My friend looks after derivatives and structured product sales for Merrill Lynch in Asia. He’s a smart guy, but he doesn’t believe in bitcoin.

Because he doesn’t understand it.

Definitions

Money, Commodity, Currency, Digital Cash, Digital Gold, Magic Internet Money. Call bitcoin what you want. It’s worked for 7 years.

The 21 Million Cap is Enforced By Game Theory

Bitcoin’s ledger lacks a single-point-of-failure because its code incentivizes decentralization. For the first four years, 50 bitcoin were created every ten minutes. Today, 25 bitcoin are being created every 10 minutes. Every four years the rate of creation halves. With 11th grade math you can sum all the bitcoin that will ever be created to just under 21 million.

Anyone can work to win new bitcoin by running code. The result is thousands of people around the world operating one distributed computer. The computer does two things: updates a database with new transactions, and creates new bitcoin.

A group of miners with 50% of the power could change the code. They could increase the rate at which new bitcoin are created!

But bitcoin’s code is a social contract. Miners have a vested interest in their mining equipment, and usually some bitcoin, too. Changing the code would break the contract, and destroy the value of miners’ bitcoins and computers. Game theory prevents major changes to bitcoin’s code and keeps bitcoin capped at 21 million.

It’s Not Backed By A Nation!

The fact that bitcoin is not “backed by a nation” does not prevent it from being money. Gold and silver were money for thousands of years without the backing of a nation. Bitcoin is digital gold and its emergence echoes that of gold’s emergence as money circa 600 BC.

Paper money backed by a nation with metal first saw success in 13th century China during the Yuan dynasty. It lasted almost 100 years, until peasants revolted against over-printing and reverted to silver. Since then, hundreds of nation-backed paper moneys have been created, and have subsequently died, from the German Renmark to the Zimbabwe Dollar. Paper money is fragile because it relies on trust.

One should think today’s monies to be no less fragile, since metal-backing was fully repealed around the world by 1971.

Money helps people produce wealth.

People produce wealth when they make goods or do work. Monies allows wealth to flow from where it is, to where it’s best usable. Bitcoin is young, and its flow is small, but its flow is efficient and worldwide. It’s the best money ever invented.