereign form of money. This means that your money is entirely under your control and it cannot be confiscated by anyone. No government agency can freeze your Bitcoin wallet. As long as you remain in sole possession of your private keys, you remain in sole possession of your money.

This is important because history shows that governments can and often do go off the rails. Presidents who start out as are heroes of the people get power hungry and turn into dictators. Advanced democracies descend into populist chaos. These things can and do happen and to simply trust that it’ll never happen where you live is naive.

In 2013 the citizens of Cyprus woke up to find that the bank accounts of all (relatively) wealthy individuals had received a government haircut, overnight. There was no parliamentary debate nor voting on this issue. You would have had no choice in the matter, nor would you have had time to move your money elsewhere if you disagreed. The government (in cahoots with the banks) decided, in their sole discretion, that everyone with a bank balance of more than one hundred thousand euro would have to pay up, to help them cover their loans. And this happened within the European Union.

Protecting a portion of your finances from your own government may sound like something only crazy paranoid people would do, but there are countless examples of situations where millions of people wished they had done so, only when it was already too late.

Governments are also notorious for implementing sanctions and capital controls that aren’t always in the interest of their citizens. You may have family living abroad and you want to send them money, but because your government’s relationship with their government deteriorated (which has nothing to do with you) you’re prevented from sending them anything.

Bitcoin is also a truly global, borderless and frictionless currency. The world’s governments do not have a particularly good track record when it comes to international cooperation. Anyone that has ever tried sending money abroad will know that it is a cumbersome process and depending on where you’re sending to and from, it can take up to a week or more for your payment to arrive.

It is truly laughable that, in this day and age, the fastest way of sending money abroad is often by drawing cash and getting on a plane. Except then you would have to worry about border currency controls.

Bitcoin can circumvent these problems entirely.

Bitcoin is also inherently scarce. The fact that the creator(s) used the term ‘mining’ to describe their proof-of-work invention is an obvious reference to gold. And it references the fact, unlike fiat currencies, new money cannot simply be created with a database entry through political decision making. A certain amount of effort has to be expended in order to extract / create more value.

And while gold production has remained fairly stable over time, at roughly 2% inflation per year, Bitcoin’s inflation rate will drop below that by mid 2020 and continue dropping lower as mining rewards are reduced.

The supply of Bitcoin is also entirely predictable, even more so that gold.

The first block was mined on the 3rd of January at 18.15 UTC and with that the first 50 Bitcoins came into existence. Since then the protocol has ensured that new blocks are mined on schedule and that new Bitcoin is created accordingly.

Anyone with an Internet connection can verify exactly how many blocks have been mined and how much Bitcoin has been created. As of 19 April at 19.33 UTC exactly 626,746 blocks have been mined and there are precisely 18,334,387.5 BTC in circulation.

Bitcoin’s monetary policy is also completely transparent as the final supply of Bitcoin is hard capped at 21 million Bitcoin.

The protocol forces a 50% reduction in miners’ block rewards every 210,000 blocks, or approximately every four years, based on the fact that a block is mined every ten minutes, regardless of how many miners join the network.

Initially the protocol rewarded early miners with 50 BTC per block but on the 28th of November 2012 the first halving reduced the mining reward to 25 BTC per block. On the 9th of July 2016 the second halving took the mining reward down to 12.5 BTC and some time around the 12th of May 2020 the third halving will see the reward fall to 6.25 BTC.

By this mechanism the last Bitcoin will be mined after the 64th halving event, which will take place sometime around the year 2140 and which will result in an inflation rate of exactly 0%.

This mechanism ensures that Bitcoin is a deflationary currency. Unlike gold the supply doesn’t just remain stable, it is programmed to continue slowing down, until eventually no more new Bitcoin is created.

In the interim, even if demand remained stable at first, with the ever decreasing supply the price should continually rise, which off course then creates more demand for an appreciating asset, reinforcing the feedback loop and pushing the price even higher.

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