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Game, Set, & Match
A forest fire, while destructive, supplies fertile soil for fresh growth. I believe Bitcoin too will burn our financial system to the ground to grow it anew.
Before I explain how that may happen, I’m going to provide the 10-billionth layman’s explanation of Bitcoin. Since you’re reading this sentence, someone has probably explained it to you before with limited success. But I have a foolproof plan! A sports analogy.
I’m not a sports guy, so forgive me for not choosing your favorite sportsball event. To explain Bitcoin, I pick Tennis. I grew up with the game, I’m familiar with the rules and it’s international community. If Tennis is Greek to you, no fear, this analogy still works.
But why Tennis? The story below re-imagines the genesis of Tennis (Tennesis — sorry, had to). And in it, we find remarkable similarities in human behavior when it comes to decentralized rules and sunk cost analysis.
Let’s travel back in time and to England, the birthplace of Tennis.
Imagine the backyard of a home belonging to a young English couple, the Swansons. Sally and Steven Swanson swat a birdie back and forth as they play England’s most popular game: Badminton.
Sally misses her shot and the birdie sags to the grass, scoring Steven a point, and the match.
Slumped in failure, a vision strikes Sally. She imagines a faster Badminton featuring a more terrifying projectile. She envisions a game dedicated not to backyard antics, but to superior athletics. Intrigued, Steven helps Sally craft a fuzzy, hallowed ball for this game. The ball, significantly heavier and larger than a typical Badminton birdie, snaps their frail rackets on impact.
The eager pair go back to the drawing board. They fashion new net-sticks with wider surfaces and thicker frames that sustain greater impact. The new racquets work. Soon, their bulging forearms fire their projectiles far beyond the boundary of a regulation Badminton court. Naturally, they resize the play area, lower the net, and permit the high-speed ball to bounce… once.
Badminton, this wasn’t. Tennis was born.
At first, the pair alone play the game. But one sunny afternoon, the Smith couple overhears the Swansons exchanging loud grunts.
The nosey neighbors peak over the fence to eavesdrop on the Swansons’ heated activity, only to discover them playing an altogether different kind of game. The Smiths invite themselves over to try their hands at Tennis. It’s an instant smash.
Soon, people from all over the neighborhood visit the Swansons’ backyard to play this marvelous new game.
Years go by and a town representative approaches the Swansons. He wishes to bring their game to the public by building its first official court. The Swansons provide him the exact dimensions, firmness of the ground required, height of the net, and every rule solidified during the course of hundreds of backyard games. Soon after, their small town cuts the ribbon on the first manufactured Tennis court.
Interest in Tennis swells in the small county. Badminton however, remains unfazed and the dominant backyard sport of England. But Tennis is tougher, faster, and more aggressive; as a consequence, it is as fun to play as it is to watch.
In the history of popular sport, mental and physical exertion are prerequisites to popularity. That’s precisely why the Olympics refuses my bid to add Sitting On Your Couch Eating Nachos to the official Olympic schedule.
The more demanding the sport, the more taxing to its players, the more valuable to its spectators. This is why Football (Soccer) and Tennis are international hits, whereas baseball remains an American drama.
After several years, English children grow up playing Tennis. Some train to play the sport at an exceptional level. Spectators gather to watch these young professionals play the game at peak performance.
Tennis becomes a regional, then national, and ultimately international sport. And the global community spontaneously conforms to the original standards set down by Steven and Sally Swanson.
A Tennis court in Spain retains the precise dimensions of the first public Tennis court built all those years ago.
The moment the Swansons released Tennis from their backyard, they chiseled its rules in stone.
This fictitious Tennis genesis story, in a nutshell, is the story of Bitcoin.
But What Is, The Bitcoin?
If we defined Bitcoin as a sport, it would be the game of record keeping. That game sounds pretty boring, but it’s worth $670 Billion. So listen up.
The only records kept by this game are transactions between two parties. One party sends money, the other receives. And anyone, including spectators, can browse the entire history of transactions.
Bitcoin represents both the game (the software) as well as the money which the game distributes and transfers between account holders. Here are the rules of this game:
A Bitcoin represents one whole money, like a single dollar, but is divisible into no more than 100 million ‘cents’ known as Satoshis
Every participant in the Bitcoin network must store the entire history of transactions made on the Bitcoin network, they acquire these records from other participants
Participants identify their accounts with a public address which they create using a secret string of characters and a cryptographic algorithm
To perform a transaction, the sender must reference their public address, the address of the recipient, and the amount to transfer
To submit a transaction to the network, the sender must also allocate a portion of their Bitcoin as a transaction fee
To prevent theft, senders must encrypt an element of their request using their private secret from rule #3 — this encryption enables network participants to verify the authenticity of the request
Transactions join the permanent public record as part of a block of data, which is approximately ~1 megabyte in size and can store 2,500 transactions
To prohibit tampering with records, a special type of participant known as a miner, must validate each block before submitting to the network
To validate a block, a miner verifies the transactions for authenticity, insures each sender has sufficient funds in their account, and then solves a puzzle associated with the transactions
The answer to the puzzle requires significant computing power to discover, but nearly zero computing power to verify
The first miner to submit a block with a verifiably correct solution to the puzzle will have their block appended to the permanent public record
The account belonging to the miner who submits the validated block receives the sum of transaction fees allocated by the senders (from rule #5) and a portion of newly-minted Bitcoins
Over time, the rewarded portion of minted Bitcoins halves every 4-years until all 21 million Bitcoins are distributed through this mechanism
In summary, Bitcoin is a software responsible for storing a list of transactions and maintaining the integrity of the account balances held by those who participate in those transactions.
The Bitcoin currency is the primary reward for participation in Bitcoin; the economic incentives therein apply pressure on all participants to adhere to the rules or risk network rejection.
The Adamantium of Money
Imagine Spain shortens their Tennis courts by 5 ft and asks the international community to do the same. Spain calls this upgrade Tennis X.
Spain claims this change has improved the pace of the game, reduced materials required for new courts, and diminished the need for a second serve.
Initially, these changes seem beneficial to all of Tennis. However, to truly go into effect and protect Spain's investment, these changes require the consensus of 100 nations, three times as many Tennis institutions, and countless professional and amateur players.
In the face of that opposition, Spain will spend even more money on marketing, development, public relations, and oodles of resources to promote this new Tennis.
Despite the clear superiority of Tennis X, everyone beside Spain keeps one eye turned to sunk costs. The capital required to modify every Tennis court in the world and retrain every players is incalculable.
As a consequence, non-Spaniards suffer the reverse of the Tragedy of the Commons — to prevent losses during the transition to Tennis X, most Tennis organizations must independently come to the same conclusion.
But there is no central ruling authority in Tennis to browbeat participants into submission. Therefore, the chance that a significant number of players and institutions take the same expensive risk at the same time is next to zero.
The fear of loss inhibits most, if not every Tennis organization outside of Spain from making the change. Spain triumphantly launches Tennis X hoping to replace Tennis. Instead, it shoots itself in the foot.
Bitcoin, no matter how technically deficient nor improvable it may appear, is as resilient to manipulation as the internationally-recognized game of Tennis. Like Tennis, players across the world will suffer sunk costs in Bitcoin if too few participants agree to a change in its rules.
And exactly like Tennis, when the rules of Bitcoin change, those who refuse to adopt the new rules continue to play the old game, and those who adopt them can no longer play the original. To this day, Bitcoin has survived several attempts to change its rules, and those who've proposed such changes have suffered significant losses.
The Bitcoin software is publicly available; anyone can learn how it works. Much like Tennis regulations, the Open Source code enables anyone to enter the game with a certain level of comfort knowing that everyone who participates adheres to the same unwavering ruleset.
The moment a person begins to learn Tennis, their commitment to that open standard encourages them to prevent changes to the standard. The shrinking of the court, a change in ball size, or some other modification threatens to unravel years of significant progress made toward Tennis mastery.
It is for these reasons that an alternative to Bitcoin (colloquially known as an Altcoin) has yet to unseat the original. The risk of economic loss faced by Bitcoin participants is far too great.
The only broad-strokes changes adopted by the Bitcoin network since its inception are performative. Much like Tennis players may improve their accuracy by acquiring a better racquet, but not by drawing a wider Tennis court.
A Self-Fulfilling Prophecy
Now, to the fire and the flames.
In most economic activities, there is an interplay between supply and demand. The greater the demand for something, the greater there is an incentive to supply it.
If the demand for Twinkies rises overnight, the price shoots up. That price hike urges Twinkie factories to squeeze more cream into ever more golden cornbreads. And as production ramps up, a new price equilibrium settles, balancing the new desire for Twinkies with the supply of Twinkies at its original price point.
One place where this interplay is regulated and coerced is in the world of FIAT money. In the United States, the dollar has no competitor. Neither does the Euro in the European Union.
I cannot pay for groceries or my taxes in anything but the U.S. dollar — they don’t accept Twinkies either. As a product, the dollar is a regulated monopoly. Its demand is largely driven by its function as the world’s reserve currency and the fact that, yeah, you can’t do business or much of anything else in the U.S. without it. My way or the highway, says Uncle Sam.
That is, until… soonish.
All but one cryptocurrency are centrally-controlled alternatives to FIAT, built by the ‘Spaniards’ of the crypto-world looking to improve upon the original.
Bitcoin remains the only public, decentralized money ever created (not discovered, as gold was). It cannot be stopped, paused, or altered without a significant coordinated attack, the sophistication of which we have yet to see and are unlikely to witness in our lifetimes.
Over the past decade, Bitcoin proved itself an unshakeable, globally-accessible store of value. The more people realize its properties, the easier it becomes to use on a daily basis, and the more businesses who choose to accept Bitcoin, the greater a threat BTC poses to USD.
Bitcoin poses a threat because it is the hardest money ever invented, it is a superior money product. Thanks to its fixed supply and rigid globe-spanning rules, it cannot be manipulated to the benefit of one party.
Enter Latin America
In El Salvador, difficult economic conditions and exceptional remittance costs pressured its leaders to consider alternatives to the dollar. In June 2021, El Salvador became the first country to declare Bitcoin legal tender.
Going forward, El Salvador will incentivize business-owners to accept Bitcoin. They plan to encourage their predominantly unbanked population to join the Strike network to exchange Bitcoin nationally and internationally. And thanks to the Strike network, transaction fees are reduced to near-zero.
Most important of all, the government of El Salvador will accept Bitcoin in exchange for core government services and taxes. If this works, one country’s reliance on the dollar will go into freefall. And if other countries mimic this model, a domino effect can result in the precipitous and sudden drop in demand for dollars.
U.S. exports to Bitcoin countries will shrink and free exchange between Bitcoin-backed nations will grow in the absence of tariffs and excessive government regulation. As a consequence, fewer dollars will leave the U.S. which will result in an inflation that every citizen can feel, much like today, but far worse.
If enough FIAT-departures occur in a short time, we may witness hyper-inflation in the United States. The adoption of Bitcoin as both a superior store of value and a medium of exchange is ushering in the collapse of traditional FIAT money.
Bitcoiners and their vision of money free of centralized manipulation is a self-fulfilling prophecy. Already, a large swathe of millennials own crypto assets.
Now, I didn’t start this blog to give financial advice, but I, like many today, are long on Bitcoin. It might all turn to nothing and go no where, but this time, I have no intention to be left holding the bag.
For my family’s sake, and my country’s, I buy Bitcoin not to become wealthy, but to insure what little wealth I do have against the collapse of easy, printable money.