@ EK

Dear Family & Friends

Bitcoin. What does it mean to you? Scam? Fad? Bubble? For me, the past few years have been enlightening as I have tried to understand its meaning. Numerous books, hundreds of hours of podcasts and some reflection has boiled the meaning of Bitcoin down to one word for me. Hope. I believe Bitcoin is a discovery with the potential to bring the greatest amount of human flourishing and freedom any of us have seen in our lifetimes. Obviously I realize that’s a pretty bold claim so this piece of writing will attempt to summarize my journey down the rabbit hole in an attempt to provide a basic foundation of knowledge for those closest to me. I’m certainly not a writer, in fact after school I never, ever thought I would write again. It was always an agonizing exercise for me because I was writing about topics I had no interest or connection with. I had nothing to say. Now, I have this overwhelming sense that I do and a responsibility to share with those close to me. At the very least I want to give people the information they need to make their own decisions. Bitcoin and ‘crypto’ are going to be increasingly politicized and it will be important for people to have the basic knowledge to avoid being misled by one misinformed narrative or another (and there are plenty). I’ve tried to find the perfect article or podcast to share but couldn’t - there’s no one size fits all. Everyone is different and will resonate with different aspects. I think that for those closest to me, a personal connection may have a stronger impact than a stranger on the internet or random news anchor on TV. All I want to do is make sure that people do not continue to dismiss Bitcoin out of hand because I’ve noticed that (almost) everyone rejects it at first - often multiple times. Eventually though, something piques their interest leading them to actually dig in and understand. My hope is that by spending some of my own time documenting my thoughts and reflections it will hopefully provide a more personal touch and interest you just a bit more, while at the same time strengthening my own understanding.

Money Makes The World Go ‘Round

Bitcoin is many things but in order to fully understand it we first need to understand money. What is money? It’s an infrequently asked question but on the surface it seems pretty simple. It’s how we pay for things and in order to survive in this world you need to have some - pretty basic. However, when we look beneath the surface it is much more than that. Money is one of the most important technologies humans have invented. In order to achieve the amount of specialization and globalization that created the world we see today, money is the crucial technology that made it all possible. Next time you are in your local supermarket or big box store, think about the sheer number of items that are sitting on shelves from all over the world, available to you. Pick one and try to trace its journey - the events that had to take place in order for you to be holding it. Money made that happen - it is a universal language. It allows us to communicate value. Said another way, money is the tool that allows us to store our previously sacrificed time and transfer that value through space and time. Time is our most precious resource. It is finite and we can never get more of it. When we work we are exchanging our time for money with the hope that it can be stored and then exchanged for something of value at some point in the future.

Money serves three basic functions: store of value, unit of account and medium of exchange: it allows us to store our time, to be able to measure it and to exchange it for goods and services. We all have our own skillset that we use to earn money. What do you do for a living? What good or service do you provide to society? Now imagine for a minute that money did not exist (and forget the fact that your role probably wouldn’t even exist in such a world). In a true trade and barter system it is necessary to trade goods and services directly for one another. How would you exchange what you offer for your next grocery order? You would need to find someone who is looking for exactly what you offer in the exact quantity that you are able to offer. They would need to have the exact amount of food that you need and you would need to do this for every type of food that you want. Logistically, you can imagine how difficult that would be. In fact, it just doesn’t work. Without money, humans would not have been able to evolve past Dunbar’s number - small communities of a few hundred people or less where everyone trusts each other and works together for the basic necessities. Money can be redeemed for anything in the marketplace, removing the need for direct trade and barter. It removes the need for trust and provides infinite optionality. It’s the missing link, meaning a teacher doesn’t need to spend two hours teaching math to a mechanic for an oil change or that a home builder doesn’t have to accept years worth of perishable vegetables for building a farmer a house.

The Root of All Evil?

We have learned that money is just a tool. Now we need a quick overview of the history and properties of money. This is going to be brief and gloss over a whole bunch of history but you should get the idea. There have been many types of money used throughout time. Shells, beads, salt (did you know salary is derived from the Latin word for salt?) and even animals have all been used as forms of money. They all served their purpose until better forms of money made them obsolete. Over thousands of years humans honed in on the best form of money available at the time - gold. We all instinctively know that gold is desirable and valuable. It is ingrained in our culture in various common sayings and phrases. Historically, humans using gold as money has coincided with times of great stability, prosperity and general human flourishing; see the Roman Empire & The Pax Romana, The Renaissance, and La Belle Epoque. Why? What made gold the best form of money? There are always certain properties that make a tool the best version possible. When it comes to money, although there are many distinct properties to be taken into account, they can be summed up in five:

Scarcity: Money must be scarce and difficult to produce in order to keep a consistent value framework. If the quantity of money is constantly expanding it makes it difficult to know how much our time is actually worth. Think of a measuring tape that constantly changes length - it would be near impossible to build anything with structural integrity.

Divisibility: Money must be able to be broken down into smaller portions and added together in greater portions in order to exchange varying magnitudes of value.

Portability: Money needs to be transported and stored easily and safely. Real estate has historically been a good store of value, but makes a terrible money.

Durability: Money should be able to stand the test of time. If it can’t be preserved in the future it won’t be able to store our time into the future. Gold was chosen because it is indestructible and has lasted throughout human history.

Recognizability: It should be very easy to tell that money is money and in what amount. If it is time consuming or difficult to verify, it would not make a good medium of exchange.

We can go much deeper into the history and properties of money, but that’s not the goal here. I only wanted to illustrate that money is simply a tool and that there can be many different versions of the same tool. Some work better than others and there can be an optimal version. A sharp metal knife performs its task much better than a dull plastic one. So when people say that money is the root of all evil I would firmly disagree. Money is just a tool - an unbiased, apolitical one. In fact it’s one of the most powerful tools humans have invented. Like any tool it can be used for good or bad. It can also be broken.

A Broken System: History

So what happened? If gold was the best version of money, why have those periods of history mentioned above always ended? Why don’t we use gold as money today? Again, trying to summarize a large amount of history, even though gold was the best money humans had discovered, it was still lacking in a number of the properties described above. It failed as global money because it was not portable, divisible or recognizable enough to keep up with the velocity of our ever expanding and accelerating global economy. This led to gold backed money where people stored their gold in banks and received paper bills to represent it. In theory, this solved the technical issues with gold, paper is very easy to carry around and can represent any amount of gold. In the early 1900s this was the monetary system for most of the world; a true gold standard where the economic measuring tape was fixed and people could measure their time against the scarce and very slowly changing quantity of physical gold. But this leads us to another historically unavoidable problem - human nature. Every single time people have been in control of a society’s money supply, the monetary system has eventually failed. This is because the temptation, well or ill intentioned, to create more money always becomes too strong. When the cost of World War I exceeded the amount of real physical gold, countries resorted to literally printing new money out of thin air to finance the war. This was a significant turn of events and set us on the path to our current monetary system. After WWI, several attempts were made to return to a sound money system but it never truly materialized and finally in 1971 the tie to physical scarcity was officially severed when President Nixon suspended convertibility of the dollar to gold - creating the fiat (literally meaning ‘by decree’), monetary system we have today. In the span of less than sixty years we went from having money that was constrained by the scarcity of gold - a reliable, solid measuring tape, to a money whose supply can be expanded or contracted at will by a small group of unelected individuals. The key here is that because of gold’s technical shortcomings, eventually there is always a reason to justify breaking the relationship between gold and paper in order to create more money.

A Broken System: Money

Enough history, let’s talk about today. What’s wrong with our current monetary system? Most people may not know what the issues are but I think we can all feel that something is amiss, even if it’s subconscious at first. Just look around at the prices of housing and food, the volatility of financial markets, and the unprecedented wealth gap that just keeps growing. We are paying more and more for less and less, both in terms of quantity and quality of goods.

Our current monetary system is based on fractional reserve banking and credit. Fractional reserve banking is quite self explanatory - it means that when you deposit money in a bank, it is not stored there in reserve until you decide to withdraw it. Instead, it is lent out or invested by the bank. Most of what is considered money today is not actually physical cash, but credit - quite literally IOUs or promises. Central banks like the Bank of Canada create money by purchasing newly created assets from governments and commercial banks create money by issuing mortgages and loans. To illustrate, let’s say you lend me $100 cash and I give you an IOU - a promise to pay you back. Then, you use the IOU to purchase $50 of goods from a friend. They know you’re good for it because you have my promise to pay you back and they receive your promise to pay them back. With only $100 we have created $250 of total value in our little economy. When a bank lends you a mortgage or loan it is creating money in the system that would not have existed before. These IOUs trade and spend like physical money. The majority of our current monetary system (including our bank account balances) is really just a collection of promises logged in spreadsheets, backed by a comparatively small amount of physical money. Under a fractional reserve system if all a bank’s clients attempted to withdraw all their money at the same time it would be impossible since the bank only has a fraction of the deposits. In fact, Canadian banks are actually not required to hold any reserves at all! Unless you have physical money in your possession all you have is a promise and we all know promises can be broken. Let’s go back to our simplistic example: what happens if I lose the $100 or refuse to pay you back. All of a sudden, through no fault of your own, both you and your friend are out of luck and lose the value you thought you had. We can see how a monetary system like this must not be allowed to significantly contract, otherwise it collapses and value is lost.

If money represents your finite time, what happens when the other side of the equation can be expanded, outside of your control, at any time? We know what happens. Just think about the cost of things in your parents or grandparents day - snacks at the corner store or a three bedroom house. How much does the same cost now? This system is inflationary. As the amount of money in the system increases, so do the prices of goods. When money no longer stores value people store it anywhere they can, in real estate, stocks, collectibles, etc. What does all this mean? Put simply, we have lost the ability to preserve our time and energy - our ability to save. A defining characteristic of being human is the ability to plan for the future. Transferring more value to the future leads to a stronger foundation in the present - we can have more faith in our future plans. On the other hand, the inability to plan for the future leads to short term, instinctive thinking. How well can you plan for retirement when the source of your family’s next meal is uncertain or you are unable to make your next rent payment? Think Maslow’s hierarchy of needs. When we are forced toward a survival state we make decisions based on short term thinking - we start to lose our humanity. Our current monetary system makes the future so uncertain it is near impossible to credibly plan for it.

A Broken System: Technology

Let me introduce you to a thought experiment posed by Jeff Booth, an incredible human who has informed much of my thinking in this area. If you could fold a piece of paper in half fifty times, how tall would it be? Don’t just look up the answer, give it some honest thought. Humans create and innovate. Similar to the need for money, the development of technology has been a constant over time. Technology is used to create efficiencies and productivity gains that improve our lives and ultimately save our time. You don’t adopt a new technology in your life or business unless it provides some improvement on the status quo - faster, cheaper, better. From fire and the wheel to the internet and now artificial intelligence, humans are on a never ending quest to innovate and improve our lives, to save our time. Life certainly looks different than it did twenty years ago and it may even seem that the rate of growth is hard to keep up with. That’s because it is. Technology grows at an exponential rate which is hard for humans to conceptualize. That piece of paper folded in half fifty times? Doubling in thickness each time, it would reach from earth to the sun. Technology is a powerful force that brings down the cost of everything, trending towards free, forever.

If technology is supposed to save our time and make things cheaper, why is it taking increasingly more to provide a basic standard of living? Why the continual need to create jobs? Shouldn’t it be the opposite? Shouldn’t the same amount of productivity be generated by a decreasing amount of jobs, keeping pace with the rate of change in technology? Why are the advancements in technology not well distributed, with a large portion of the world population still living in extreme poverty? The answer to all these questions has to do with the monetary system discussed above. Gross Domestic Product (GDP) is the monetary value of all goods and services produced; the sum of all the hard work and energy of every single working person. It used as an indicator for economic health, as is the job market, revenue, profit, net worth, etc. Growth in all these indicators is required for a healthy economy. Right? But wait, we just highlighted how powerful technology is. Unlimited photos and music, a calculator, a newspaper, a weather station - all in your pocket for free. How many industries have been rendered obsolete by the internet and your smartphone? Now ask yourself where these show up in GDP? They don’t. We have two opposing forces that cannot co-exist. On one hand we have technology providing exponential productivity gains, saving time and reducing prices, constantly shrinking GDP and removing the need for jobs. On the other hand we have an inflationary monetary system that must keep expanding to avoid collapse, inflating GDP and creating jobs that would not otherwise be necessary - attempting to ignore the effects of technology. Real standard of living improvements are sacrificed by chasing nominal increases in metrics like GDP. How, on a planet of finite resources, does it make sense to have a monetary system that requires literally infinite growth?

Finally, Bitcoin.

So what do we do? How do we deal with these irreconcilable forces? With better money. With Bitcoin. Although it can be described and analogized in many different ways, Bitcoin is simply money. It is the next iteration of the tool and improves on, or nearly perfects the properties of money we talked about previously. It is absolutely scarce, infinitely divisible and can be moved at the speed of light. It is the most secure software protocol ever invented, impossible to destroy and impossible to counterfeit. As a globally distributed network of computers running open source software that maintains a public ledger of value transactions secured by cryptography and proof of work, it is digital money tied to the physical world via real energy use. This doesn’t even scratch the surface but I believe that in the beginning it is much more important to understand the problems discussed above and the ways in which Bitcoin provides a solution rather than dive into the technical deep end.

For people not familiar with Bitcoin it may seem hypothetical or speculative in nature but it is currently being used all over the world in very real, important use cases. Probably most relevant to us in North America, Bitcoin gives us back the ability to save. Don’t let short term volatility fool you, when using a long time horizon (four years or more) it is one of the best performing assets in human history. Value stored in Bitcoin over any four year period would have appreciated anywhere from 24% to 235%. Another way to think about it: if you had 99 dollars in cash and 1 dollar in Bitcoin you would outperform the S&P 500 over any four year period with negligible volatility.

Although this solves a serious problem for us in North America, it is even more important for people in developing nations around the world suffering under authoritarian dictatorships where hyperinflation and currency debasement occurs regularly. Imagine waking up one day and the value of your savings was reduced drastically overnight at the simple stroke of a pen or was inflated away at more than 100% per year - and this is if you are lucky enough to even have a bank account with savings. It’s not hypothetical, this is a current reality for large portions of the world’s population, a quarter of which doesn’t even have access to a bank account. Bitcoin can provide protection and give a savings account to anyone with an internet connected device. Many living in such situations have family members working abroad sending money back home. Conventional international money transfers are cumbersome at best and predatory at worst with high fees and days for final settlement, not to mention the threat of violence and theft when receiving money at a physical location. Using the Bitcoin network, any amount of money can be sent with finality in seconds and received from the safety of home. Because Bitcoin is simply information, your entire net worth can be stored in your head via memorization. Think of all the stories of people fleeing war-torn countries having to leave their entire life savings (cash, real estate, gold, etc.) behind. A refugee can now arrive to safety with their entire net worth in their memory or stored on easily concealed paper, metal or a digital thumb drive.

It’s been very difficult to determine what to include in what was intended to be a short summary of my understanding of Bitcoin. I haven’t even mentioned the energy implications of Bitcoin mining and how it is providing previously unfeasible energy access to remote populations in Africa, stabilizing energy grids and providing real economic incentives to reduce global energy waste and pollution like gas flaring and methane emissions. Or, the fact that Bitcoin is censorship resistant, providing an essential tool for individuals and activists in oppressive regimes. Or, all of the grassroots Bitcoin communities popping up all over the world. There is so much more to explore. Like it or not, money touches every aspect of our lives and we’ve seen the issues that are caused by broken money. Humans have never seen such an improvement in monetary technology. Never before has there been a way for any two people to trust and agree on a global monetary ledger without the need of a corruptible third party. Never before has money been able to move instantly and be stored so simply and securely, truly altering the logic of violence. This has huge implications and I don’t think that anyone can fully understand the potential of what Bitcoin can bring to the world.

I’ve never been a person who felt hopelessness, but I’ve realized that I would look at issues like wealth inequality, poverty, environmental concerns, global hunger, etc. with a lot of apathy because it felt that there was nothing that I could do to make an impact on such large problems. Now, I feel more hopeful than ever before. As the next iteration of money, Bitcoin touches all of these problems in one way or another and changes the status quo. It won’t fix everything, but I believe it has the potential to improve all aspects of life. I’m not advising everyone to immediately buy some, but I am urging people to learn about one of the biggest innovations in human history. So ask yourself, what is money? and see if you can arrive at anything other than Bitcoin as the best there is.