Misconception About Bitcoin

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When something is poorly understood it becomes so much easier for misinformation to spread.

A fundamental misunderstanding of Bitcoin is that its primary use case is for payments. And this stops people from understanding Bitcoin’s true purpose.

When you ask most people on the street what is Bitcoin, they’ll tell you that it’s a different way to buy your coffee or pay for a service. And most people who think of Bitcoin like this will dismiss it because it’s not actually better than PayPal, Apple Pay or credit cards at making everyday transactions easier.

People hear about the 7 transactions-per-second limit, the high fees and the irreversibility of transactions, and naturally, conclude that Bitcoin sounds pretty limited. And then on top of that, you throw in that it sprung out of thin air 10 years ago, and that its price can fluctuate wildly day-to-day, and you can see why the idea of Bitcoin is so easy to dismiss.

For now, Bitcoin doesn’t need to have a high transaction rate, because it isn’t competing with PayPal or Apple Pay. Bitcoin is competing again US Dollar or the fiat currencies we all know. It isn’t another form of payment, it’s a completely new form of money.

What is Fiat Currencies?

Fiat currencies has existed in numerous forms throughout human history — it is one of our oldest technologies. Beads, shells, skins, stones, livestock, weapons, salt, metals, and paper have all been used as money extensively by human societies.

These objects worked as money as they were — above all — reliably scarce in human environments. There was no point in using sticks or leaves as money as people didn’t desire these things.

A handcrafted metal dagger, on the other hand, a beautiful string of beads or a useful animal hide were very difficult for people to produce, and therefore their rarity gave them value. Eventually, some of these rare objects began to be accepted not for the attainment of the thing itself, but as an intermediary in a transaction between two other goods.

For example, if I wanted to buy the deer you just caught, but I only have an axe to trade, the potential difference in the value of these items makes the transaction difficult. Therefore a third valuable item that is easily portable and divisible can be used to calculate the value of the deer, and I can pay you in that instead.

Well like I said earlier, Bitcoin — like the beads, shells, and pieces of metal that came before it — is a new form of money. And the reason why people are still talking about it 10 years after it was invented is that it’s the best form of money we’ve ever had.

Essentially, something can only function as money if its users think it is valuable. And that thing’s value is directly tied to how hard it is to produce. The reason gold is the most valuable of all the metals is overwhelmingly determined by two things: how much we have already mined (its stock) and how much we dig out of the earth every year (its flow).

Copper, tin, lead, bronze and silver all have far greater industrial demand than gold, but gold is far more valuable. Why? It comes down to this stock to flow ratio (SF). The amount of new gold we dig out of the earth in any given year is roughly 2% of its existing stockpiles, giving it an SF of roughly 50.

Having such a high SF means that you can be confident when buying gold that if the supply suddenly spiked, the price of your investment wouldn’t be sent plummeting. Even a doubling of gold production, which is incredibly difficult, would only increase the flow from 2% to 4% of the stock, which is hardly enough to make a noticeable impression on the metal’s price.

A high SF gives you confidence in the rarity of that item, thus fulfilling the first function of money: being a consistent store of value over time. And no other object throughout history has had such a consistently high SF as gold until Bitcoin.

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