Explaining what bitcoin is, is complicated for the good reason that it cannot be compared to anything that has been done before it. Bitcoin is one of a kind.
To approach the problem, many like to use the analogy of the blind and the elephant. The story is simple; imagine six blind people who do not know what an elephant is and are asked to identify the animal by touch. The first one, touching the ear, will say that an elephant is a large fan. The second one will touch the tail and think it is a rope. The other will put her hands on one paw and say that an elephant is a column.
This metaphor is perfect for describing bitcoin. Is bitcoin a means of payment? Is it comparable to a currency? is it an online property? Is it a store of value? Or is it all these things at the same time?
Experts sometimes have difficulty agreeing on the subject. To put it simply, we decided to follow the footsteps of the inventor of bitcoin, Satoshi Nakamoto, who presented his invention as a decentralized payment system on the Internet. We will start this course by asking ourselves what money is and then we will compare our findings with the fundamental structures of bitcoin.
What is Money?
Let's start with what seems obvious: money is what you have in your pocket or on your debit card and you use it to buy things. Phew!
But why does the salesperson on the corner shop accept the banknote that you present to him? In other words, why do both of you think this piece of paper has a value?
I'll let you think for a minute. You can also search the Internet for an answer if you want.
I'll give you the answer: you both think this piece of paper has a value because... the authorities of the country you leave in guarantee you that this piece of paper has a value. In other words, you believe what you are told to because they claim that the banks and the central bank (the bank of banks) guarantee the value that is inscribed on the note in question. Thus, money is a matter of trust. Money is all about trust. / Now let's get a little more technical.
Trust is not only between you and the shop keeper, but it is also in the minds of all the people who live in your country and who use the same currency daily. We can therefore say that for a currency to exist, a group of people must agree to use it and trust that it is worth something. We call it social construct.
1. Money is all about trust and
2. It is a social construct.
You now know more about money than 99% of the population.
But there is one last aspect to consider to fully explain what money is. This is the concept of value.
Imagine you live in a hamlet and own a cow. You produce milk. Your neighbour does not have a cow but produces shoes. Every morning he asks you for milk in exchange for a pair of shoes. At the start of the month, you may find it to be a good deal, but you only have two feet and after a while you won't know what to do with all those pairs of shoes.
That's when the concept of abstraction of value comes into play. You have two products: shoes and milk. It is very difficult to compare their intrinsic value. One day, someone says to you: why not take a third object; for example, a piece of metal or a shell as a bargaining chip?
What you must do is abstract the value of the cow and the pair of shoes and put that abstraction of value into this new object. It only remains for the group of people who will use it to believe that this value is real. Here the concepts of trust and social construct come into play. This is what the concept of money is.
In conclusion, the intrinsic value of the euro, for example, rests on the same concepts. All the currencies in the world too. They are therefore fragile because if a people no longer has confidence in its currency, its value drops to zero. These rules are also applicable to bitcoin and to all cryptocurrencies. This is also the answer to those who critic bitcoin when they claim that BTC has no intrinsic value. They are wrong. Bitcoin has the value assigned to it by the people who use it. The concept of money is magic!
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