THE BITCOIN STANDARD SUMMARY | Bitcoin Explained

cryptocurrencies are growing in popularity and believe me they are not difficult to understand in this video we're going to find out what bitcoin is where it comes from and why it's always in financial news so what is bitcoin and why care well first there are three functions of money the first is a medium of exchange which basically means we don't have to barter for everything and keep track of bartering and all the goods involved if we just relied on bartering things would be very inefficient so we need a medium of exchange a widely accepted token which can be exchanged for goods and services another function of money is a unit of account which just means that all prices are expressed in the same terms if we relied on everyone bartering one ounce of gold is 100 apples and 100 apples is two pairs of shoes and so on and so forth it's unproductive and inefficient we need a standard way to price things so money has to be a unit of account the third function of money is a store of value store of value depends on sale ability which is how readily a good can be sold an old wooden boat in the middle of a desert is not very saleable water would be much more saleable in a desert because people need it saleability of goods depends on three things there is sellability across scales across space and across time a good that is saleable across scales can be easily divisible saleability across space indicates ease of transport as people need to travel sale ability across time is the most important sale ability across time refers to money's ability to hold value into the future which allows you to store wealth to be sellable across time a good has to maintain value it must be durable apples rot they're not sellable across time because their value does not last but also to maintain value the supply of the good has to stabilize or preferably remain low imagine if everyone in the world got a ferrari tomorrow the value of ferraris would go down so all of this is obvious and this means that in order to maintain value and money we have to limit production to keep supply down for something to assume a monetary roll it has to be costly to produce and so this leads us to hard versus easy money hardness of money is how difficult is it to produce the money if it's difficult to increase a money supply that is hard money if it's easy to increase a money supply that is easy money the hardness of money depends on stock which is existing supply and flow which is new production and so we have the stock to flow ratio so for any currency we want a stock to flow ratio to be high if a stock to flow ratio is low that means it's easy to produce so if we as a society choose to hold an easy money producers would make more of it because they all want more money so supply increases meaning more people have it and the value of that currency is eventually destroyed to further understand the stock to flow ratio we can look at the different goods that have been used as money throughout human history to start seashells were used as a currency throughout africa and asia for over three thousand years but then humans developed more and more advanced boats and technologies for harvesting seashells from the sea so supply increased and value was destroyed which results in a loss of salability over time we used cattle as money but they are big and bulky and not easily divisible and difficult to travel with so cattle are not saleable across space or scales we also use salt in combination with cattle and a bunch of other different kinds of currencies but advancements in metallurgy allowed us to begin using monetary metals which included copper silver and gold all right so let's look at each of these monetary metals copper is easy to produce and susceptible to corrosion silver is rare and durable gold is the rarest and virtually indestructible gold was mainly used for large transactions because it's the heaviest copper was for the least valuable transactions because it's the lightest but but but monetary metals can be easy money too history has shown that copper has a low stock to flow ratio it's important to first understand that the amount of copper in the earth is more than we can measure let alone extract through mining there is so much copper in the earth and you can always mine more copper now consider that if the price of copper is rising producers will rush to mine more copper so they'll have more copper but at some point the demand for copper at this higher price will subside and the holders of copper will want to offload to buy other goods so now everyone wants to sell and when that happens the price comes crashing back down again in other words as revenue to the producers of the good increases they invest in increasing production which brings the price crashing down again so of the monetary metals gold is the hardest money gold is extremely chemically stable and virtually impossible to destroy gold is impossible to synthesize from other materials and is extremely rare on our planet the only way to increase the supply of gold is to mine more from the earth gold mining is an expensive toxic and extremely uncertain process that humans have been engaged in for thousands of years with ever diminishing returns the existing stockpile of gold held by people around the world is the product of thousands of years of production and the existing supply outnumbers the magnitude of new production by far to this day it is impossible for gold miners to mine quantities of gold large enough to depress the price significantly so it turns out that there are two problems with monetary metals one the fluctuations in supply and demand of silver and copper and a more serious problem was that governments and counterfeiters often reduce the precious metal content in coins causing the value to decline the reduction in the metal content of the coins compromised the purity and soundness of the money but in the 19th century we began to use paper and financial instruments to back these metals and with gold superior hardness governments around the world adopted the gold standard we used paper money and checks backed by gold the gold standard was great because the entire planet used one sound choice of money but the major flaw of the gold standard was that by centralizing the gold in the vaults of banks and later central banks it made it possible for banks and governments to increase the supply of money beyond the amount of gold they held which devalued the currencies and so there were two problems with the gold standard governments and banks were always creating a money beyond the quantity of gold in their reserves and many countries used not just gold in their reserves but also currencies of other countries and so throughout the 20th century countries around the world came off the gold standard and began to use fiat currencies also known as government money after world war one many european countries went off the gold standard in order to generate and print money when they needed and they desperately needed money to finance the cost of war and trying to stimulate economic growth and this continued into world war ii the gold standard stopped working because governments had to expand their money supply to fight the depression they ended up printing cash with no metal backed standard and so this brings us to fiat money fiat money is a currency established as money often by government regulation but has no intrinsic value it has value simply because a government maintains its value the us dollar euro and many other major world currencies are fiat currencies today and so under the gold standard money represented an amount of gold so now the money that citizens use today does not directly represent an amount of gold but today central banks around the world have far more gold in their reserves than they did under the gold standard the central bank's large reserves of gold can be used as an emergency supply to sell or lease on the gold market to prevent the price of gold from rising during periods of increased demand to protect the monopoly roll of government money so in this way the roll of gold has been restricted to central banks while individuals have been directed toward using government money and the problem with government money is that you can easily print more cattle silver gold and seashells all require serious effort to produce and in comparison to those primitive forms of money government money is extremely easy to produce and as we know when we increase supply value goes down so far history has shown that governments will succumb to the temptation of inflating the money supply typically for good reason like national emergencies but it still doesn't come without a cost advanced economies have had their money grow at rates of around five percent per year growth at five percent a year will double the money supply for a country in only 15 years hyperinflation is an economic disaster unique to government money there was never an example of hyperinflation with countries that operated on a gold or silver standard when seashells or beads lost its monetary role it was a slow transition with replacements taking over the purchasing power over time hyperinflation is defined as a 50 percent increase in the price level over a period of a month most hyperinflations in history have occurred in the era of fiat money there have been 57 episodes of hyperinflation in history only one of those episodes was before the era of fiat money so there are problems with government money so this brings us to digital currencies before digital currencies payments could be divided into two distinct categories cash payments which is immediate execution of a transaction and both parties must be physically present this is a problem as the internet makes it more likely for individuals to want to transact with people who are not physically present intermediate payments which require a third party such as credit cards debit cards paypal and so on using a third party introduces the risk of fraud theft or technical failure this raises transaction costs and delays final settlements of payments and so following years of trial and error by programmers bitcoin was the first engineering solution that allowed for digital payments without having to rely on a third-party intermediary bitcoin is a decentralized open source digital currency that can be sent between users on a peer-to-peer network without the need for intermediaries it was developed in 2009 by an anonymous person under the name satoshi nakamoto transactions are verified in a public distributed ledger called blockchain so what is blockchain let's start with the idea of a distributed ledger a distributed ledger is simply data spread across multiple locations think of this as excel spreadsheets or a database so just a store of information it's not just in one place but there are copies of the spreadsheet in a lot of different places every time my copy of the spreadsheet is updated everyone else's copy is also updated so that's a distributed ledger or distributed computing now imagine this concept at scale there are thousands of copies of the spreadsheet all over the world and we combine this distributed ledger or distributed database with decentralized control decentralized control means you need others who own the copies to vote yes on the update so now it's a distributed store of data with a democratic voting mechanism to determine when all those copies can get updated together so it's controlled by a group of participants rather than by one central controller so no one person can destroy everything and destroy all the data if you try to threaten one person with a gun about an update that's not going to do anything because it's controlled democratically at scale now just imagine this concept in a chain across time so now we have blockchain where each block contains data now let's observe a peer-to-peer network when someone joins the network he gets a full copy of the blockchain the copy of the blockchain is called a node when i want to add a new block to the chain it must be voted on and approved by other network members and so then the new block is added to each node in bitcoin's case these blocks contain the transaction data so this brings us to bitcoin mining bitcoin eliminates the need for third parties through proof and verification nodes compete to be the first to add the new block of transactions every 10 minutes remember that nodes are just individuals with a copy of the blockchain to commit this new block of transactions a node expends processing power on solving complicated math problems that are hard to solve but with a solution that's easily verified this is called proof of work if a node solves the proof of work otherwise known as the complicated math problem the other nodes vote on its validity if the node gets the majority of the votes then the new block is added to the chain this is how bitcoin's blockchain voting system works checking solutions to math problems so the node that gets the math right and commits a valid block of transactions to the network is rewarded with brand new bitcoins this process is called mining and those who solve the proof of work are called miners so here we see a miner submitting a solution to a math problem the proof of work the others check that the solution is correct and if the majority vote correct our new block of transactions is added to the blockchain and so now we'll look into some more important concepts with bitcoin as more people want to use bitcoin the price rises and more people will want to mine bitcoin will raise the difficulty of mathematical problems and therefore processing power needed to unlock the mining rewards to ensure blocks will continue to take around 10 minutes to be produced as bitcoin's value rises more effort to produce bitcoins does not lead to increased production of bitcoins it only results in more processing power which makes the network more secure each block contained a reward of 50 coins in the first four years halved to 25 coins in the next four years and halved every four years after that this brings us to the hardness of bitcoin for other forms of money gold silver sea shells etc as price rises people are incentivized to produce more increased production brings the stock to flow ratio down bitcoin is even harder to produce than gold because mining bitcoins means you need more and more processing power to solve more and more difficult math problems the proof of work new blocks will always take around 10 minutes to produce with bitcoin's blockchain fraudulent transactions are a waste of time dishonest nodes would waste processing power which cost money on solving the proof of work only to watch the other nodes rejected and therefore get no bitcoin reward and what if nodes collude to submit fraudulent transactions well you need a majority to participate in the collusion and if they were to succeed the entire premise of bitcoin would be destroyed making bitcoins worthless immediately so there's no incentive for collusion because they'd just be left with a bunch of bitcoins that would suddenly be worthless it's also important to note that no individual is essential to bitcoin the supply of bitcoin will grow at a decreasing rate until the year 2140 there will be 21 million coins in total at that point the supply of bitcoin will never exceed 21 million coins each coin is divided into 100 000 units called satoshi's which makes bitcoin saleable across scales the bitcoin supply will increase by 27 in the coming 25 years whereas the supply for gold will increase by 52 the japanese yen by 64 the swiss franc by 169 the u.s dollar by 272 percent the euro by 286 percent the british pound by 429 bitcoin supply restrictions could lead to demand as a store of value and therefore sellability across time okay so now we know what bitcoin is but what will it take to become a dominant currency well the most important thing to address is volatility as we now know the production of bitcoin is limited and so the only way for the market to meet the growing demand for bitcoin is for the price to rise enough to incentivize holders to sell to newcomers this is why bitcoin's price has rapidly increased since 2009. unlike any regular commodity bitcoin supply does not respond to demand changes in the early stages of bitcoin demand will fluctuate so bitcoin will continue to be volatile and will this volatility ever end in order for bitcoin's volatility to stabilize people must hold bitcoin as a store of value and not just spend it without a number of people willing to hold the currency for a significant period of time continued selling will keep its price down and prevent it from appreciating volatility can decline as the market grows as long as more and more people hold bitcoin for the long term because this raises the market value of the supply once bitcoin's growth stabilizes it would likely act as a monetary asset expected to appreciate slightly each year and what about other cryptocurrencies how does bitcoin compare bitcoin was invented by a pseudonymous programmer whose real identity is unknown there have been thousands of cryptocurrencies invented and marketed with active management development and marketing how can they credibly demonstrate that these currencies are not controlled by these individuals if a single group have the final say the entire purpose of blockchain is destroyed meanwhile bitcoin has no third party influence so this concludes our intro course on bitcoin we now know what it is where it comes from and why everybody's talking about bitcoin these videos required hours and hours of reading and studying on my end and i can dance all that down into just a few minutes for you so please show your support by liking and subscribing and thanks for watching

Channel: Spencer Krebs

Views: 66,265

Keywords: btc, bitcoin, cryptocurrency, what is bitcoin, the bitcoin standard, blockchain, ethereum, crypto, how bitcoin works, bitcoin price prediction, currency, bitcoin explained, digital currency, investing, altcoin, money, satoshi nakamoto, ripple xrp, stock market, binance, decentralized, the bitcoin standard audiobook, the bitcoin standard summary, chamath palihapitiya bitcoin, jack dorsey bitcoin, bitcoin books

Id: t1brCcgi174

Length: 16min 53sec (1013 seconds)

Published: Mon Aug 03 2020