You don't understand bitcoin because you think money is real.

The old article from 2017 still resonates powerfully today.

Original Title: "You Don’t Understand Bitcoin Because You Think Money Is Real"

Written by: Maria Bustillos, reporter and editor at Popula.com

Translated by: Eric, Foresight News

People often say that bitcoin is an illusion, a collective hallucination. It exists only as numbers in cyberspace, a mirage, as insubstantial as a soap bubble. Bitcoin is backed by nothing except the faith of the fools who buy it, and the faith of the bigger fools who buy it from them.

All of this is, in fact, true.

But what may be harder to grasp is that the US dollar is also an illusion. Dollars are also mainly made up of numbers in cyberspace; sometimes they exist as paper bills or coins, but even though bills and coins are physical, the dollars they represent are not. Dollars are backed by nothing except the faith of the fools who accept them as payment, and the faith of other fools who agree to accept them as payment again. The main difference is that, at least for now, the illusion of the dollar is more widely and strongly recognized.

In fact, about 90% of US dollars are entirely abstract; they do not exist in any tangible form. As James Surowiecki reported in 2012, "Only about 10% of the US money supply, about $1 trillion, exists as paper cash and coins." (Now, this is about $1.5 trillion, with a total supply of $13.7 trillion.) Nothing prevents our banking system from creating more dollars on a whim. As of October 2017, of the $13.7 trillion in the M2 money supply, $13.5 trillion was created after 1959—in other words, M2 has expanded almost 50-fold.

The dollar is a so-called "fiat" currency. "Fiat" in Latin means "let it be," just as "fiat lux" means let there be light, and "fiat denarii" means let there be lira, bolivars, dollars, and rubles. Throughout history, the temptation for national leaders to create money has been almost irresistible. One obvious result of this recklessness is inflation: one dollar in 1959 now has a purchasing power of just under 12 cents.

The creation of the bitcoin blockchain was partly a response to this historical weakness. After the 21 millionth bitcoin is mined around the year 2140, the system will produce no more bitcoins.

Swindlers and thieves will always try to exploit loopholes in the structures set up to control or even account for any monetary system (or any form of value storage). (See: the Panama Papers, the $65 billion Ponzi scheme orchestrated by Bernard Madoff, the London Whale incident, the bankruptcies of Long-Term Capital Management and BCCI, the Isabella Stewart Gardner Museum heist, the 2008 financial crisis, and the thefts at Mt. Gox, The DAO, and USDT.) All stores of value are targets; using any system of exchange, whether by legitimate or illegitimate means, wealth can and will be created and lost. Yet, despite appearances to the contrary, enough people act in good faith to prevent monetary systems from collapsing entirely.

There are some fundamental differences between cryptocurrencies and the US dollar. For example, transactions in the bitcoin system are recorded in an unforgeable ledger that relies not on the authority of banks or governments, but on the power of a public computer network that, in theory, anyone can freely join. In addition, the supply of bitcoin is ultimately fixed. Of course, the anonymity of cryptocurrencies may not be as flawless as that of (unmarked) cash.

Money itself is an illusion, a collective hallucination. You work hard to earn it, increase it, save it, but even so, its only real quality is its symbolic power. From a certain perspective, this is truly awe-inspiring.

Our shared understanding of the value of that green bill, a Krugerrand, ethereum, or a pound coin is what matters most, and this shared understanding has no fixed meaning; it is in a state of perpetual flux. The value of all money, all means of exchange, is unstable and abstract, even in the face of every attempt to ensure its value by pegging it to various assets or by regulating its flow through interest rates. Money is merely a constantly shifting network of protocols representing the interests of parties in the network, and it has always been a fragile thread in humanity’s network of trust.

Think of the "flight capital" that refugees are forced to trade at huge losses to cross borders—of course, that is money, but what does it have in common with your "invisible" salary, a string of numbers colliding with another string in your bank account in the void? Perhaps between your payday and your market day, the price of avocados or coffee will rise or fall. In a natural disaster, people may suddenly be willing to pay exorbitant prices for a few gallons of clean water. So, what is "the value of a dollar"?

All the common arguments against cryptocurrencies (like bitcoin) and the blockchain technology that underpins them fail to take into account this fact: the transience and fragility of ordinary money. If you believe that money is real, solid, or "backed" by anything other than human trust in institutions, you cannot understand cryptocurrencies. The dollar is backed by "the full faith and credit of the United States." But what does that actually mean?

It means that if you take a dollar to the US Treasury and ask them to redeem it, they will give you a dollar. Or, if you prefer, four quarters.

Unfortunately, the currency crises of unstable governments like Greece, Venezuela, and Spain have already triggered a series of cryptocurrency surges. When the Cypriot government tried to resolve the 2013 banking crisis by forcibly cutting 7% from citizens’ bank deposits, the price of bitcoin soared; the likely reason was that many euro holders in debt-ridden southern European governments deduced that bitcoin might be a more reliable "safe haven" for funds than Cypriot banks. Spanish savers must have wondered: will we be next?

In short, our existing financial institutions are riddled with flaws and always prone to corruption; this was true long before the mysterious inventor of bitcoin had the idea. Satoshi Nakamoto made this clear in the "genesis block" of bitcoin: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." Bitcoin was political from the start, with the explicit goal of creating a tamper-proof digital medium of exchange as a superior alternative to the existing banking system.

The theory behind all cryptocurrencies (including bitcoin) is that records generated by distributed computer networks can be made tamper-proof, and thus, in theory, better guarantee the soundness of money than governments can. So far, despite some major setbacks, the blockchain system established by bitcoin has at least partially proven this theory. Since 2009, over one million bitcoins have been stolen, but the underlying distributed ledger—the accounting system of bitcoin—has remained stable and tamper-proof to this day.

Many of the thefts and frauds in the early days of bitcoin are reminiscent of the film "The Treasure of the Sierra Madre," a story of greed and corruption set in the 1920s. No doubt, the prospect of easy riches can drive people mad. But note: the tendency for greed to breed crime and madness did not render gold worthless.

The real warning is this: the bitcoin ledger has remained tamper-proof not only because the system is decentralized, not only because of its clever cryptographic protections, but also because, in its infancy, a group of developers shepherded it with goodwill and reason. Without the unique "fire chief" Gavin Andresen calmly managing multiple early crises, bitcoin might have died young. Even today, endless forks and growing pains continue to "stress test" the entire system. At present (just my personal opinion): the core developers are increasingly losing credibility, and many believe they are only looking after their own stakes. This distrust could not only inflict lasting damage on the bitcoin project but also harm the future of blockchain technology as a whole.

Another issue is that early cryptocurrency speculators were extremely vulnerable to being "fleeced" for two reasons:

1. It was difficult to create secure storage solutions at the time;
2. The systems for safely moving ordinary money in and out of cryptocurrencies were not yet mature.

The 2014 theft of about 800,000 bitcoins from the Mt. Gox exchange cast a shadow of "original sin" over the entire cryptocurrency ecosystem. The public mistakenly believed that "bitcoin was hacked," but in fact, it was the largest exchange that was hacked—just as last year, when $63 million was stolen from the Bangladesh central bank’s account at the New York Fed, the problem was with the channel, not the currency itself.

To say "bitcoin is a scam" because some people commit fraud is as absurd as saying "the entire financial industry is a scam" because Jamie Dimon’s company was dishonest. Some say, "bitcoin is used to buy drugs on the dark web!" But most $100 bills have traces of cocaine on them—if you dislike $100 bills for that reason, please send your extras to me. Is cash disqualified because it is used for crime? No. The truth is: money is inherently tainted.

It won’t be long before the blockchain system that now secures bitcoin transactions will morph and merge into other systems, because its value is incalculable. From Wall Street to Sand Hill Road, investors have already poured vast amounts of money, time, and effort into blockchain companies. As long as humans need to verify "whether something really happened," blockchain technology can provide a tamper-proof answer through programming. Whatever flaws remain in the system Satoshi Nakamoto released in 2009, he has proven that it is entirely possible for humans to create a foolproof transaction ledger without relying on banks, governments, or other external authorities. Once this step is taken, there is no going back.

Any currency’s efforts to maintain stability are always on the verge of failure; as long as there is an opportunity to manipulate or forge transactions, human nature dictates that someone will try to cheat. Even the limited and fragile stability in developed countries requires countless principled people to remain vigilant and constantly patch the system, and there is never 100% certainty. The struggle to maintain the illusion that "money is real" will never end, nor can it ever end.