Thoughts and ideas on people and technology.
March 10, 2025
Welcome to part 3 of the “What is Money?” series! So far we’ve covered the base concepts of money and money as a system in part 1, and the Canadian Dollar in part 2. Today we’re going to talk about a relatively new system of money, Bitcoin!
Let’s review a few key details about money and the Canadian Dollar (CAD). Money is a placeholder to make trading easier, so anything that can fulfill the 3 functions of money can do the job (store of value, medium of exchange, and unit of account). During the Italian Renaissance the double-entry bookkeeping (or double-entry ledger) system was codified as a method of tracking transactions, and this system is still in use today for CAD and most other money systems. One of the features of using a ledger instead of physical money with intrinsic value (such as precious metals) is that it allows for fiat (money by decree) that isn’t backed by anything. The CAD is a fully fiat money with no reserve requirements. It’s also mostly digital, with only 7% of the total supply being cash and liquid deposits with the Bank of Canada.
Bitcoin was invented by Satoshi Nakamoto, a pseudonymous individual or group who no one knows the real identity of. They released the Bitcoin whitepaper (which can be read here: https://bitcoin.org/bitcoin.pdf) in October of 2008, and on January 3, 2009 they started the Bitcoin system. 2 years later they decided to disappear and were never heard from again. Others were involved in early development and maintenance, including Laszlo Hanyecz, who completed the first real-world purchase using Bitcoin. He paid 10,000 bitcoin for 2 pizzas on May 22, 2010, which is now unofficially celebrated as “Bitcoin Pizza Day”. There are several websites and pages dedicated to the story and tracking the current “value” of those pizzas; one can be found here: https://bitcoinpizzaindex.net
Fun history nuggets aside, Bitcoin is similar to CAD in that it uses the same double-entry ledger concept. The difference is that Bitcoin uses a single digital ledger across the entire network. Transactions are grouped into 10-minute blocks and chained together, which is where the popular term “blockchain” comes from. Another term you’ve probably heard, “mining”, is all of the computers dedicated to the task competing with each other in a combination math and guessing game for who gets to verify the authenticity and correctness of each block (the combined computational power from all of the competing computers is used, not just the winner), and the winner is rewarded with newly generated bitcoin and the transaction fees from the included transactions. This is what keeps the ledger secure and makes it practically impossible to fake, break, steal, or cheat on Bitcoin transactions. Last piece of technical background, I promise: If Bitcoin is just a ledger, how do you actually “hold” the money? You do so by holding something called a “private key”. This key is used to authorize new transactions (spending the money). Think of the private key as similar to a password, PIN, or secret code for a bank account. In Bitcoin, if you hold the keys, you hold the coins.
That was a lot of history and technical stuff; take a break, touch some grass, pet the dog, sip some coffee, and come back in a few minutes.
Since you have an understanding of how money systems and CAD works I won’t bother re-explaining it all for Bitcoin; I’ll instead hit some of the major differences between it and CAD (and most other fiat currencies). Bitcoin doesn’t have a central bank or any other central authority governing or controlling it. The ledger is the “single source of truth” and anyone with a valid private key and internet connection cannot be stopped from creating a new transaction. The ledger is also fully public; you can download a full copy and view it, or use a handy website. There are several; here’s the “Bitcoin Pizza” transaction on one of my favourite public sites, mempool.space: https://mempool.space/tx/a1075db55d416d3ca199f55b6084e2115b9345e16c5cf302fc80e9d5fbf5d48d
There’s also a hard limit to the number of Bitcoin that can exist, so there’s no inflation. 21 million bitcoin, which can be divided down into 2.1 quadrillion “satoshis”, or “sats”. Think of sats as similar to the CAD penny, the smallest unit of measurement.
Bitcoin is what I call a “push” system, which is opposite of CAD’s mostly “pull” system. When you do a debit, credit card, or cheque transaction, you’re authorizing the receiving bank to reach in and “pull” the money from your account. Credit cards especially rely on this; it’s how recurring subscriptions where you are charged automatically work. Central authorities also have the ability to pull from your accounts, such as banks for fees and the Canada Revenue Agency (CRA) for taxes (though the latter pinky-promise to only do this in emergency situations). With cash, you can’t authorize someone to physically reach into your pocket and take some of your money, and it's the same with Bitcoin. You have to “push” the money to the other person. This is one of the reasons Bitcoin has been referred to as “digital cash”.
Lastly, you may have heard some, including myself, talk about Bitcoin as a replacement for fiat currencies. How is it supposed to do that if we’re required by law to use CAD? My opinion is that we’ll most likely use both for several reasons, but let’s address CAD’s requirement of use. There are no Canadian laws that force the acceptance of CAD, including cash, for purchases. In Canada cash is “legal tender”, which is “the money approved in a country for paying debts.” (See the Bank of Canada page explaining this here: https://www.bankofcanada.ca/banknotes/about-legal-tender/) If there’s no debt being settled, there is no requirement to accept CAD in cash or digital form (i.e. debit or credit card). If there is debt (i.e. paying a bill for a product or service you already received) only cash (as legal tender) is required to be accepted, but payees are not required to use it. There is a bit of an exception to CAD’s non-requirement of use though; all “business” transactions (including barter and Bitcoin) are potentially taxable and therefore are required to be reported at Fair Market Value, denominated in CAD, to the CRA. See the CRA interpretation bulletin here: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it490/archived-barter-transactions.html Taxes are required to be paid in CAD as well.
If you’d like to see how Bitcoin works in the real world, I’d be happy to show you. I’ll even gift you a few sats to practice with! You can find us at scalebright.ca.
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