"What’s the deal with Bitcoin?"
You're probably here because you've asked a Bitcoiner that very question. What follows attempts to answer for the average reader what it is, why it matters, and how you can start using it securely, without getting mixed up in scams or losing your bitcoin by mistake. I'll keep this guide free of any deep, technical detail, but I'll provide links to go down the rabbit hole if you want.
First, let me just say this: we're still in the early days of this new technology. Anyone who was just learning about movable type a decade after Gutenberg invented the printing press hadn't missed out on the printing revolution. In fact, it took a while to catch on. But it supercharged the Renaissance, enabled the Protestant Reformation, and ushered in the Scientific Revolution and the Enlightenment. Every aspect of our world is changed because of the printing press.
You haven't missed out on Bitcoin. It's still early.
What is it?
Imagine you could use the cash in your pocket to instantly pay for things on the Internet and didn't need a bank to keep your money safe. That's Bitcoin.
Bitcoin is peer-to-peer electronic cash. Peer-to-peer meaning it's transmitted from person to person without the need for a trusted intermediary like banks or Venmo to process the transaction. Electronic meaning it naturally exists in digital form, so it's global and can easily be used for online payments. Cash meaning it's an asset that's readily available to pay for goods and services without needing anyone else to follow through on their responsibilities—like your bank's promise to process your debit card transactions.
When someone talks about Bitcoin, they're referring to one of two things:
- Bitcoin (with an uppercase B) is a global network for transferring value between participants that isn't owned or controlled by anyone, and everyone can be a part of it by running the open source Bitcoin client software.
- bitcoin (with a lowercase b) is a digital asset often represented as BTC, and it's the way to represent value on that network. This is a concept called the unit of account in economics. The total number of bitcoin available now and in the future is known by everyone and unchangeable by anyone. At most, there will only ever be 21 million bitcoin.
Most of the news gets caught up in the price of BTC, but it's the network that's revolutionary. BTC is just a necessary part of it, and it wouldn't be valuable at all without the incredibly well-designed dynamics of the network.
Why does it matter? What problem does it solve?
It's critical to human flourishing that money remain free from the influence of those who would manipulate it or control populations with it, even for what they consider noble reasons. History is rife with wretched examples, often to the benefit of the elite and powerful and the ruin of everyone else. This sounds overly pessimistic to those of us in the West, but zoom out a bit and you'll see that we're enjoying a rare period of stability.
- Ancient Rome debased their currency to fund their insatiable spending, leading to runaway inflation, soaring taxes, and ultimately the collapse of the Roman Empire.
- European settlers discovered that Africans used glass beads as money, something the Europeans could easily manufacture in mass quantities. They were “able to strip the African continent of its wealth by trading easy-to-produce glass beads for hard-to-produce human slaves" and precious natural resources.
- In 1994, France and the IMF colluded to slash the value of the CFA franc, the French-controlled currency used by more than a dozen African countries. This outrageous devaluation cut Africans' savings in half literally overnight, roiled their economies, and further entrenched French exploitation of their former colonies. (Unbelievable, right? Alex Gladstein has a great Twitter thread explaining how this happened along with a thorough essay on the subject.)
- Governments engulfed in a financial crisis—like those in Venezuela, Brazil, Indonesia, Greece, Turkey, China, Taiwan, Argentina, and Russia—often enforce capital controls or block bank withdrawals in a desperate attempt to regain control, forcing destitution on anyone who would leave.
- In many parts of the world, protests often result in bank account suspensions (as we've seen in Russia, Nigeria, and Hong Kong) and bans from payment channels (as they've done in China). Belarus and Canada both recently seized funds from people who merely donated to support protestors. But "no government can turn off Bitcoin if it's threatened by your ideas."
- Even PayPal says it can take your money if it doesn't like what you have to say.
The US dollar is the world's reserve currency, yet it's created out of thin air and largely maintains its value thanks to a more than 50-year agreement with Saudi Arabia that compels the world to price oil in dollars. (You may have wondered why the US government always seems to turn a blind eye to outrageous human rights abuse by the Saudis...) Other nations aren't exactly thrilled with this arrangement, so the dollar's stability is a costly endeavor. How many lives, families, industries, and countries are wasted propping up the petrodollar? (That's a long essay, so if listening is more your speed, here's a great podcast episode that includes the essay's author and covers many of the same topics.)
Aside from military might backing up the dollar, the current financial system is a patchwork of inefficient, costly, and politically-vulnerable systems that move money around and settle financial obligations for individuals, corporations, and nation-states. Think Visa transactions, Western Union, ACH, Fedwire, CHIPS, etc. Bitcoin and its Lightning Network layer replace all of this with a faster, more reliable system for a fraction of the cost. One company is now using the Lightning Network to offer instant payments at Shopify shops and retail stores using NCR point-of-sale systems in the shop's local currency for pennies compared to Visa's transaction fees. This is the future.
Bitcoin is open 24/7, censorship-resistant, unstoppable, efficient, borderless, pseudonymous, and egalitarian. No one controls it, and no one gets special treatment.
Bitcoin is revolutionary. It may not happen immediately, but eventually you won't be able to ignore it. There will be a gravity to it, an incentive to be a part of it. Those who don’t use it will put themselves at a disadvantage. Over time, the world's financial systems will all reorient themselves to the new reality ushered in by Bitcoin.
I know that sounds incredible, but that's what happened with fire, concrete, the printing press, gunpowder, aluminum, the transistor, and more. At some point, it actually takes more work to ignore the innovation.
How does it work without anyone in charge?
In short: rules without a ruler.
Each computer running the Bitcoin client software (called a "node") in the network checks every new group of transactions (called a "block") to make sure all participants are following the rules. Each node has the same rules baked into its software. Rules like you can't spend the same bitcoin multiple times and the person trying to spend this bitcoin has the authority to do so.
No one can change the rules in their favor because none of the other nodes will go along with it. Trying to spend the same bitcoin twice? Everyone else will call shenanigans. All of this happens automatically in software without requiring human involvement.
Note that nodes aren't the same as miners. You've probably heard a lot about miners and never really understood what they were doing. Simply put, miners are specialized, expensive computers that are paid bitcoin to process transactions. Want to go deep on mining? Here's a fantastic video on how it actually works, complete with illustrations to make it easy to understand. I highly recommend it.
Nodes, on the other hand, make transaction requests, ensure miners are following the rules, and keep a copy of the entire history of Bitcoin transactions. Anyone can run a node from their home with very inexpensive hardware, like an old computer. Because they're the ones enforcing the rules, nodes keep the network secure. River does a great job explaining nodes if you want to learn more.
But bitcoin's been so volatile lately!
Most Bitcoiners will tell you that we expect bitcoin to go up in value over time, but no one can predict the price in the short term. A few points to keep in mind:
At 13 years old, bitcoin is a relatively new asset on the world stage and one that most people still don't understand, so it's helpful to consider bitcoin's current value in the context of the global economy. At the time of writing, bitcoin's market cap (the current price x total number of available bitcoin) is about $317 billion. Relatively speaking, that's still small. Gold's market cap is over 36x larger at approximately $11.5 trillion. Even the market cap of a single company, Apple, is more than 7x larger than bitcoin at nearly $2.25 trillion. When you jump into a pool, you stir up that body of water far more than when you jump into the ocean. It's the same thing with buying and selling assets. The more an asset grows in total value, the less any one person's purchase or sale will move the price. Every asset stabilizes as it grows in value. Bitcoin is no exception, and there's still a lot of room to grow.
Bitcoin experiences many of the same forces that cause stock market fluctuations because for most people right now, bitcoin is just one of their many investments. They invest heavily during bull markets, and pull back with negative economic news and rising Fed rates. So when you see bitcoin's price move, take note of what else is happening in the economy.
Bitcoin also suffers a one-two punch from negative public sentiment whenever yet another crypto scam blows up. But people are catching on. Bitcoin is the innovation; other crypto coins are trading on Bitcoin's success, and most of them are pump-and-dump scams with a coordinated hype machine designed to let the founders and VC investors sell at the top and leave their marks holding the bag. Some are outright Ponzis. The recently disgraced Sam Bankman-Fried accidentally admitted as much more than 6 months before FTX blew up.
Don't mess around with those things. Bitcoin is the genuine article.
How do I get started? How can I keep my bitcoin safe?
You’ve no doubt heard horror stories of people losing their bitcoin through hacks and forgotten passwords.
In the first few years, the most secure way to save bitcoin was using an offline wallet that was never connected to the Internet and was therefore extremely difficult to hack. Unfortunately, if you lost your keys or forgot your password, there was no way to recover it.
For that reason, many people have felt more comfortable leaving their bitcoin on the crypto exchange where they bought it. Unfortunately, that leaves you vulnerable to hacks, phishing, and the poor business practices of the people running the service. As I'm sure you're well aware, there's been lots and lots of news recently about companies that haven't been trustworthy.
The solution to both problems is self-custody in a multisig wallet, a technology that maximizes security and minimizes failure by requiring multiple keys to unlock the wallet. A typical 2-of-3 multisig wallet requires any 2 of its 3 keys to spend the bitcoin. Like launching missiles from a submarine, there's no longer a single, precious key that unlocks the wallet. These wallets are much harder to hack and much easier for the rightful owner to recover if they were to accidentally lose one of their keys. You can keep bitcoin in your custody instead of trusting an online service to hold it for you and still be confident that you're not going to lose it.
How do you set up a self-custody multisig wallet? Thankfully there are services like Unchained Capital and Casa that can help you set up your own multisig wallet, put an inheritance plan in place, and recover funds if something goes wrong. And importantly, they never have access to your bitcoin. Take a look at both services, and see which one works best for you. Unchained Capital has concierge onboarding to personally walk you through the process, and Casa has a handy guide to help you get set up.
To buy bitcoin, use a reputable service like Swan Bitcoin, River, Strike, Unchained Capital's trading desk, or Casa and move it to your multisig wallet as soon as possible. I do not recommend using a crypto exchange that deals with altcoins, yield farming, or the like, since all too often it means the exchange is at risk of liquidity issues and could halt withdrawals at any time.
I also recommend setting up recurring buys to take advantage of dollar cost averaging. I've got my automated weekly purchase set up at River since they offer free recurring orders, and I transfer to my multisig wallet once a month.
These recommendations will get you started, and as you learn and get more familiar with the world of Bitcoin, you'll find many other ways to get involved.
The Bullish Case for Bitcoin is a deep-dive essay on the origins of money and why bitcoin is so revolutionary.
Inventing Bitcoin is an easy, non-technical book that explains Bitcoin's fundamentals by walking through the problems it solves and explaining how Bitcoin solves them.
River's Bitcoin Learning Center is a fantastic set of clear definitions and accessible guides to learn about all aspects of Bitcoin and its surrounding ecosystem.
A most peaceful revolution is a widely lauded essay discussing Bitcoin's implications for the unquenchable, inexorable state.
The Quest for Digital Cash is a history of cryptography, prototypes of digital cash, and how Satoshi Nakamoto pulled together all the best ideas so far to ultimately solve the problems preventing full decentralization.
The white paper that announced Bitcoin to the world: Bitcoin: A Peer-to-Peer Electronic Cash System
Robert Breedlove on the Lex Fridman Podcast is a discussion of Bitcoin through a philosophical and economic lens, coming at it from first principles. The ultimate “why” without focusing on the engineering. A great listen.
Alex Gladstein on the Lex Fridman Podcast is a discussion of how Bitcoin subverts authoritarian control and why it’s critical for human rights.
If you've heard that Bitcoin mining threatens us with a climate catastrophe, this is required reading: What Bloomberg Gets Wrong About Bitcoin's Climate Footprint
Don't Trust, Verify
Above all, remain skeptical, even of everything I've told you here. Check it out for yourself. Be especially wary of claims of untold riches. If an opportunity sounds like easy money without work, it's probably too good to be true.
Updated on Dec 2, 2022: Rewrote the section on multisig wallet services and where to buy bitcoin to provide multiple reputable options for each.