# What Bitcoin Shows Us About How Money Works

There seems to be some longstanding confusion about Bitcoin. Not about how it works; there are plenty of articles which explain that quite lucidly— it is confusion about what Bitcoin represents, and what its role could be. I regularly hear these ideas repeated in seriousness:

• Bitcoin could one day supplant ordinary currency
• The decentralized / algorithmic nature of Bitcoin makes it safer than “normal” currency
• Bitcoin is like gold, and gold is good for counting wealth, therefore Bitcoin is good for counting wealth.

I originally penned this article nearly two years ago (before setting it aside). At that time, it seemed like Bitcoin was a passing fad— I believed then, as I believe now, that Bitcoin’s merit (or lack thereof) doesn’t stem from its popularity (or lack thereof), though the mood around Bitcoin has since entirely reversed.

Bitcoin advocates back then would have dismissed Bitcoin’s slide in popularity as proof of its invalidity, though today they’d probably be just as likely to point to its popularity as evidence of its success. I want to cast aside whether Bitcoin is Hot Right Now, as well as questions about implementation details (like the size and existence of transaction fees, the scalability of the blockchain, or transaction delays), and ask whether the fundamental idea is sound. In particular, I think the assertions listed above reveal some really interesting things about the way money actually functions, and what kind of value Bitcoin actually offers. So let’s dive in.

# How Bitcoin works

You don’t need to know a whole lot about Bitcoin to understand its basic premise: You have an artificially scarce resource, which in this case happens to be very large numbers with a special mathematical property. That property is what makes the numbers rare, and thus computationally time-intensive to find. As time progresses, the property is designed to become more and more stringent, so new Bitcoin numbers become increasingly difficult to create. The total number of bitcoins in circulation is fixed ahead of time by the algorithm, regardless of how many people are using Bitcoin; and eventually no more bitcoins will be found. Bitcoins cannot be faked, because anyone can verify whether the mathematical property actually holds or not.

Ownership of bitcoins (or parts of them) can be transferred easily, because a large network of computers keeps track of who gave what to whom. There are more technical details which ensure the security of the whole system, but they’re not important to this discussion. What is important is that it is commonly said that this scarcity is what gives Bitcoin its value. And there are some problems with that.

# Is Bitcoin like gold?

People often say Bitcoin is like gold and highlight the fact that, like gold, it’s valuable because it’s scarce, and because other people believe it’s valuable.