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Bitcoin VS Fiat AKA Good Vs Evil

How is Bitcoin Mined?

Keep in mind, when I refer to Bitcoin with a capital B the reference is to the Bitcoin network, and bitcoin, with a lower case b, is a reference to the currency. To understand the halving you must first understand the way bitcoins are mined and why that way.

The currency exists digitally, there are no physical bitcoins. Thefore they are created digitally, but not in the same sense that US dollars are created digitally. When a US dollar is created, there is no tangible asset backing it like gold or silver or anything else. Instead the US uses a long-standing system of imperialism and military force to ensure the use of its paper notes in global transactions as well as those occuring in the US. For more on how they do that, read my article on the history of the fed. When a bitcoin is mined however there has been some work done other than a human punching numbers into a computer as they appear on the screen. In order to create these bitcoins into existance, the miner must use a computer to solve a very difficult math problem, before anyone else in the network does.

Think of it like this, there is a 3D block, inside that block we have packed all sorts of information about transactions on the network in the form of receipts. In order to make sure no one put in a fake receipt claiming something that isn't true, like that they own 10,000 bitcoins when they do not, we must check each individual receipt. For a human this would be a painstakingly long process, as each block contains thousands of receipts. Instead we make a computer screen the transactions before we put the receipts in the block.

Since this is a capital intensive process, one must purchase a computer and aquire electricity for it, the owners of these computers need to be compensated. So, each block is locked up with a unique number that is the result of a math equation, which is very difficult to solve. If your computer can solve this equation before anyone else, you can unlock the box, and you receieve a prize of 6.25 bitcoins. This reward incentivizes good behavior, those who lie about transactions in their block will be rejected because the network wil see their answer doesn't match the network's true answer. The answer to the equation, through cyptography is link to the recepits in the block.

The Reward Used to Be 50 bitcoins?!

Yes, it was. A bitcoin was also only worth a max of around 10 dollard before the reward was downsized. You may ask why it is downsized on a regular basis, and there is a very simple answer.

Money requires scarcity. The US dollar, Japanese Yen, Chinese Yuan, Russian Ruble, Iranian Rial, and all other currencies issued by governments are exactly that, currency. They are not money as they do not meet the required attributes that define money, those attributes are laid out in an easy to follow manner in this video by Mike Maloney. This infinite printing is called inflation, and it degrades the value of the currency.

One of the requirements of money is that it acts as a store of value. In order for something to have value, and hold that value, it must be scarce. For example, gold is money, it has a fixed amount that can ever exist, and more will never be made. An ounce of gold has has the same level of purchasing power for thousands of years. No one can just print more gold, as can be done with fiat currencies, any currency issued by a government as listed above.

Back to bitcoins, they also have a fixed amount of 21 million, a hard-coded scarcity, that will never change. This in tandem with the halving create a deflationary asset, the opposite of fiat currencies. When as assett is deflationary, it's value increases with time as the supply of new ones dwindles down to zero.

Deflation and Network Growth

There have been many "outlandish" price predictions for bitcoin, but taking a seconf look they seem a bit more plausible. I will not give a specific price point, as I do not wish to be added to the many failures that have predicted huge bitcoin prices in the past, instead I will explain the logic behind their plausability.

Bitcoin has millions of miners on it's network, all competing for freshly mined bictoins. These are not the only stakeholders in the network however, as they are there simply to validate transactions and continue to secure the network. There will never be a billion miners, or even 8 billion, but there very well could be 8 billion users of bitcoin.

Since bitcoins are divisible to the eigth decimal place, 0.00000001 bitcoin is the smallest amount possible, extremely small transactions are completely possible on the network. As the "price" of bitcoin goes up, the value of fruit, wood, clothes, still denominated in fiat will not be immediately affected, withholding massive hyperinflation. Therefore it is entire plausible to see these micro transactions become more popular as the use of bitcoin also grows and economies become built around it.

How does this give weight to the huge price predictions in the past? Well the value of a bictoin denominated in fiat, or the "price" of one bictoin, is based on the amount of fiat in the system, it's market capitalization. As more and more people trade their fiat for bitcoins, the price will follow. Since there is a huge population of people without traditional financial means of transacting, this growth potential is seemingly infinite at the moment.

A Post-Fiat World and Bitcoin

For many out there it is entirely out of the discussion that we will ever see a world without dollars as we know them today. Every day more and more people seem to wake up to this reality.

For hundreds of years, monarchies and governments alike have attempted to centrally plan their economies to realize the maximum growth potential and they have often used inflationary means to do so, creating "money" to pay for advances in society. Since the begging of this system its has never worked.

There have been hundreds of fiat currencies in the past, and every one of them has gone to zero, following the same pattern. Some ruler dictates the creation of the currency, ususally to fund war efforts. The currency becomes scarce, so more and more is created. The value drops over time, there are riots, possibly another war, and then the same system is set up all over again, with a new picture on the notes.

We are in the final stages of the dollar's dominance. Soon we will see these riots as the price of food will skyrocket due to the unprecendented amount of inflation occuring. As the dollar goes out, all other fiats who have been tied to the dollar global economy will also fail. It has never been seen before but there is a significant chance that the world will expeirence it's first muti-fiat collapse simultaneously.

At this point, bitcoin will be at an astronomical price, as it will act the way the dollar had acted in the past, presenting a safe haven against the inflationary fiat. When those currencies become essentially worthless, we will realize a bictoin's only "price" has always been a bitcoin. We will see free market price discovery, in which the ability to set prices will shift back to the consumer and creator of the good. This will mean we will have prices set in terms of bictoin, not in terms of how much fiat is my bitcoin worth.