Why is Bitcoin important?

The Big Picture

It is not only a new asset class, it is one that makes the holder sovereign. It is completely uncensorable. No one – not a government, not a corporation, not a person, not a single group – controls it, because it is truly decentralized. Bitcoin exhibits Aristotle’s four characteristics of good money:

  1. Durability – it does not weather or fall apart;
  2. Portability – relative to its size it is easily moveable and hold large amounts of value relative to its size;
  3. Divisibility – it is easy to separate and put back together without ruining its basic characteristics;
  4. Intrinsic value – it has value in of itself, independent of any other object; it is rare.

It is volatile in the short-term, but deflationarily stable in the long-term. Since there will only be 21 million ever mined (approximately 18.5 million have been mined thus far), it is scarce. Some view it as a hedge against market crash. Some, such as people in countries in which the fiat currency has become worthless, need it desperately right now. It may be viewed as superior to the U.S. Dollar or to Gold.

Bitcoin can provide financial services to the billions of people in the world who live without access to such services due to corrupt governments, worthless fiat currencies, and KYC/AML and like regulations.

No one can predict the future with absolute certainty, but it is exceedingly difficult to see how Bitcoin could be killed. Many things have tried, many obituaries have been written, and yet it lives on with strong fundamentals and incredible new development. With every passing day it enjoys more of the Lindy Effect, that is that the longer it lives, the longer we can expect it to live. The following network effects are mutually reinforcing, and explain Bitcoin will become more powerful (and arguably much more valuable):

Trace Mayer’s Seven Network Effects of Bitcoin

  1. Speculation
  2. Merchant Adoption
  3. Consumer Adoption
  4. Security
  5. Developer Mindshare
  6. Financialization
  7. Adoption as World Reserve Currency

The Functions of Money

  • Collectible
  • Store of Value
  • Medium of Exchange
  • Unit of Account: (and in some cases, System of Control [hat tip to Andreas Antonopoulos])

Bitcoin is currently somewhere between a Collectible and a Store of Value. Over time, it is likely that it will progress in functionality, much like Gold did, but much more quickly).