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What is Bitcoin? A Definitive Ranking of Popular Explanations

Bitcoin. What is it? The public has circulated various ideas as to what it is. And some of those popular explanations are more accurate than others.

In this article I am offering you a definitive ranking, from lowest to highest, of popular explanations of Bitcoin. My goal is to provide you with the best possible explanation that you can use to understand Bitcoin into the future. One thing is certain about Bitcoin, nobody knows what it is yet, so we need a best possible way to make sense of it in the meantime.

Bitcoin is trending up

#1 Bitcoin is Nothing

How accurate?

Not very accurate. I can see why people may jump to this conclusion. Bitcoin is a new entity and, at first glance, it may seem like science fiction. However, it is becoming clear that Bitcoin has legs. People are using it in the real world and investors on an institutional level are now recognizing its legitimacy as an asset. It may not be clear exactly what Bitcoin is yet but, at the current market valuation, it is clear that Bitcoin is $1 Trillion worth of something.

Easy to understand?

Somewhat. Bitcoin is a virtual entity. To establish its tangibility in your mind can be tricky. Keep in mind that money is a mutually agreed upon concept whose value only exists in the mind of those who use it.

#2. Bitcoin is a Black Market Payment System

How accurate?

Only slightly because it is true that Bitcoin has been used in black markets. However, Bitcoin was not intended for this use and is not ideal for criminals either.

A common misconception is that the identity of a Bitcoin holder is completely anonymous. Bitcoin preserves privacy well but, ironically, it is much more difficult to conceal a Bitcoin transaction. Bitcoin tracks transactions so well that you can see that path of every Bitcoin ever. Therefore, you can determine if your Bitcoin was ever used for illegal purposes. One can argue that the use of Bitcoin in the black market will decrease over the long run.

Easy to understand?

Yes. Just because Bitcoin has been used for illegal transactions in the past, doesn’t mean Bitcoin should be disregarded altogether. Bitcoin benefited black market participants in the short run, but will not in the long run.

#3 Bitcoin is a Network

How accurate?

Bitcoin certainly is a network. Everyone who has Bitcoin is connected to anyone else who has Bitcoin and transferring Bitcoin is extremely efficient.

How does this improve our understanding of Bitcoin? The network of the internet allows you to communicate with anyone and the network of Bitcoin allows you to pay anyone. Extrapolate this to all the interconnected pieces of the internet and you begin to see the infrastructure of value exchange that Bitcoin allows.

Easy to Understand?

Yes, given that you are likely familiar with the internet. The blockchain network is interconnected like the internet but it uses a fundamentally different protocol to transfer value, rather than text, images, and videos.

#4 Bitcoin is an Experiment

How accurate?

Very accurate. Bitcoin is an experiment unleashed upon the global financial-monetary system by Satoshi Nakamoto, Bitcoin’s anonymous inventor.

Bitcoin was not the first experiment of its kind. The first digital currency was created by David Chaum and was called “Digi Cash”. Another digital currency “Hashcash” was created in 1997 by Dr. Adam Back and “Bit Gold” in Nick Szabo in 1998. The difference with Bitcoin is that it crossed the threshold to pragmatically start meeting society’s needs.

Easy to understand?

Yes. Bitcoin didn’t appear out of thin air and there was no certainty of its success. Like any successful creation, it took decades of work and many iterations to become successful.

#5 Bitcoin is Digital Money

How accurate?

Very, but with a fatal flaw. Bitcoin meets the criteria of money but why is it not used like money?

In fact, Bitcoin is better than fiat currency in many ways. However, the price of Bitcoin changes too much and won’t stabilize for some time. Also, Bitcoin isn’t user friendly yet, particularly for the digitally uninitiated.

At this point in time most Bitcoin users prefer to hold BTC rather than spend it. That being said, we see pockets of people, communities, and societies using Bitcoin as their primary money. You need not look further than Bitcoin Beach in El Salvador. They are routinely using, and transacting with Bitcoin to buy food and services within their community. This social experiment gives us an amazing insight into how Bitcoin may be adopted as money by the broader society at large.

Easy to understand?

It should be easy to imagine Bitcoin as a substitute for fiat currency. The difficult part is predicting Bitcoin’s broader implications on society.

#6 Bitcoin is a Project

How accurate?

Bitcoin is indeed a project but it’s probably not what you think. What Bitcoin represents is the first “real-world implementation of a ‘decentralized autonomous organization (DAO)’”. What this means is that the work to sustain Bitcoin is determined by the protocol programmed into Bitcoin – not by any manager or executive. Changes to the protocol are made via a democratic voting process.

Easy to understand?

Making sense of a DAO (Decentralized Autonomous Project) is probably going to be a challenge the first time around. You can start by thinking of Bitcoin as an organization who has no executives or employees and whose direction is ultimately determined democratically by the participants in the network. These participants are volunteers, and users. It is worth noting that folks like Michael Saylor and companies like Coinbase have opted to sponsor Bitcoin developers.

#7 Bitcoin is a Ledger

How accurate?

Very accurate but with a key difference. Bitcoin is a distributed ledger.

Specifically, Bitcoin is a Distributed Ledger Technology (DLT). Bitcoin does not need a third party, like a bank, to validate records because Bitcoin is self-regulating. A DLT is a ledger that is able to validate its own records. Bitcoin can in theory replace many of the transaction middlemen in any industry. Therefore, no more need for middlemen.

Easy to understand?

Yes, if you think of Bitcoin as a conventional ledger. However, the complexity increases quickly when considering it as a distributed ledger.

#8 Bitcoin is Digital Gold

How accurate?

Bitcoin as digital gold is the prevailing explanation in the public and qualifies as my most accurate popular explanation of Bitcoin. Specifically, you might hear Bitcoin described as digital gold in conjunction with its property of being a good “store of value”.

Other than being a useful hedge against inflation, there is an alternative interpretation to the digital gold explanation. Gold has served as our reference of monetary value. Even after moving to fiat currency, gold has remained a fundamental asset and financial instrument for its properties of scarcity. Bitcoin has and may continue to behave similarly. It is our first reference point for digital value. As cryptocurrencies develop into society, Bitcoin has and will likely continue, serving as the reference and foundation for digital value and beyond.

Easy to understand?

Yes, especially if you have any investment experience. If not, then I recommend you research the idea of storing the value of your money.

Wrapping Up: Bitcoin is Digital Gold

Aside from the notion of Bitcoin as nothing, the explanations provided are all appropriate. The case that I found most compelling is Bitcoin as digital gold.

Bitcoin as digital gold makes the most sense because the history of gold gives us a timeline of events for the structure of value in modern society. This timeline has proved to be a relevant reference to Bitcoin in the past and likely into the future.

You are now armed with many explanations of Bitcoin, and can educate others as it permeates into society. I wish you luck as you make sense of future interpretations of this fascinating tech we call Bitcoin.

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Gerrit van Sittert

About the Author

Gerrit van Sittert

Gerrit van Sittert is a cryptocurrency investor keenly interested in the ramifications of blockchain technology. Since graduating from a commerce and entrepreneurship degree, he has specialized his knowledge of how cryptocurrencies are set to impact the global supply chain and emerging markets. He started his crypto journey in 2017 while hosting an entrepreneurial focussed meetup group in Victoria, BC.

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