November 30, 2020

Biggest Bitcoin Misconception

Understanding Bitcoin is difficult. I fell into this rabbit hole in 2017, and only after two years of incessant research began to understand the deep essence of Bitcoin.

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Unsurprisingly, for most people whohave heard about this cryptocurrency only a couple of times, Bitcoin is something incomprehensible. And when people do not understand something, it is much easier to misinform them. The biggest misconception about Bitcoin is that its primary purpose is payments. This misconception makes it difficult to understand the real purpose of Bitcoin.

What does this mean?

Most people on the street will answer that Bitcoin isthis is another way to buy coffee or pay for services, if, of course, they have heard of this cryptocurrency at all. Those who think of Bitcoin in this way do not consider it to be something worthy, because in terms of daily payments, it really no better than PayPal, Apple Pay and credit cards. When people hear about the seven transactions per minute cap, high fees and irreversible payments, they come to the conclusion that Bitcoin is very limited. In addition, Bitcoin appeared literally out of thin air 10 years ago, its price is constantly changing dramatically. This is why Bitcoin is being discounted so quickly.

These are the reasons why Bitcoin supposedly doesn't make sense.

People are wondering why the network cannot be scaled to increase the number of transactions processed. If this is not possible, then why not just use a different cryptocurrency?

The problem is that the concept of Bitcoin aspayment system "is absolutely wrong. Today, Bitcoin is not required to handle a large number of transactions because it does not compete with PayPal and Apple Pay. Today Bitcoin is competing with the US dollar. This is not another type of payment, but a completely new form money... If you have never thought about what money is actually, then the statement above could lead you to a stupor.

Let's move on to a short and simple explanation of what money is.

What is money?

Throughout the history of mankind, money has been accepteddifferent shape - this is one of the most ancient technologies. Most often, people used beads, shells, leather, stones, livestock, weapons, salt, metals and paper in the form of money. All these things were used as money and were relatively scarce in the human environment. People did not use sticks and leaves as money, because they simply Not needed... But a hand-forged metal dagger, a beautiful thread with beads or a practical animal skin were difficult to get. The scarcity gave these things value.

At one point, people started usingsome of these rare items not as a final purchase, but as an intermediary for the exchange of other goods. For example, a person wants to buy a newly caught deer, but in exchange can only give an ax. The difference in value between the two makes it difficult to exchange. Therefore, a third valuable thing appears, which is easy to move and share, to use to calculate the value of a deer. You can make a purchase on it.

Money must have three main properties:

  1. Have value for those who use them and maintain this value over time (property of a store of value).
  2. Be suitable as an intermediary for the exchange of two other items and be used in the process (properties of the medium of exchange).
  3. Since a thing is used as a medium of exchange, it gradually becomes a measure of value, for example, a deer will cost 20 gold (a property of a unit of account).

With these three functions, items become money.

What does Bitcoin have to do with it?

As stated earlier, Bitcoin, like beads,shells and pieces of metal that came before him are a new form of money. Bitcoin is still popular 10 years after its inception because it is the best form of money in human history. An entire book could be written to prove this assertion (Saifedin Ammus did a great job in The Bitcoin Standard), but in this article I will only give a brief explanation. An item can only become money if users find it valuable. Value is directly related to how difficult it is to craft the item.

Gold has become one of the most valuable metals intwo reasons: because of the amount of gold mined (its reserve) and the annual rate of its extraction (production). This is the whole point. Copper, tin, lead, bronze and silver are in much higher industrial demand than gold. But gold is of great value.

The ratio of the volume of stock of various metals to the volume of their production (source)

Why?

It's all about the ratio of stock to volumeproduction (RFP). The annual production of new gold is about 2% of the total stock - the salary is about 50. This high salary means that people can buy gold with confidence, because if the stock changes unexpectedly, the investment value will not fall.

Even if the gold production is doubled, which is incredibly difficult, the production volume will be only 4% of the reserve volume. This is hardly enough to significantly change the price of the metal.

Quote from The Bitcoin Standard:

"It is because of the steadily low rate of increase in gold production that this metal has retained a monetary role in human history for so long."

A high salary gives confidence in scarcityproduct, that is, it provides it with the first property of money - it turns the product into a stable store of value. Gold had the most consistently highest salary in human history.

Until Bitcoin came along.

A limited supply of all bitcoins as wella graph of decreasing production, making Bitcoin one of the most scarce human-made products. Now every 10 minutes, 6.25 bitcoins are produced, which are sent to the miner of the new block.

The link provides a quick overview of how the Bitcoin network works.

Bitcoin inflation rate over time (source)

In August 2019, Bitcoin's salary was 22.7. After the halving in May 2020, the salary has increased to 55. Bitcoin halving occurs every four years and is designed to simulate a gold shortage. Halving will continue until 2140, when the total amount of bitcoins in circulation reaches 21 million. After that, no new bitcoins will be produced.

The ratio of the stock of bitcoins to the volume of their production in the future (source)

In 2020, Bitcoin's salary almost equaledGold salary (55 for Bitcoin and 50-60 for gold). During the next halving, Bitcoin's salary will skyrocket to 100, and then production will decline again every four years. It can be concluded that in a few years, Bitcoin will become the most scarce product that humans have ever produced.

This is a major achievement.

History has shown many times that whena person uses many types of money at the same time, then the most "difficult" (or most reliable) money wins. And Bitcoin is the safest money ever invented by man.

Means of accumulation

So, in theory, Bitcoin should be a great store of value. What is in reality?

Over the past 10 years, Bitcoin has been the best asset ofexisting. Reality matches theory. Some people talk about incredible ups and downs in the price of bitcoin, consider it too volatile to use as a store of value, argue that bitcoin is a bubble. There are two problems with this view.

First, a great storage medium shouldn'tmaintain a stable price in the short term. New bubbles appear on the real estate and equity markets with enviable regularity, but no one considers them to be a bad store of value. The same goes for bitcoin. After each rally in price, the fall always ended at a higher level than in the previous cycle. This means that the value of an asset grows steadily over time, even despite the volatility of its price.

Second, speculative bubbles burst andnever inflated again. The speculative tulip mania in the 1630s, which many like to compare to bitcoin, did not repeat itself a few years later. This did not happen with the South Sea bubble in the 1720s, and with all other speculative bubbles in human history.

But beneficial bubbles formed around new onestechnologies are always restored. Take, for example, the dot-com crash in the early 2000s, the railroad craze in the 1800s. and any stock market crash. All these falls are mainly due to the irrationality of human nature. They are easy to predict when you know what to look for.

The bitcoin market is still relatively small, so it is heavily influenced by overly optimistic or pessimistic investors.

An excellent storage medium retains orincreases its value in the long term - over tens of years or centuries. Short-term fluctuations are completely irrelevant in this perspective.

Other properties of money

Now we can say that bitcoin is a great store of value in the long run. But does this mean that bitcoin is money?

Not really.

As mentioned earlier, money must bealso means of exchange and unit of payment. Today, bitcoin is accepted by only a few sellers, it is used to form a few goods and services. Therefore, it cannot yet be said that Bitcoin has all the functions of money.

This is where skeptics come into play. They see bitcoin as slow and volatile, with too few people buying bitcoin. Therefore, skeptics believe that Bitcoin will never be a good means of payment, and another product must be found to perform this function.

But the problem is that the opposite is true.

It is unlikely that modern people, like our ancestors,would agree to receive a stick as payment, because sticks have no value. This is a bad deal. But if we say that the stick is "protected by the blockchain," then some might think that it has some value. However, this is still a useless and useless stick.

I think you understand what I mean. When skeptics say that other cryptocurrencies are better suited to the role of money than Bitcoin, they are missing one important thing: money must be primarily a means of accumulation.

All the things that humanity has everused as money fit this scheme. At first they were collectibles. People collected these things out of interest — they were rare, attractive, or useful, or both. These things were difficult to produce, so people considered them valuable. Gradually they turned into a store of value and were in demand for a long time. Since these things were in demand, people began to exchange them and turned them into a medium of exchange and a unit of payment. This is an ancient, time-tested process, not just an idea that can be easily refuted with two buzzwords.

Bitcoin is not good money now,but that's okay too. The more people consider it a store of value, the more often it will be used in this vein. The more people hold bitcoins, the more stable its price. The more stable the price, the more people want to conduct transactions. This is how the medium of exchange becomes a unit of account.

Additional levels of functionality such asThe Lightning Network will increase network scalability in the same way that the bulky TCP / IP protocol increased the bandwidth of the first Internet from a few KB to high-speed streaming to billions of users.

Bitcoin's scalability will increasethanks to additional layers, and then one day, only the largest and most important transactions will take place at the basic network level. Daily payments will be made at the second level (for example, Lightning) or even through the third level technologies.

That's all.

Today, Bitcoin is unable to process thousands of transactions per second, is expensive to use, not cheap enough, stable and secure. But no other cryptocurrency is capable of this.

You always have to find a balance betweensecurity, price stability and speed. The superfast network should be centralized as much as possible, which means it is insecure. It will never acquire the property of a store of value if the volume of its tokens is unstable. It is impossible to create a decentralized and secure cryptocurrency with super fast and cheap transactions. It will take thousands of nodes and expensive mining to secure the network.

But the history of money shows that the most reliable storage medium beats the competition.

Bitcoin is not suitable for making payments right now, but nobody needs it.

Bitcoin is no better than PayPal, but better than the dollar.

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