This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
During the first half of this series we explored the basics of Bitcoin. By now you should have a good grasp of some of the underlying concepts of the unique technology that has led to its rapid success since the first block was mined in January 2009. The series will now pivot to explain some of the way Bitcoin creates value. One of the most common criticisms of Bitcoin is it has no purpose. However, this is naïve and factually inaccurate! The next phase of this series will explore some of these use cases and some that could on the horizon.
The next phase of our series will begin by exploring the first true use case for Bitcoin: censorship resistance. Many of the early key players in Bitcoin were at their heart hardcore libertarians. One of the key features of Satoshi’s revolutionary technology was the fact that it was permissionless. As a result of no trusted third party being needed to make a transaction, anyone can use the bitcoin he/she self-custodies for any reason at all. That is a very valuable use case which was proven in the early days of Bitcoin and continues to be a use case today as we will expand upon in our next three articles.
More recently use cases for sovereign countries to self-custody Bitcoin have emerged due in part to the global turmoil the world is facing. When Russia invaded Ukraine in February 2022 the United States froze the bank accounts of several individuals affiliated with the Russian government. While the intention of war deterrence was pure, the harsh reality may be foreign countries moving away from dependence on the U.S. dollar. And, as discussed above, Bitcoin’s permissionless features could make Bitcoin an attractive asset for these countries or individuals with strong ties to these countries who have a different worldview than many Western countries.
Another key feature of Bitcoin is there will only ever be 21 million bitcoin or 21 quadrillion satoshis. This feature makes Bitcoin an inflation hedge. This feature is sometimes difficult for Americans to see even though the Federal Reserve’s goal is for compounding 2 percent inflation, a mark the Fed has woefully missed the last 2 plus years. However, for individuals stuck in countries with hyperinflation, the day-to-day volatility of Bitcoin does not seem so bad when the alternative is holding the country’s currency which rapidly loses its value with each passing day.
While gold has historically been a good hedge against inflation and allows for the separation of dependence on another sovereign nation’s currency, the ease at which Bitcoin can be transferred and stored compared to gold has led some to believe that Bitcoin will replace gold with respect to this function. This is a trend worth monitoring as Bitcoin develops more of a history and more individuals with a deep understanding of the technology become leaders in our society.
Finally, as we have already written about extensively, Bitcoin’s proof of work system is already helping clean energy projects become more efficient and profitable. We look forward to exploring each of these use cases and a few more in this next phase of our series. As always, if you have any questions or would like to discuss further please don’t hesitate to reach out via email or twitter - @uscryptotax.
