Book Review: The Promise of Bitcoin by Bobby C. Lee

The Promise of Bitcoin introduces readers to the financial revolution that began in 2009 after an anonymous coder by the name of Satoshi Nakamoto launched the Bitcoin currency. 

The blockchain promises a more secure, decentralized, and democratic alternative to the old monetary system, rooted in the belief that old monetary systems have failed us. What does it do? 

Bobby Lee, a Bitcoin pioneer who has been fighting since the revolution began, can explain that better than anyone.

You may be wondering if you should read the book. This book review will tell you what important lessons you can learn from this book so you can decide if it is worth your time.

Without further ado, let’s get started.

Lesson 1: Money can facilitate commerce, but it isn’t perfect

Bitcoins are digital currencies. Unlike dollar bills, euros, and yen, bitcoins do not come in physical form. A cryptocurrency, on the other hand, is a set of encrypted numbers.

It’s money like no other that has ever existed. When you think about it, pretty much anything can be money. Silver, gold, beads, shells, spices, or salt can all be used. The real issue is not what you use as currency, but that people use it. The real legitimacy comes from widespread adoption.

By most measures, money is a pretty good medium of exchange, provided it is in the right hands.

There are other ways to exchange goods besides money. You can also barter for something like boots or wood by directly trading apples. It works, but it is inefficient: a shoemaker who doesn’t have fruit will not repair your shoes.

For thousands of years, people have been bartering. From the Mediterranean shores to the Euphrates banks, Phoenicians and Babylonians developed a vast barter system 3,500 years ago. Their trade included weapons, spices, and luxury goods. 

For centuries following, the Romans used salt – a scarce and highly valued commodity – to pay their soldiers.

Barter-based on goods has continued for millennia. Sometimes even societies with complicated monetary systems returned to barter. For example, cash-poor Americans during the Great Depression in the United States traded goods like corn for medical services or coal to heat their homes.

Despite not being the most efficient means of connecting buyers and sellers, barter does have one major benefit: it is self-regulating. Therefore, the value of the “currency” is determined by its users.

State-issued money is different. Look at Lydia, a kingdom from the sixth century. The first centralized currency was created in this state, which today is part of Turkey. A regal symbol like an eagle was imprinted on the coins to guarantee the value of this currency.

In the beginning, commerce flourished. Since the Lydians introduced centralized money, every monetary system since then has faced the problem that guaranteeing a currency’s value has a flip side. The currency can also be devalued.

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Lesson 2: Banks and governments mismanage economies regularly

A medium of exchange, money is just one of its many facets. The second feature identified by economists is that it retains its value over time.

However, if you look back over monetary history, you will see that this second characteristic is less common in practice than in theory. Money’s value usually changes in reality. To solve this problem, governments and banks can impose their authority over money by centralizing control.

This power is often abused by those governments and banks. As a result? The currencies they control lose value.

During a cash crunch, a government can print new coins and bills simply by smelting new coins or increasing the money supply. 

As a result, the price of goods and services rise and the purchasing power falls. More cash in the economy means a lower value of the currency, so you need more of it to make purchases.

Small amounts of inflation aren’t all bad. Often when people see prices rising, they decide to buy big things today instead of waiting until tomorrow, when they’ll be even more expensive. A boost to the economy can result. 

However, inflation that is too high can wipe out savings and reduce investment. With less cash to spend, and investments yielding too little, households are unable to spend; this leads to stagnation.

This is exactly what happened in fifteenth-century China – the first country to use paper banknotes. It printed new notes whenever the government needed money. In no time at all, the currency had fallen so far in value that it had to abandon paper money – notes were worth just 0.014 percent of their face value.

By extending credit, loans, and mortgages, banks can increase the money supply as well as governments by printing money.

A major cause of the Great Depression was banks lending more money than they had on hand. Investors were anxious to withdraw their savings when the stock market crashed. The result was a bank run that depleted a bank’s cash reserves and caused it to go bankrupt. 

Around 9,000 banks failed between 1929 and the mid-1930s, costing American depositors about $140 billion.

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Lesson 3: Gold standard abandonment ushered in a free-floating fiat monetary system

The one-dollar bill and the two-euro coin have no intrinsic value. It’s a piece of cheap paper, and it’s a copper-zinc alloy that is only worth a few cents.

Clearly, the value of dollars and euros has nothing to do with what they’re made out of. And it has nothing to do with commodities such as precious metals. They are therefore fiat currencies. 

In fact, the term comes from the Latin word for “decree,” which is pretty much how their value is established: states declare that dollar bills and euro coins are legal tender.

Its value depends solely on the trust placed in the government that issues it. But what if you do not trust those governments? This, in a nutshell, is what Bitcoin is all about.

The use of fiat money as a medium of exchange is effective. As an example, take the US dollar, the “global reserve currency.” Governments around the world keep dollars on hand to conduct international transactions, like buying and selling oil. Because of this, the dollar can be used almost anywhere.

However, it does not retain its value well. With a $100 bill, you could buy two pairs of top-of-the-line Nike sneakers in 1979. Today, the price of a single pair is much higher. In another decade, you may not even be able to buy a pair of Nike shower sandals for a hundred dollars.

A new era of fiat money began in 1971, when purchasing power decreased rapidly. In the aftermath of the Second World War, global currencies such as pounds and francs were linked to the US dollar, whose value, in turn, was linked to the gold standard – the international price of gold. 

Governments were bound by the gold standard. A government could only print as much money as it held in gold, since anyone could redeem their dollars for gold.

The United States, however, was in economic difficulties by the late 1960s. The country was bogged down in a costly war in Vietnam, and faced trade deficits at home. 

During that time, foreign governments were exchanging dollars for gold to deplete its gold reserves. This led to the end of the gold standard in 1971.

As a result, governments and central banks have been able to print cash at will – a method that has become an all-purpose cure for economic crises.

Critics claim that this approach worsens the problem than it cures. What are their alternatives? The gold standard must be reinvented for the digital age. Introducing Bitcoin.

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Lesson 4: Without a central authority, Bitcoin verifies transactions

What exactly is Bitcoin? Technically speaking, it’s virtual currency or cryptocurrency – that is, a payment system utilizing encrypted digital “coins” in order to prevent fraud.

However, Bitcoin isn’t just about technology. In a deeper sense, it provides a solution to the problems associated with centralization and fiat currencies, discussed earlier.

Critics claim these monetary systems involve trusting institutions that have proven untrustworthy in the past. Wouldn’t it be nice if you could delegate decision making powers to a machine that can’t make a mistake? Well, Bitcoin lets you do just that.

Satoshi Nakamoto unveiled a solution to the problem of fiat currency abuse and the lack of trust on January 3, 2009.

While Nakamoto claimed to be a 32-year-old Japanese computer programmer, many believe he was actually Yasutaka Nakamoto, a former courier for Pablo Escobar. Others, like the author, suspect that three Australian coders worked together.

It was clear, however, that Bitcoin was a definitive improvement over earlier designs for digital currencies.

Why? All digital currencies are affected by the double-spending problem. When you spend a dollar in cash, it’s gone – two people cannot spend it simultaneously. 

While it is possible to counterfeit currency, this is not easy. Compared to the difficulty of counterfeiting state-of-the-art government-issued bills, copying and spending money online is as simple as hitting “Control” and “C.”

Standard solutions to this problem involve entrusting recordkeeping to large, centralized institutions such as banks, which verify and record transactions. Having just witnessed banks crash the global economy in 2008, Satoshi was wary of doing so. The blockchain is a solution to this problem.

Blockchains are essentially spreadsheets that solve the double-spending problem without the involvement of large institutions. It is known as a distributed ledger in Bitcoinese. It’s like those dusty old ledgers used in accountancy firms, with one major difference: it’s the same ledger for everyone, from Beijing to New York to Montevideo. 

A line added by one accountant appears in everyone else’s ledger. The blockchain enables everyone to see and verify each line of accounting code, or block, when it is created.

A decentralized mechanism for tracking transactions is created, which eliminates double entries and ensures that they are safe.

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Lesson 5: “Proof of work” ensures Bitcoin users’ honesty

Bitcoin’s distributed ledger is what makes it so much more trustworthy than traditional money. Legitimate transactions are recorded in the ledger, which is vital to the entire system. People wouldn’t trust the ledger if it were full of fraudulent transactions, like people spending the same bitcoin twice.

What, however, can you do to ensure the blockchain only contains legitimate transactions? Basically, mining is a way to reward users for helping keep the ledger trustworthy by rewarding them.

Are you familiar with the problem of double-spending? To ensure that a genuine 20-dollar bill isn’t spent in one store and a counterfeit bill next door, you can check the serial numbers on the banknotes.

Bitcoin miners verify transactions to ensure that users don’t spend bitcoin twice. They do this using software on their computers.

Every second, thousands of serial numbers need to be compared, and this takes a huge amount of computing power. Bitcoin is essentially a network of thousands of computers that either accept or reject transactions.

These computers “mine” for solutions to complex math problems by digging and blasting their way through digital mud and rock until they reach gold in the form of solutions.

All of these efforts are called proof of work. Upon solving a problem, thus creating a new block, every user recognizes that a certain amount of computation has been devoted to making sure the transactions it contains are legitimate.

Mining software requires electricity to run, so why do miners spend so much money on it? You could say it’s a bit like winning the lottery. Every time a new block is created, new bitcoins are created. 

Although the odds of winning this lottery are one in 21 trillion, the rewards are high. In the spring of 2021, a miner managed to solve one of these puzzles and earned 6.5 bitcoins – around $215,000.

However, bitcoin miners cannot create endless new coins – that would be devaluing the currency. Bitcoin’s protocol allows for only 21 million bitcoins to be created. After they are mined, they cannot be created again. From that point on, miners will be rewarded with fees rather than new bitcoins.

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Lesson 6: Solo Bitcoin miners cannot compete with their industrial counterparts

Bitcoin mining and gold mining have some striking similarities. Both cases, for example, were mainly handled by individuals in their early days.

During the nineteenth-century gold rushes, gold seekers flocked to places like California and Australia, but the first Bitcoin miners relied on their own – limited – resources.

As opposed to panning for gold in creeks, they set up “mining rigs” – computers that solve algorithms, create new blocks in the chain, and earn bitcoins. Things have changed, though. 

Bitcoin mining is now largely carried out by global groups with more computing power than most individuals can muster. Bitcoin mining is similar to mining gold, which is largely carried out by large corporations using industrial equipment.

The mining process solved a puzzle earlier digital currencies had been unable to solve.

No matter how well-designed many of these Bitcoin forerunners had been, they weren’t able to inspire enough people to use the currency. The innovation of Satoshi Nakamoto was the mining reward scheme.

The innovation created a community of pioneers and a refereeing system that was more fair and transparent than traditional payment systems offered by banks.

Everyone can participate in mining, since it’s permissionless. No single entity can control the Bitcoin system because no one person or institution controls the global mining.

Despite the fact that mining is permissionless, it is not easy. Indeed, the Bitcoin protocol makes it increasingly difficult to verify payments. Each new transaction entails a more complex mathematical problem than the previous one. 

As a consequence, verification of payments and generating new bitcoins require more and more computing power.

Mining pools have gradually displaced early pioneers, who operated improvised mining rigs in their basements and bedrooms. Groups like these can deploy more computing power than most individuals can afford due to their well-financed, well-organized nature.

Consider computers designed to solve Bitcoin problems. They use technology called application-specific integrated circuits, or ASICs. The average ASIC-based mining computer costs upwards of $10,000. Then there’s the cost of the electricity for it to run for extended periods. 

With the extremely low odds of solving the algorithm behind a new block, it’s easy to see why mining has become beyond the reach of solo hobbyists.

Aside from mining, there are other ways to obtain Bitcoin.

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Lesson 7: Think about security and accessibility when choosing your Bitcoin wallet

Bitcoins are essentially a unique set of digital numbers. Each of these numbers is stored in a unique account, which itself is composed of a private key and a bitcoin address.

You will need a wallet before you can use bitcoins. Several options are available here, and each has its own advantages and disadvantages.

Using a Bitcoin wallet is similar to keeping bills in a leather wallet. However, the wallet’s contents cannot be accessed without a key. This is your private master key – a randomly generated 64-digit number that can only be located by you.

Wallets can be classified into two categories: hot and cold. The former are always connected to the internet, so they are always active – thus “hot.” The latter are “cold,” as they are always offline. Security and accessibility are factors that determine the pros and cons of each kind of wallet.

Let’s talk about hot wallets. One option is a desktop wallet, which can be downloaded onto your computer. On your laptop or PC, you will save the addresses you use to acquire and send bitcoins. 

This setup has the advantage that nothing is stored on third-party servers, which reduces the risk of being hacked. What’s the downside? Accessing your crypto-assets requires always having a computer handy.

This brings us to mobile wallets – apps that you can download on your phone. It gives you a lot of flexibility; you can receive and spend bitcoins wherever you are, not just when you are at your computer. But you also run the risk of losing access to your cryptocurrency if your phone is lost, stolen, or damaged in any way.

Is it possible to have a cold wallet? Hardware wallets hold cryptocurrencies on conventional thumb drives that resemble hardware devices. They are very secure, but they require technical knowledge to set up. Paper wallets are a simpler alternative. As the name suggests, private keys are kept on paper.

In terms of security, paper wallets are the most secure. If your master key is generated securely and stored safely, it cannot be hacked. Paper and ink, however, are fragile and can tear, fade, run, be misplaced, or be destroyed by water or fire.

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Lesson 8: The easiest way to get involved in the Bitcoin revolution is to use an exchange.

Previously, we discussed mining as a way to obtain bitcoins. However, let’s assume that you aren’t one of the few investors with the time, money, and inclination to mine Bitcoin. Is there an alternative?

A crypto-exchange is a bazaar or marketplace where buyers and sellers can trade cryptocurrencies.

The Bitcoin exchange is similar to a local movie theater. No two countries are alike, and national tastes differ, but almost all countries screen the latest blockbusters.

Similarly, each country and region has its own cryptocurrency exchange. The “blockbusters” here are the basic services offered – primarily, buying and selling bitcoins. 

Since these exchanges must interface with local currencies and banking systems, they aren’t identical.

After you purchase a ticket, you can choose how you want to use it. If you decide you don’t want to watch the movie, or if you decide you don’t want to buy bitcoin, you can choose to sit with your back to the screen. 

Research is the key. Find a local exchange that meets your needs, and choose it. Start by visiting coinmarketcap.com, which lists over 300 exchanges around the world.

Once you’ve found the right exchange, what happens? The process is similar to opening a bank account. As part of your application, you will need to submit copies of your ID or passport as well as a picture of yourself. To verify the details you’ve submitted, some exchanges conduct test deposits on your bank account.

You’re now ready to buy bitcoins after going through these bureaucratic steps. You can use your debit or credit card or your bank account to transfer fiat currency. 

With the latter option, you usually have to wait for a couple of days before you can access your bitcoins – credit cards, in particular, have high transaction fees. After that, you’re on your own.

Here you have it – the basic building blocks that will let you invest in Bitcoin and become a part of the cryptocurrency revolution! 

The golden rule of investing, whatever the asset, is to take your time, do your homework, and make your decisions based on common sense.

About The Author

Ballet, a startup that helps people use and buy Bitcoin, is the brainchild of Bobby Lee. 

Previously, he worked at Yahoo! as a software engineer before joining Walmart as vice president of technology. 

Probably Lee’s most famous achievement is founding BTCChina, China’s first Bitcoin exchange. 

He serves today on the board of the Bitcoin Foundation, a nonprofit organization dedicated to promoting Bitcoin awareness.

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