What is Money?

Before understanding what Bitcoin is, one must first understand what money is. Most people do not understand what money is. I began my career in investment banking and even I did not fundamentally understand the nature of money. One does not need to understand the nature of money in order to work in finance just as one does not need to understand the nature of waves in order to surf. Bankers can take it for granted that money exists just as surfers can take it for granted that waves exist. In other words, one does not need to understand something in order to know how to use it. To varying degrees, most people know how to use money, but what is money exactly?

Money, at its core, is a system of belief. Without the system of belief, money is worthless. As an example, let us consider the dollar. Everyone believes in the value of a dollar. People believe dollars have value because dollars can be exchanged for things of value and dollars can be exchanged for things of value because people believe dollars have value. It works both ways. If one was not certain that they could use dollars to buy things, one would never accept dollars to sell things. Even those who are not familiar with selling things can understand that they are selling their time to their employer in exchange for a wage or a salary in dollars. We cannot do anything with dollars themselves that makes them worth the time we put in to earn them or the things we sell in exchange for them. We put in that time or agree to sell those things because the dollars represent value in the infinite possibilities of goods and services we expect we will be able to exchange them for. In other words, we value dollars because they let us buy things because the people selling those things value dollars because they let them buy things because… you get the gist. The dollar only works because everyone believes it works. The value is not in the paper. The value is in the network of people who have dollars and want more and agree generally on what they are worth.

Bitcoin is no different. The value is not in the Bitcoin. The value is in Bitcoin’s Belief System. The value is in the network of people who have Bitcoins and want more and agree generally on what they are worth. That is what money is all about.

Note: The network of people who believe in Bitcoin has grown rapidly in the decade since Bitcoin was first created. Since its inception in 2010, the value that the network generally agrees one Bitcoin is worth has increased from less than a penny to more than $10,000. We cannot always assume that history will repeat itself, or that what has happened in the past will continue in the future, but the fact of the matter is that Bitcoin has risen from a penny to a dime to a dollar to $10 to $100 to $1,000 and now $10,000. I have not heard anyone present a compelling reason to doubt that there is at least a decent chance that it will soon rise to $100,000, and then $200,000, and maybe one day even $1 million. At some point, some people believe we will not be talking about the value of Bitcoin in terms of dollars at all. They believe we will be talking about the value of dollars in terms of Bitcoin (more specifically in “satoshis”, which represent one one-hundred-millionth of a Bitcoin).