Chris A. McLaughlin - Why Bitcoin: Is Bitcoin the Solution to a Flawed System?

WHY BITCOIN

IS BITCOIN THE SOLUTION TO A FLAWED SYSTEM?

Chris A. McLaughlin

Why Bitcoin - Written by Chris A. McLaughlin.

The book is part of Kick Block, a company dedicated to helping bring Bitcoin to the world.

Why Bitcoin The goal of this book is to educate people on Bitcoin. It is not intended as financial advice. When people first encounter Bitcoin it is usually met with interest based on its price, or scepticism based on its price. This book should help readers understand Bitcoin for more than its price, to be able to draw the conclusion of why Bitcoin was created, and to understand why Bitcoin has the potential to change the way we think about our current financial systems. The book is intended to be short and snappy in some parts and philosophical and thought- provoking in other parts.

We aim, where possible, to keep the chapters under 5 minutes each. Although Why Bitcoin has technical elements, the intention is not to dive into the intricacies of Bitcoin technology. The technical components are described with layman explanations where possible. The book is aimed to be inclusive to all levels and backgrounds. Bitcoin is a subject with deep layers that can only be understood with many hours of research.

I would like to give a special thanks to Thomas Moore for his input into this book, and to thank my friends and family for supporting me throughout this journey.

And dont worry, the price of Bitcoin does have its own dedicated section in the book.

CONTENTS

At Kick Block we believe the best path to understanding Bitcoin is to first understand money, secondly, to understand the reasons why Bitcoin was created, and thirdly, to understand the technology that makes Bitcoin one of the most profound inventions in history. As price movements draw people in, people then immediately try to understand the technology but many fail to understand the economic impact of Bitcoin and its value in the world, both today and for the future. Understanding the why behind Bitcoin is the most important step in the journey.

So, what is money? We often take money for granted and dont question its origin. Money, like Bitcoin, is also an invention. Money as we know it today came in many different forms throughout history. If you think back to a time before physical and digital money, how do you think goods and services were exchanged?

Thousands of years ago, humans operated in a barter economy. A barter economy pre-dates the use of money. A barter economy is a cashless economic system in which services and goods are traded at negotiated rates.

A barter economy worked to a certain point, but one major hurdle was valuing one good against another. It wasnt easy to agree on a unit to measure all transactions

For example:

Are 3 fish equal to the value of 20 pineapples?

Is a spear equal to the value of a pair of sandals?

Although if you were brave enough and you were the one with the spear, you could certainly craft ways to snatch the sandals!

Based on these examples, you can see how flawed the barter economy can be.

It isnt certain who invented money but eventually humans figured out that if there was a trusted unit system that had certain properties, it could be used to facilitate human-to-human transactions.

Some early versions of units used as money for transactions were things such as:

And many more.

In the next section well look at the properties that make good, sound money, along with why some of the early versions of money failed.

In this section well look at what makes good, sound money, and what doesnt. In the previous section, what is money, we showed examples of units which were used in exchange for goods and services.

If we look at some of the properties that make good, sound money, and we ask ourselves whether these previous versions of money meet these desired properties, well soon discover why they eventually failed as money.

The desirable properties of money can have many different attributes. We are going to focus on the 5 main properties which are desirable of money:

Let's take a look at these desired properties and decide which previously used forms of money worked and which failed.

Durability Money must be sturdy enough to stand the test of time. What happens to the durability of salt if it comes into contact with water? Is Livestock a good example of durable money? Cows wont be able to serve as money for hundreds of years due to their limited lifespans. However, some metals, if you dropped them to the bottom of the ocean and came back a thousand years later, would be in the same condition. It may be a wet lump of metal after doing this experiment but this is what gives metals strong durability and a potential for being money.

Portability Money needs to be small, light, and easy to carry or transport. As a form of money, imagine the inconvenience of transporting live animals over a great distance. Transporting something like sand is much easier but in large quantities could prove to be problematic.

Divisibility Money needs to be divisible so change can be given. Sand comes in small enough units that it doesn't necessarily need to be more divisible but sand may face the problem of each unit being too small. What if you tried to divide sea shells in to smaller units? Does breaking the unit render the money worthless in this case?

Recognizability Money needs to be recognisable and uniform, in certain ways, for it to be widely used. Grains of sand look similar at a glance so many would think it ticks the box on this property but sand can vary in different geographies and conditions. Rocks are flawed as recognisable money in a more obvious way, as rocks come in different shapes sizes and colours. Today, physical metal coins are recognisable by having identical shape, size, and weight. Many producers of coins establish recognisability by having a stamp, often a figure head carved in the coin. Examples include Queen Elizabeth, US presidents, a king, or a leader.

Scarcity Money needs to be scarce, not easily created or produced. If cows were today's form of money, wouldnt everyone be trying to breed as many cows as possible, and working on ways to speed up the farming of cows? Eventually an over-production of cows would take place and cows would become extremely abundant. In the basic fundamentals of economics, if supply outstrips demand, the value of the good or asset will decrease. On the other hand, certain metals are not easily found and unable to be recreated. Certain metals are scarce due to the difficulty to locate and produce them - More on this in a later chapter.