How to explain Bitcoin to your friend who thinks you are insane…

1% of the population of the world owns Bitcoin according to numbers I have recently seen.  Flip that around and 99% of the world doesn’t own Bitcoin.  Worse, everyone has Fiat currency in their wallet or bank account, and they have understood how the concept of money as a way to buy things has worked since they were kids.

How do you explain your fascination for Bitcoin to the 99%?  My friend asked me today, “what is your obsession with Bitcoin?”  they followed this up with the question all HODLers’ hate “please don’t invest anymore, you already have too much money in Bitcoin”.  This blog is written for the people who question Bitcoin, and for all of us converts who come up against these questions every day.

Let’s list some of the main objections so we can frame the discussion:

  • It’s a scheme, some form of Ponzi scheme designed so you will lose all your money eventually
  • Bitcoin is gambling
  • Lack of regulation is an issue
  • Bitcoin is a scam designed to make the few even richer
  • There are a lot of fakers and scammers involved in Bitcoin
  • You can’t buy stuff with it
  • It’s too volatile

In order to address these concerns, we need to get into a fundamental discussion about what money is and this is the scope of part 1 in this blog series. I have been thinking about this topic more and more recently.  I have earnt money, saved money and spent money for over 4 decades, but I never researched what it is. I have just accepted money as the foundation of modern life in a civilized society, from my own experience this has been the Pound and the Dollar, with the occasional use of the Euro.  Against the backdrop of these very stable state-issued fiat currencies the question of “what is money?” is probably very different from the perspective I would have if I lived in South Sudan or Zimbabwe where hyperinflation is rampant.

What is Money?

Investopedia has probably the simplest and most comprehensive explanation I have seen:

Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Money provides the service of reducing transaction cost, namely the double coincidence of wants. Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange. Money can be: market-determined, officially issued legal tender or fiat moneys, money substitutes, and fiduciary media, and electronic cryptocurrencies.

Until I started going down the rabbit hole of Crypto a few months back I had never heard of the term ‘Fiat’ currency.  This has amazed me. I did a business degree at a top 10 university in the UK, I have been in the corporate world for 25 years, I regularly read Bloomberg Business Week and the Economist, I subscribe to Barrons, so why has this term only recently surfaced for me???

Again Investopedia has a good definition.

Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money.

We will come back to the “not backed by a physical commodity, such as gold or silver” in future blogs in more detail (I plan to cover the Gold Standard in more detail), but my revelation from my research is that we ‘trust’ the government to issue legal tender (banknotes and coins) and we take it quite literally at face value, and go about our daily lives.

Again, I hear my Friend in my ear, “what is the issue with trusting the government of the US and the UK with our money?”. Well for the best-detailed read on what is wrong with our collective blind trust in Fiat currency you should read this blog by Parker Lewis.  Trust me it’s a tough read, I have read it 3 times, but it is worth rereading. It will rock your world.  My take on it is as follows.

Your government controls the money supply (how much money is in circulation and how much is printed), they can arbitrarily decide to print more money at any time, and the value of money as a unit of exchange is not tied to anything physical or real, rather it’s just a statement of “I trust my government”.

My friend again – ANSWER THE QUESTION !!! 

Well if the government can print more money when they desire, and the unit is flexible this can lead to issues.  Issue one is the money supply.  When the government can print money, what stops them from printing more and the ‘value’ of that money going down?  Nothing !!! In fact, that has is exactly what has happened.

Check out this blog post for more of the plummeting value of the dollar in a little over a century.  However, for the non-clickers this statement and table sum it up:

Excerpt from Value of the Dollar today blog on The Balance

Since 1913, the dollar has plummeted in value. At that time, a person with $100 could buy the same amount of food, clothing, and other necessities as $2,529 would buy today. 

Basically, in the time since your grandparents were in their prime the ‘value’ of Money has changed dramatically.  Now tell me you think a currency that is 10 years old is volatile??? 

How does Bitcoin fix this issue?

Bitcoin is not a Fiat currency; it’s backed by anybody, not by a state or government and not by a central bank.  Sounds bad right?  Quite the opposite.  When your government can just print more money on a whim, then imagine a currency where the supply and flow of money will be constrained and fixed by the system. Sounds like nirvana, right?  Well, that is Bitcoin.  There will only ever be 21 million Bitcoins, no more, no arbitrary printing to fix a short-term recession no intervention in the supply built into the design and managed by consensus.

Channeling my friend again – “But these Fiat currencies have been around forever, so we can trust them!”.  WRONG !!! On average Fiat currencies survive 27 years.

Read this:

“According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedent for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes. The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. 

Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years, it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it’s worth less than 1/200 or 0.5% of its original value. In other words, the most successful long-standing currency in existence has lost 99.5% of its value.”

Summary

Hopefully, I have rocked your world, challenged you to research what is money and question your blind faith in your government. Lots of topics for future blogs such as Quantitive Easing, the Gold Standard, how money supply affects the general population and why Central Bankers hate crypto, but in the meantime, here is some wider reading:

Unchained Capital Blog 1

Unchained Capital Blog 2

Unchained Capital Blog 3

Plan B’s Blog

They are all tough going and pretty dense, but they will help give you some real depth and are a LOT more detailed than the level I plan to blog at.  If you are serious about going ‘down the rabbit hole’ of Bitcoin they are worth the time invested.

This whole blog can be summarised by my favourite Crypto Twitter agitator Pomp who says, and regularly – “money is a belief system

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