How best to describe Bitcoin?

The challenge of describing this elephant's true nature

Hi all,

As an update, I’ve paused all paid subscriptions for Once-in-a-Species.  With the growth of Onramp, I no longer have the time to deliver a quality piece of new writing every week.  However, I will continue to publish new pieces, just a bit less frequently. 

I look forward to continuing to show up in your inbox, and you can be sure that I will be loudly banging the drum about Bitcoin as the April 2024 sets in motion the next post-halving bull market.

Without further ado, here’s my latest article – hope you enjoy!

---

How best to describe Bitcoin?

One of the challenges about explaining Bitcoin to people is that it’s hard to define what it means for people and for the world.  Understandably, this ambiguity is unsatisfying at best and suspicious at worst.  Bitcoin enthusiasts end up looking like crazed lunatics trying to describe some elaborate and complex mess, straining to transfer their zealous belief to their bewildered audience. 

No wonder people tend to change the topic when Bitcoin comes up!

But much to the chagrin of the politely uninterested, this thing won’t go away.  It keeps coming back, stronger than ever, surging to new highs once every four years. 

So, here’s a simplified explanation of what Bitcoin means for the world and for you, in particular.

Transformative innovations sound boring

First, let’s acknowledge why it’s so hard to explain Bitcoin.  When DVDs first came out, they were easy to explain because of the narrow scope of the innovation – it’s a videotape, but better.  However, deeper, more profoundly transformative innovations are harder to explain precisely because they so dramatically change the world – the printing press, electricity, the internet. 

The truth is that the internet profoundly altered every facet of our lives, and yet people struggled to understand why nerds were so excited about “this Internet thing” because each discrete example seemed so trivial.

In a funny way, the more profoundly transformative an innovation is, the more basic and underwhelming it sounds.  The printing press made the written word more abundant.  Electricity made it possible to transmit energy to do work across town.  And as Bill Gates puts it, the Internet is “a place where people are publishing their information.”  None of these innovations sounds particularly important, and yet we all know how profoundly they transformed our world. 

Bitcoin is in this same category. 

The elephant in the room

The other quixotic challenge for an innovation that impacts everything is that people describe it based on all the things it impacts.  Which is to say, evangelists talk about tangible, salient use cases specifically because the full scope of the innovation is too expansive and abstract.  For example, early advocates of the internet talked about electronic mail, rather than the transformative digitization of the world’s information. 

There’s a classic Hindu parable that applies to expansive innovations like this:

“A group of blind men heard that a strange animal called an elephant had been brought to the town, but none of them were aware of its shape and form. Out of curiosity, they said, “We must inspect and know it by touch, of which we are capable.” So, they sought it out, and when they found it, they groped about it.

The first person, whose hand landed on the trunk, said, "This being is like a thick snake.” For another one whose hand reached its ear, it seemed like a kind of fan. As for another person, whose hand was upon its leg, said, “The elephant is a pillar like a tree-trunk.” The blind man who placed his hand upon its side said the elephant "is a wall." Another who felt its tail, described it as a rope. The last felt its tusk, stating the elephant is that which is hard, smooth and like a spear.”

In essence, sometimes things are bigger than what we can digest, particularly when we are exposed to only a small part of the whole.  This is inevitably the experience when first learning about Bitcoin. 

The truth is that Bitcoin is a number of things, but none of these discrete features satisfactorily describes the whole.

While each of these pithy descriptions is accurate, each describes just a small part of the larger innovation of Bitcoin.  This leaves us with a challenge: how best to conceptualize Bitcoin. 

I’ve thought long and hard about this, and really it is a two-part answer: what Bitcoin is & what it means for you.

What Bitcoin is

Simply put, Bitcoin is “digital gold” — designed to improve on gold's strengths and solve for gold's weaknesses.

A little underwhelming, right?  But again, profoundly transformative innovations typically sound rather basic.  At any rate, we have to unpack what this means.

The fact of the matter is that money is an endless competition between store-of-value assets.  All store-of-value assets have their idiosyncratic characteristics.  These characteristics can result in each asset being good or bad at fulfilling the properties of money:

Source: Vijay Boyapati

 The story of money over human history has been an organic, free-market competition between various commodities that can be used as money.  Sea shells were not a great store-of-value since new, dilutive supply was easily sourced.  Glass beads and cloth strips and carved stone discs were more reliably scarce since their creation took hard work to achieve.  However, technological improvements eventually made it easier to create new supply of these manufactured commodity moneys and eroded their ability to store value and propagate that value through time undiluted.    But technology doesn’t make it feasible to make more of a particular atomic element.  And so, while technological advances made glass beads an unreliable store-of-value, precious metals emerged as superior commodities to store value in.  But rarest of the precious metals was gold.  And that scarcity in the earth’s crust ensures that it’s extremely difficult to dilute the existing supply of above-ground gold.  In fact, global gold-mining efforts typically add ~1.5-2% to the existing supply each year over the last century.

We think of gold as being the most precious metal because it’s beautiful, or perhaps because it was favored by kings and the Catholic church in their visual efforts to project their power, wealth, and majesty.  But quite simply, these historical preferences were already rooted in the scarcity and value of gold as a material to source and work with.

All this to say that gold is the best form of money that exists in the physical world.  And that is why it emerged as the champion in the 70,000+ year Darwinian process of societies experimenting with different forms of money in the physical world.

In that sense, “gold” is really shorthand for “the commodity with the strongest monetary properties.”  And therefore, when we say that Bitcoin is “digital gold,” we don’t mean that Bitcoin is simply valuable or reliable.  Instead, we mean that Bitcoin is the digital version of an ideal store-of-value asset.

And the thing about digital versions of analog systems is that they can be much more perfect than their physical-world counterparts.  The Internet vs. a library; digital cameras vs. film; email vs. snail mail.

“Digital gold” is no different.  In other words, Bitcoin is the digital perfection of a commodity with strong monetary properties. 

While this is the best way to conceptualize what Bitcoin is, there is a better way to crystallize what Bitcoin means for you. 

What Bitcoin means for you

For users (meaning, any individual or entity who stores value in this “digital gold”), Bitcoin is a savings technology.  (Credit to Pierre Rochard for this idea.) 

What does this mean?  The simple (and implausible-sounding) reality of Bitcoin is that it is designed to increase in purchasing power over time, specifically because of its increasing scarcity — pre-programmed and guaranteed every 4 years.

The reasons this sounds so impossible to us is that there’s never been an asset that reliably grows in purchasing power over time, specifically because it has never been possible in the physical world to immutably guarantee increasing scarcity of new supply issuance.

In other words, the way to think about what Bitcoin means for you is that it is a tool for you to leverage.  This asset is designed to get more scarce every 4 years, and these supply-demand mechanics result in Bitcoin becoming more valuable over time. 

What this means is that Bitcoin can be used to grow the purchasing power of value stored in Bitcoin and held for 4+ years.

So, how best to describe Bitcoin? Well, Bitcoin is two things.  As an asset, it is best described as “digital gold” — which is to say, a digital improvement on gold’s outstanding monetary properties.   But as a tool, Bitcoin is best described as a savings technology — a way to grow the purchasing power of your savings by riding the incredible mechanics of increasing scarcity.