Bitcoin¶
1 The Evolution of Money and the Rise of Bitcoin¶
1.1 Introduction¶
Bitcoin is much more than just a digital currency — it represents a new form of money built on technology, cryptography, and decentralized ideals. It challenges long-standing financial systems and provides a novel way to transfer and preserve economic value without relying on intermediaries like banks or governments. As we explore Bitcoin, we uncover its philosophical foundations, technical design, and the profound economic and social implications it carries.
Throughout history, people have wished for money that is fully under their control, holds its value over time, and can be used conveniently across borders. Traditional forms of money have often fallen short: governments control issuance, inflation erodes purchasing power, and many forms of money have limited geographic reach. Bitcoin emerges as a potential solution to these enduring issues, aiming to put financial sovereignty back into the hands of individuals and facilitating seamless global commerce.
1.2 Rethinking Money: Friedrich Hayek’s Vision¶
The economist Friedrich Hayek offered a revolutionary perspective on money. In his 1976 work, Denationalisation of Money, Hayek argued that currency should not be monopolized by the state but instead issued through free market competition among private institutions. He believed that when individuals are free to choose between competing currencies, the result would be greater stability and better protection of individual freedoms.
Hayek identified key problems with government-controlled money: monopolies often lead to inflation, governments use monetary expansion for political goals, and central planners cannot match the information-distribution power of a free market. He emphasized that market competition would naturally weed out inferior currencies, encouraging issuers to prioritize stability and user trust. This vision set the intellectual stage for decentralized currencies like Bitcoin.
1.3 The Human Dilemma with Money¶
Money has taken many forms across history. Early economies operated via barter, trading goods directly. As societies grew, they adopted objects like shells, salt, and glass beads as primitive money. Eventually, metallic currencies — particularly gold and silver — emerged as superior stores of value due to their scarcity, divisibility, and durability.
In the 19th century, the Gold Standard tied national currencies to specific quantities of gold, ushering in an era of monetary stability. However, wartime financing needs during World War I led to its abandonment, and by 1971, the United States officially ended the dollar’s link to gold, fully transitioning the global economy to fiat currencies. Digital currency, spearheaded by Bitcoin, now represents the next phase: a purely digital, decentralized, and borderless form of money.
Money addresses a timeless dilemma: how can value be preserved and transferred across time and space? Good money must fulfill critical human and economic needs. It must safeguard the interests of individuals and businesses, support the operation of states, and enable global trade and specialization.
Three fundamental qualities define effective money: divisibility to match various transaction sizes, durability to retain value over time, and portability to move easily across distances. Traditional assets like cattle, vegetables, or real estate fall short in one or more areas. Bitcoin, however, is designed from the ground up to meet all three criteria in a modern, digital world.
1.4 Functions of Money¶
Economists traditionally identify three core functions of money: it serves as a medium of exchange, a store of value, and a unit of account. A medium of exchange facilitates transactions, removing the inefficiencies of barter. A store of value allows individuals to save and invest for the future. A unit of account standardizes prices and debts, making economic calculation possible.
Although these functions may seem obvious, global currency fragmentation introduces enormous hidden costs. Bitcoin seeks to streamline all three functions into one seamless global system, minimizing friction and maximizing efficiency.
Currency fragmentation imposes massive but often invisible costs on the global economy. In 2024, the daily foreign exchange trading volume reached $7–8 trillion — roughly equivalent to the value of the world’s gold reserves. Hidden in these transactions are daily costs approaching $4 billion, stemming from commissions, bid-ask spreads, and currency risk management.
Over a year, these inefficiencies cost the global economy around $1.3 trillion, or about 1% of total world GDP. Bitcoin’s vision of a single, borderless, decentralized currency could eliminate much of this waste, unlocking huge gains in global commerce.
1.5 Hard Currency and Sound Money¶
Hard currency is defined by its scarcity relative to its flow — the annual addition to its total supply. Gold, with a stock-to-flow ratio of 63:1 as of 2022, remains the hardest known currency, maintaining its value for millennia. Silver also qualifies but is significantly more abundant and easier to mine.
However, gold is physically heavy, indivisible in small transactions, and costly to transport across long distances. Bitcoin replicates gold’s scarcity while solving these problems digitally, allowing for easy divisibility, instant portability, and programmatic verification of authenticity
Sound money is money selected by the free market that protects individual sovereignty and maintains value over time. Today, gold is still regarded as sound money, but its practical use in a digital economy is increasingly limited. Fiat currencies, while dominant, lack the essential properties of sound money and are susceptible to political manipulation.
Bitcoin aspires to become the internet-age version of sound money: decentralized, scarce, sovereign, and incorruptible by governments or corporations. It represents a profound shift toward a freer and more resilient financial system.
2 Problems and Promise¶
2.1 The Dangers of Fiat Money Without the Gold Standard¶
The collapse of the gold standard marked a pivotal shift in global monetary systems. Without a tangible asset backing national currencies, governments gained unrestricted control over money supply. This newfound ability to print money at will contributed to significant global events — including the financing of two devastating world wars. In 1914, at the outset of World War I, European powers suspended gold convertibility, giving states unchecked access to wealth for military buildup.
Later, in 1971, the U.S. formally ended the Bretton Woods agreement, severing the dollar’s last link to gold. Fiat currencies, now untethered, became tools for expansive fiscal policies, often causing inflation, asset bubbles, and recessions. This unchecked state control over monetary systems remains a root cause of many capitalist crises, distorting markets and hindering free trade across nations.
2.2 The Benefits of Sound Money¶
Sound money — stable, scarce, and free from manipulation — fosters long-term economic thinking. When individuals can trust their money to retain value, they are more likely to invest in the future, innovate, and contribute to sustainable economic growth. In contrast, unstable money encourages short-term speculation and excessive consumption.
Moreover, sound money promotes peace and cooperation between nations by minimizing the economic manipulations that often lead to conflict. It underpins trust in trade, finance, and international relations. In this sense, money is not just a medium of exchange but a foundation for civil society and technological advancement. Bitcoin, by aspiring to be sound money for the digital age, promises to revive these positive dynamics.
2.3 Bitcoin as Sound Digital Currency¶
Bitcoin represents a breakthrough: the creation of the first form of sound digital money. Its open network allows anyone in the world to participate without needing permission from a central authority. Ownership is purely personal and sovereign, secured through cryptography.
Importantly, Bitcoin is a hard currency by design. Its maximum supply is capped at 21 million coins, a limit enforced by its open-source code and decentralized network of users. This scarcity ensures that Bitcoin cannot be debased over time, fulfilling one of the primary requirements of sound money. It offers a credible solution to the ancient human challenge of transmitting economic value securely across time and space.
2.4 Satoshi Nakamoto: The Mysterious Founder¶
Bitcoin’s creation is closely tied to the enigmatic figure known as Satoshi Nakamoto. On November 1, 2008, Satoshi first appeared on an obscure cryptography mailing list, sharing the Bitcoin white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System."
A few months later, on January 3, 2009, Satoshi mined Bitcoin’s Genesis Block, embedding a symbolic headline: "Chancellor on brink of second bailout for banks" — a direct reference to the financial crises of the time. The first open-source Bitcoin software was released shortly after, on January 9, 2009. For about two years, Satoshi actively contributed by fixing bugs, answering questions, and leading development, before disappearing quietly in December 2010.
Later, in 2014, Satoshi briefly reemerged to deny false rumors about his identity but has remained silent since. His deliberate exit preserved Bitcoin’s decentralization, leaving no central figure to control or influence the network.
Satoshi Nakamoto’s contributions extend beyond the invention of Bitcoin. In amassing a personal fortune — worth hundreds of billions of dollars in Bitcoin — Satoshi demonstrated remarkable restraint, never spending his holdings or manipulating Bitcoin’s value. His conduct contrasted sharply with typical founders in the technology and finance worlds.
Had he chosen to claim it, Satoshi’s work could easily merit a Nobel Prize in Economics. More importantly, his anonymous, non-exploitative approach established an ethos for Bitcoin: one based on technological purity, not personal gain.
As of March 2025, Bitcoin’s total market value was approximately \(1.9 trillion — making it larger than the entire M1 money supply of many major countries. Bitcoin’s market cap exceeded that of Italy (\)1.8 trillion) and France (\(1.7 trillion), and dwarfed Canada’s (\)1.1 trillion).
Although Bitcoin remains smaller than Germany’s $2.8 trillion money supply, its relative position among national currencies reflects its growing influence. Bitcoin, originally dismissed as an experimental project, has evolved into a significant global financial asset.
Bitcoin’s creation and growth were driven by a decentralized group of developers — cryptographers, programmers, and early adopters — motivated by technical curiosity rather than personal wealth. Many early contributors were part of the cypherpunk movement, a community that valued privacy, cryptography, and digital freedom.
These individuals saw Bitcoin not as a speculative asset but as a technological breakthrough. Their focus remained purely on building and securing the protocol. This culture helped Bitcoin maintain its neutrality and credibility even as its financial value grew exponentially.
3 Bitcoin Evolution and Use Cases¶
3.1 A Brief History of Bitcoin¶
Bitcoin’s early journey reflects both technological innovation and social experimentation. On October 31, 2008, Satoshi Nakamoto published the now-famous white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, proposing a decentralized form of money resistant to censorship and manipulation.
On January 3, 2009, the Bitcoin network officially launched. The first block, known as the Genesis Block, contained a hidden message: "Chancellor on brink of second bailout for banks" — a symbolic critique of traditional financial systems. By May 2010, Bitcoin achieved its first commercial transaction when 10,000 Bitcoins were exchanged for two pizzas in Florida — an event still celebrated annually as Bitcoin Pizza Day.
In July 2010, the first Bitcoin exchange was established, creating a secondary market for trading. Over the following decade, Bitcoin steadily grew. By 2014, Overstock.com became the first major U.S. retailer to accept Bitcoin payments. From 2020 onwards, major corporations like Tesla and MicroStrategy began purchasing Bitcoin as a treasury asset. In 2021, El Salvador became the first country to recognize Bitcoin as legal tender — a groundbreaking moment in monetary history.
Bitcoin introduced several key innovations that made true digital money possible.
- First, users could create their own verifiable accounts using public key cryptography, ensuring ownership without reliance on centralized authorities.
- Second, the system was decentralized: built on a peer-to-peer protocol open to anyone, without needing permission.
- Third, Bitcoin solved the double-spending problem through Proof-of-Work (PoW) — a breakthrough that had eluded earlier digital money experiments.
- At the heart of Bitcoin lies the blockchain: a global public ledger that records all transactions.
- The Bitcoin network consists of tens of thousands of nodes, each maintaining a copy of the ledger. While minor inconsistencies can temporarily occur, consensus is eventually restored across the network, guaranteeing the integrity of records.
3.2 Technical Challenges and Solutions¶
Bitcoin’s technological design prioritizes security over speed. Its throughput is modest, processing only 3–7 transactions per second — a constraint that limits its immediate use as a medium of exchange for everyday purchases.
To address scalability, solutions like the Lightning Network have been developed, enabling faster and cheaper Bitcoin transactions off the main blockchain. Still, Bitcoin’s slow block confirmation time — approximately 10 minutes per block — means large transactions are advised to wait for six confirmations, roughly one hour, for full security.
One early critical flaw emerged on August 15, 2010, when an integer overflow bug created 184 billion Bitcoins in a rogue transaction — an error 8,000 times larger than the intended 21 million cap. However, no exploitation occurred. Satoshi Nakamoto and other early developers quickly patched the bug, and Bitcoin has remained stable and secure ever since.
Although Bitcoin was envisioned primarily as electronic cash, it has found its true calling as a store of value — often referred to as “digital gold.” Its capped supply of 21 million coins ensures scarcity, and its Proof-of-Work mining process continuously increases difficulty over time, reinforcing Bitcoin’s hardness.
Bitcoin also facilitates international payments efficiently. Transactions typically settle within about an hour at low fees compared to traditional cross-border methods. However, Bitcoin’s limited anonymity and open-access design have also enabled illegal transactions and created a platform for decentralized financial activities, including derivatives trading.
Despite high price volatility, Bitcoin operates with remarkable reliability, running continuously without downtime since its inception — a testament to its robust decentralized architecture.
Bitcoin’s development community and early users were notably focused on technology rather than profit. Satoshi Nakamoto, despite holding Bitcoin worth tens of billions of dollars, never spent his coins. Early developers like Hal Finney shared a similar ethos of technical exploration and innovation over personal enrichment.
Bitcoin’s biggest technical vulnerability remains the theoretical risk of a 51% attack — where a malicious entity controls more than half of the network’s mining power. However, mounting such an attack would require massive resources and would likely yield no financial gain, as trust in Bitcoin would collapse, destroying the asset’s value.
Another future risk is quantum computing, which could eventually compromise current cryptographic standards. However, quantum threats remain distant, and the Bitcoin community is actively exploring quantum-resistant solutions.
Government regulations also pose a potential threat. Bitcoin’s decentralized nature makes it difficult to shut down, but national policies can influence adoption, usage, and market stability.
4 Altcoins¶
4.1 Bitcoin and the Rise of Altcoins¶
As Bitcoin gained attention, countless alternative digital currencies — known as "altcoins" — emerged, attempting to replicate, improve upon, or extend Bitcoin’s model. Yet despite this explosion of new projects, Bitcoin remains fundamentally unique.
There are essentially two categories of digital currencies: Bitcoin and everything else. Bitcoin represents a true technological and monetary breakthrough — a 0-to-1 innovation. Altcoins, by contrast, are generally modifications, experiments, or imitations based on Bitcoin’s core ideas. Bitcoin's first-mover advantage, combined with its decentralized architecture and massive network effects, makes it extremely difficult for any altcoin to replace it as the primary digital currency.
Moreover, most altcoins suffer from centralization, weak security, limited community support, or lack of true purpose beyond speculation. Bitcoin’s unique combination of decentralization, security, and simplicity ensures its dominance for the foreseeable future.
4.2 Ethereum: Beyond Currency to Smart Contracts¶
Among altcoins, Ethereum stands out as the most significant. Created by a young programmer, Vitalik Buterin, Ethereum expanded the idea of blockchain beyond currency. While Bitcoin focuses on being money, Ethereum was designed to be a platform for decentralized applications (DApps) and programmable agreements known as smart contracts.
Ethereum captured the imagination of developers and entrepreneurs by offering flexibility: its scripting language supports loops and complex conditions, enabling everything from decentralized finance (DeFi) platforms to non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs).
As of the end of 2024, Bitcoin retained a commanding 56.7% share of the total cryptocurrency market, while Ethereum held about 12.3%. All other coins combined made up the remaining 31%, illustrating the stark dominance of the two leading projects.
4.3 Key Features and Innovations of Ethereum¶
Ethereum’s core innovation is programmability. Unlike Bitcoin’s intentionally limited scripting language (designed to minimize security risks), Ethereum’s smart contract capabilities allow developers to build complex decentralized applications directly on the blockchain.
Over time, Ethereum evolved technically as well. It transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS), a consensus mechanism that drastically reduced energy consumption and improved transaction speed. On the performance side, Ethereum handles 15–30 transactions per second on its main chain — faster than Bitcoin — and is working toward greater scalability through techniques like sharding and Layer 2 solutions.
These enhancements aim to position Ethereum not just as a digital currency, but as a decentralized global computer — a platform for building a new generation of internet applications.
4.4 The Reality of Altcoins and Speculation¶
Outside of Bitcoin and Ethereum, the altcoin space is largely speculative. Few projects achieve significant real-world use or technological breakthroughs. Many fast-payment coins or stablecoins (cryptocurrencies pegged to fiat currencies) make up a small fraction of the market, while countless other projects remain experimental or fail outright.
Meme coins like Dogecoin — originally created as a joke — highlight the speculative nature of the market. Dogecoin’s meteoric rise to a peak market value of $73 billion underscores how easily hype and celebrity endorsements can distort valuations in the altcoin space.
Ultimately, while innovation is abundant, very few altcoins maintain lasting relevance or demonstrate true decentralization. Bitcoin remains the benchmark against which all others are measured.
4.5 Participants in the Crypto Space¶
The cryptocurrency ecosystem comprises several different types of participants. A small group of early adopters — primarily tech enthusiasts and idealists — continue to use Bitcoin as a store of value and as a tool for financial sovereignty.
Speculators make up another segment, trading cryptocurrencies for short-term profits, often driving price volatility. However, the overwhelming majority of participants are inexperienced retail investors, drawn by media hype and promises of quick wealth. These retail investors often lack deep technical or economic understanding, making them particularly vulnerable to bubbles and scams.
Understanding the motivations and behaviors of these participants is key to interpreting the often unpredictable dynamics of cryptocurrency markets.
5 Blockchain Business Applications: Failures and Lessons¶
5.1 Business Cases¶
In the aftermath of Bitcoin’s success, a wave of enthusiasm surrounded "blockchain technology" itself. Many large corporations attempted to harness blockchain for traditional business processes, often without needing the decentralized aspects that give Bitcoin its true strength.
Yet, reality diverged sharply from the hype. IBM, once a leading advocate for blockchain-based supply chain systems, canceled its major blockchain projects in 2022. Similarly, Australia’s stock exchange abandoned its multi-year effort to rebuild its trading system using blockchain in 2023, citing technical complexity and inefficiency. Even Microsoft shut down its Azure Blockchain service in 2021.
These high-profile failures illustrate a crucial lesson: when decentralization, immutability, and censorship-resistance are unnecessary, traditional databases are usually faster, cheaper, and more effective than blockchains.
5.2 The Rise of Financial Bubbles in the Crypto Space¶
While Bitcoin remains focused on sound money, much of the broader crypto space has descended into speculative frenzy. Projects like the Bored Ape Yacht Club (BAYC) — expensive NFTs acting more as status symbols than functional assets — typify the speculative excesses.
Decentralized Finance (DeFi) platforms have exploded, offering derivatives, collateralized loans, short selling, and complex financial instruments. While some innovation occurs in DeFi, much of the activity mirrors historical financial manias like the Dutch Tulip Bubble — rapid price increases fueled by speculation rather than fundamentals.
Still, amid the chaos, the crypto sector provides a rich environment for learning about financial mechanics, governance experiments, and market psychology — insights valuable beyond just cryptocurrency. The speculative bubbles surrounding NFTs, meme coins, and DeFi projects serve as cautionary tales. They reveal human susceptibility to hype, greed, and crowd behavior — patterns that repeat throughout financial history.
However, genuine innovation continues to emerge. Concepts such as decentralized governance, non-custodial financial services, and programmable money offer real promise. The challenge lies in distinguishing meaningful progress from short-term fads — a skill crucial for navigating the future of digital finance.
5 Conclusion¶
5.1 Bitcoin as a New Form of Wealth¶
Bitcoin is not merely a currency; it is a new class of wealth. Unlike fiat money, Bitcoin is resistant to inflationary dilution. Unlike gold, it is digitally native and globally portable. Its scarcity, durability, divisibility, and security make it uniquely suited for preserving value across generations.
Bitcoin's value is not intrinsic but derives from the network of participants and the collective belief in its rules. The strength and resilience of this consensus have enabled Bitcoin to outperform and outlast countless competing projects.
In the short term, Bitcoin remains highly volatile. But over the long term, it stands as the only truly decentralized digital asset, offering a unique combination of monetary soundness, technological robustness, and ideological purity.
5.2 The Ultimate Inference: Bitcoin’s Singular Role¶
From a broader perspective, the fundamental inference is clear: Bitcoin is unique. It represents a singular breakthrough — a fusion of cryptography, economics, and decentralized governance — that other projects have yet to match.
Altcoins, by comparison, often resemble financial tulips: speculative instruments that flourish briefly before fading. Furthermore, the idea of applying blockchain indiscriminately to non-currency fields is largely misguided; unless global consensus and immutability are critical, blockchain often adds unnecessary complexity.
Thus, Bitcoin stands apart — a digital anchor for economic value in a turbulent world, a profound answer to the age-old question of how humans can store and transmit value securely across time and space.