Why does Bitcoin exist? In other words, what purpose does it serve?

These questions will get a variety of answers, many of them based upon ideology. There is a lot of misunderstanding about the world's leading cryptocurrency. Many of the attacks on BTC are actually correct, something that is dismissed by the advocates.

To get to the bottom of these questions, it is best to study what Bitcoin actually brought to the table. What was the breakthrough and, in hindsight, where was it flawed?

By uncovering this, we might be able to reveal what the true role Bitcoin has.

Bitcoin: The Ultimate "Price Go Up" Asset

Bitcoin is a brand name. People often use this word when they mean cryptocurrency. Unfortunately, that word is misleading also.

The original idea, according to the white paper, was to created decentralized electronic money. It was titled "Bitcoin: A Peer-to-Peer Electronic Cash System". Here is where we gain insight into the basic concept.

The goal was a payment system. This is the first line of the paper:

A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution.

This reveals the first major flaw.

To operate as a payment system, the role of medium of exchange is required. This means price stability, something that is the opposite of what Bitcoin is. Historically, this is one of the more volatile assets. This actually provides benefits but not for payments.

Since the inception, we have seen stablecoins fill this role. While there certainly is work to be done in that area (such as developing ones not dependent upon government controllable assets), these fit the price stability requirement as well as anything else out there.

Another issue is the network itself. Perhaps not in the original design, the lack of updates over the past 15 years has seen a lag. The Proof-of-Work mining system is slow and inefficient. This makes large scale transactions, at the base layer, impossible.

The result was the attempt to move the payment system to another network. Sadly, this is not incentivized causing a host of other problems.

Consensus Mechanism

The major breakthrough, in my opinion, that came from Bitcoin, and started a revolution, was the long term problem Satoshi solved.

From my reading of previous attempts, the one barrier that everyone ran into was the fact that centralized consensus mechanisms were required. Nobody, until Bitcoin, was able to bring decentralized consensus forward.

Bitcoin did this. For the pitfalls of crypto mining, one thing PoW did was ensure that consensus was spread to a number of entities. The validation did not come from a single company or source. In fact, nobody knows who is validating the next block.

This was revolutionary since it did provide the ability to conduct financial transactions without intermediaries.

Since that time, innovation has led to a number of alternatives, all following a similar concept. It is debated how effective some are, what the trade off is, and how beneficial. Nevertheless, there are now a number of networks that are ran by many different, unrelated node operators.

In spite of flaws, one thing Bitcoin does provide is the ability to transfer value in a permissionless manner. No matter what is taking place, anyone who is willing to pay the transaction fee can move money from one wallet to another.

It is also something that drives the likes of Elizabeth Warren nuts.

The Bitcoin network cannot be shut down. There is major value in this. If nothing else, we can view it as a backstop to the ability to transact without permission.

All of this is due to the decentralized consensus mechanism.

Green Candles And Price Go Up

Bitcoin is the ultimate "price go up" asset.

Why do I say this?

If we look at history, the chart shows that BTC has appreciated greatly over time. Here is the view from Coingecko.

As we can see, there is a lot of volatility. There were periods of massive decline. That said, over the long haul, we do see a massive upward trend. What is required is the ability to weather the pullbacks, which can last a couple years.

What this means is Bitcoin can be viewed as a wealth generator. Of course, looking at the past does not mean it will be replicated in the future. Many have predicted the demise of BTC, claiming the price will go to zero.

Which brings us to the greatest characteristic that Bitcoin has. It is also what makes it the "price go up" asset.

Bitcoin has confidence. This is the basis of all financial assets. When people have trust in something, it tends to do well. This is what is leading the calls for government entities to adopt BTC as part of their reserves. Companies and funds are doing the same thing.

Confidence is one of the most powerful use cases there is. Those who state that Bitcoin does nothing are overlooking this characteristic.

There is another historical fact that we are seeing repeat itself: fixed money always pools.

Bitcoin will end up in the hands of fewer individuals (entities) over time. Average people will not be holding the majority of BTC in a couple decades, especially if governments, central banks, and sovereign wealth funds start to adopt it. The likes of Michael Saylor, who is a relatively small fish by Wall Street standards, will keep expanding their holdings.

To me, this means that, over time, we will probably see more price appreciation. There will certainly be ebb and flows. However, the overall trend could persist for a while. If governments get involved, the number of big HODLers will grow. This will bring increased volatility as overall supply (on the market) declines. However, it probably will help the past to be repeated in the future.

Is this guaranteed? Of course not. The point is that Bitcoin has garnered a lot of confidence over the last 5 years. People are starting to believe it will keep appreciating versus other assets. It did outperform every asset class since its inception.

Many are banking on this happening again.

This is not financial advice. The purpose of this article is for education purposes only.