A Framework for Understanding Bitcoin

My Journey Toward Understanding Bitcoin

My path to really starting to understanding Bitcoin didn’t begin with technology or trading. It began with questions about the system itself.

Like many investors, I found Ray Dalio’s Long-Term Debt Cycle thought provoking, the idea that over centuries, economies move through comparable arcs of debt accumulation, monetisation, and eventual restructuring. At the same time, I found Neil Howe and William Strauss’s “Fourth Turning” equally compelling and complementary, a generational framework that argues societies pass through recurring seasons of crisis and renewal. These 2 cycles, one economic and one social, align to the same 80-100 year timeframe.

These ideas both suggest that every few generations, the financial and political architecture of the world resets. Eventually, debts become unpayable, institutions lose legitimacy, hyperinflation destroys the old system and new systems emerge.

When I first looked at Bitcoin, I dismissed it as another speculative bubble. But over time, I came to see it differently, not as a “trade,” but as a monetary technology (like coinage) and a response to a predictable hyperinflation of an old monetary order.

Somethings never change, “The refusal of King George to allow the colonies to operate an honest money system, which freed the ordinary man from clutches of the money manipulators was probably the prime cause of the revolution.” Benjamin Franklin.

What Is Money?

To make sense of Bitcoin, you must first contemplate philosophically; What is money?

Money, as ubiquitous as it is, few really understand it, you might consider the U.S. Dollar to be omnipotent, the safest and most globally accepted currency, but around 30% of people still believe it is still backed by gold (it hasn’t been since 1971). Money, like USD, is now ‘fiat’ (Latin for ‘it shall be’), no longer backed by anything but a governments word and fiscal discipline.

Historically, ‘good’ money serves three essential functions:

1. Medium of exchange: facilitates trade efficiently.
2. Unit of account: provides a standard to compare value.
3. Store of value: preserves purchasing power over time.

Throughout history, societies have oscillated between two broad types of monetary systems, commodity money and credit money.

In commodity money systems, value is rooted in something scarce and tangible, typically gold, silver, or another hard asset. The discipline of limited supply keeps governments and financial institutions in check, but it also constrains their ability to respond to crises or fund wars.

In credit money systems, value is based not on scarcity but on trust, the collective belief that debts will be honored and that the issuer remains solvent. Credit systems allow rapid expansion of trade and innovation, but they carry a fatal flaw: they rely on continuous debt creation and political management of money’s value.

Bitcoin combines a digital commodity on the trustless rails (no trusted counterparty is required) of distributed ledger technology, and allows us to ponder should money be separated from the state.

The Flaws of the Current System

When someone says to me bitcoin is a solution looking for a problem, I know they don't know their monetary history very well. Our monetary system is built on inherent fragilities — most notably, fractional reserve banking and a monetary policy that mandates inflation.

Under a fractional reserve system, banks keep only a fraction of deposits in reserve and lend out the rest, effectively creating money out of thin air and leveraging their deposits up to 10 times. Banks lend out money they don't have, multiplying both credit and systemic risk. The model works only as long as public confidence holds; when it doesn’t, bank runs expose how little real liquidity exists beneath the surface.

Enter the Federal Reserve, created in 1913 after a series of bank runs called the Panic of 1907, to backstop this system, a lender of last resort, to provide emergency liquidity when the system inevitably overextends. In other words, its primary purpose was, and remains, to bail out the banks (and the government). Over time, that role expanded to financing government deficits, it wasn’t until the 1970s that mandates like unemployment and inflation targets were added.

The system’s second flaw is conceptual: equating “price stability” with 2% annual inflation. This is not stability — it is an explicit policy of currency debasement, guaranteeing that your purchasing power erodes by at least 2% per year. What began as a tool for short-term economic smoothing has become a structural tax on savers.

Bitcoin is both a payment system (a global, censorship-resistant network for transferring value) and a native asset (its token, BTC). So you should consider it being something like SWIFT with a neutral global currency. That looks a lot like gold, but with one key difference if can by moved over the internet.

The Austrian School and Sound Money

The intellectual foundation for Bitcoin didn’t appear out of thin air in 2008, it lies in the Austrian School of Economics, a tradition that emphasises free markets, individual choice, and the dangers of credit expansion. Thinkers like Friedrich Hayek, Ludwig von Mises, and Murray Rothbard all warned that governments, when given control over money, inevitably abuse it. Had the internet existed in their day they may very well have been our Satoshi Nakamoto.

Hayek described the characteristics of sound money — durability, divisibility, portability, uniformity, scarcity, and acceptability.

Bitcoin satisfies these criteria as well as, or better than, gold and surpasses it in portability, auditability, and resistance to confiscation.

It’s no coincidence that Hayek once mused we would “never have a good money again until we take it out of the hands of government.” Bitcoin is that experiment, a private, voluntary form of money emerging in real time in the digital age.

Recommending Readings:

For those who want to dig deeper, here’s a structured pathway that helped me connect the dots:

• Understanding Bitcoin by Andreas Antonopoulos — a clear technical explanation of how Bitcoin works and why it’s secure.
• The Bitcoin Standard by Saifedean Ammous — a historical and economic argument for why Bitcoin represents a return to sound money.
• The Price of Time by Edward Chancellor — a sweeping history of interest rates and the distortion of capital over centuries (also recommended by Stanley Druckenmiller).

Together with the white paper, these readings form a bridge between three disciplines: technology, economics, and monetary history. To have a good level of understanding requires a working grasp of all three.

This is a new paradigm, no one, certainly no one I’ve ever spoken to intuitively gets it (I don’t know any of the cypherpunks!), so it does take some reading, but those who put the work in will have the ‘penny drop’ moment, much like the proof of work security and consensus mechanism for the protocol, we too need to ‘do the work’ to understand and therefore have  conviction in the system.

This grounding in blockchain technology will also bring the rest of crypto into the light, which I’ll dive into in the future, i.e. why stablecoins are the bridge between the 2 systems and how tokenisation naturally follows with this technological unlock.  The digital world we are moving to has to be 24/7 not T+2 Mon-Fri circa 7 hours a day.

Thanks for reading and please drop any of your own recommending readings in the comments below.