Bitcoin

Origins and Conceptual Framework

Bitcoin is the first decentralised cryptocurrency, functioning as a peer-to-peer electronic cash system that operates without the oversight of a central authority.

It was introduced in 2008 when an unknown entity published a white paper under the pseudonym Satoshi Nakamoto. The network officially commenced on 3 January 2009 with the mining of the genesis block. This technological innovation was designed to solve the double-spending problem by utilising a public distributed ledger known as a blockchain.

The Bitcoin Protocol and Technical Structure

The underlying protocol consists of a set of rules governing a decentralised network where each participating node maintains a copy of the entire transaction history. Transactions are validated through cryptography, specifically the Elliptic Curve Digital Signature Algorithm, which ensures that only the rightful owner of a private key can spend the associated digital assets.

New transactions are broadcast to the network and grouped into blocks approximately every ten minutes. These blocks are linked chronologically through SHA-256 hashes, creating an immutable chain that is computationally impractical to reverse.

Proof-of-Work and Mining

Consensus across the network is achieved through a process called mining, which relies on a proof-of-work mechanism. Miners utilise specialised hardware, such as Application-Specific Integrated Circuits (ASICs), to solve complex mathematical puzzles to secure the network.

The difficulty of these puzzles is recalibrated every 2,016 blocks to maintain the average ten-minute block interval regardless of the total computational power. Mining serves the dual purpose of processing transactions and issuing new currency into circulation. As of 2025, approximately 48 per cent of the electricity consumed by this process is derived from fossil fuels, while the remainder is sourced from sustainable energy.

Monetary Economics and Scarcity

In economic terms, scarcity is not defined by the absolute physical quantity of a material on Earth, but rather by the human time and labour required to produce it.

While physical resources such as minerals and energy are practically limitless relative to human needs, their availability is constrained by the opportunity cost of the time directed toward their extraction. Historically, as the price of a commodity increases, more human time is dedicated to its production, leading to an increase in supply that eventually depresses the market value.

Bitcoin introduces a fundamental shift in this dynamic through the creation of absolute digital scarcity, representing the first instance in history where a liquid monetary asset has a strictly fixed supply that cannot be increased regardless of the effort or technology applied.

This fixed supply of 21 million coins ensures that the currency remains immune to the supply-response cycles that affect all other physical commodities.

#### The Stock-to-Flow Ratio and Monetary Hardness

The hardness of a monetary medium is primarily measured by its stock-to-flow ratio, which compares the existing supply of an asset to the amount of new units produced in a given period. A high ratio indicates that the existing stockpiles are large relative to new production, making the asset more salable across time as its value is less likely to be diluted.

For centuries, gold has served as the premier monetary standard due to its high stock-to-flow ratio, with annual production typically representing only 1.5 to 2 per cent of total stockpiles. In contrast, Bitcoin’s stock-to-flow ratio increases predictably through a preprogrammed disinflationary schedule. By 2022, Bitcoin’s ratio was projected to overtake that of gold, and by 2025, it is expected to be approximately double that of the metal, continuing to rise until the ratio becomes infinite upon the mining of the final coin.

#### The Difficulty Adjustment and the Easy Money Trap

Most commodities fall into the easy money trap, where an increase in monetary demand raises the asset’s price, incentivising producers to flood the market with new supply and expropriating the wealth of savers. Bitcoin bypasses this trap through its difficulty adjustment mechanism, a unique technological innovation that recalibrates the computational effort required to mine a block every 2,016 blocks. This ensures that even if the market value of the currency rises and more miners expend processing power, the rate of coin issuance remains constant.

Consequently, increased demand for the network does not lead to a rise in supply but instead results in an increase in the total hashrate, which enhances the security and antifragility of the system.

#### Impact on Time Preference and Capital Accumulation

The transition from an inflationary currency to a sound, appreciating monetary standard has profound implications for time preference, defined as the ratio at which individuals value present consumption against future utility. A currency that loses value over time encourages high time preference, leading to immediate consumption, increased debt, and the erosion of long-term savings.

Conversely, a hard money standard like Bitcoin incentivises individuals to defer gratification and save for the future, as their holdings gain purchasing power over time. This lowering of time preference is a critical driver of the process of civilisation, facilitating capital accumulation, technological innovation, and the development of longer, more sophisticated production cycles.

Monetary Sovereignty and the Unit of Account

A sound monetary standard serves as an essential information system for economic production, providing a stable measuring rod or unit of account for global trade. In the current era of monetary nationalism, fluctuating exchange rates create a system of partial barter across borders, necessitating a massive and unproductive foreign exchange market. Bitcoin offers a potential path toward a homogeneous global monetary standard that is neutral to the policies of individual nation-states and independent of central bank control. By functioning as a sovereign base money with an immutable supply, it allows for digital cash finality and international settlement without the need for trusted third-party intermediaries or counterparty risk.

Bitcoin may be compared to a yardstick forged from an indestructible material that remains the same length regardless of changes in temperature, providing a constant and reliable measure for an entire world of construction.

Scalability and Network Development

The network faces challenges related to throughput, as on-chain capacity is limited by a block size cap originally set at one megabyte. To address these scalability issues, developers have introduced Layer 2 solutions such as the Lightning Network, which facilitates instant, low-fee transactions off the main blockchain. Other enhancements include the SegWit and Taproot upgrades, which improved transaction efficiency and smart contract functionality.

Global Adoption and Legal Status

Bitcoin has transitioned from a niche cryptographic project to a recognised asset class integrated into the global financial system. In 2021, El Salvador became the first nation to adopt it as legal tender, although this status was effectively revoked in practice by 2025. Institutional adoption accelerated with the approval of spot exchange-traded funds (ETFs) in the United States in 2024, providing direct exposure to the asset for mainstream investors. Several governments and sub-national entities have also explored establishing strategic bitcoin reserves to bolster their international reserves.

Security Threats and Resilience

The network is secured against unauthorised spending and history modification through the collective processing power of honest nodes. A 51 per cent attack, where a single entity controls the majority of the hashrate, remains a theoretical risk that could allow for transaction reversal. Additionally, the advent of quantum computing poses a potential future threat to current cryptographic primitives. Despite these challenges, Bitcoin has demonstrated antifragility, surviving numerous exchange hacks, regulatory bans, and internal protocol disputes.

Bitcoin may be likened to a digital lighthouse, emitting a constant and predictable signal of value that remains unaffected by the surrounding economic storms.