Like many new technologies, the implications of bitcoin's innovation are not apparent at the outset. Enthusiasts focus on its monetary policy, censorship resistance, and open-source nature. Critics dislike how bitcoin threatens the monetary status quo, offers users financial privacy, and requires substantial energy to mine.

Features like its monetary policy are essential to why bitcoin is the best form of money ever invented. However, another key component of what makes bitcoin unique is how it changes the way we interact with money from an ownership perspective.

Unlike digital dollars, which offer holders a claim to an underlying asset, or physical dollars that cannot be used for online transactions, bitcoin is a pure form of digital cash.

One way to think about bitcoin's ownership qualities is by viewing it as a bearer asset. Taking self-custody of bitcoin provides the private key holder access to the underlying asset at any time. Unlike dollars held in a bank account, money market fund, Venmo, or PayPal account, taking self-custody gives holders complete control over their bitcoin, like physical cash.

Owning your keys means owning your coins in a pure, literal way. Therefore, bitcoin is a bearer asset. However, what makes it special is that it is the first digital bearer asset.

Physical bearer assets: A short history

The concept behind a bearer asset is simple: A bearer asset (or "instrument") represents an obligation to pay its holder a fixed amount of another asset upon demand. Holders are entitled to ownership of company shares, gold, and real estate, and they can redeem the bearer instrument for those assets with the instrument's issuer. Issuers create bearer instruments in the form of physical certificates, vouchers, or tickets.

Bearer assets do not require the redeemer to register ownership. Anyone holding the asset can redeem it. Ownership is transferred by physically giving the physical certificate to someone else.

Before modern fiat currencies, banknotes were redeemable for a fixed amount of another asset, usually gold. The purpose of a banknote was simply convenience. Bank customers would deposit gold in a vault, and the bank would issue a note redeemable for the gold. Whoever had the note could bring it to the bank and trade it for gold in the vault.

Is cash a bearer asset?

Modern fiat currencies are not bearer instruments. Unlike the banknotes of the past, physical cash has value based on the assumption that other people will accept it for various goods and services. Banknotes can no longer be exchanged for fixed amount of another asset like gold. Physical cash is not "backed by" anything.

Digital fiat currency (the numbers you see when you look at your online bank account) is likewise not a bearer instrument. Customers cannot redeem or exchange digital dollars for anything besides physical dollars from a bank, or for goods and services from people willing to render them.

Digital dollars are held in regulated, third-party custody accounts such as checking and savings accounts, or accounts associated with payment apps like PayPal or Venmo. Unlike bearer instruments, these types of dollars can only be spent through those third parties – relying on their software systems, and requiring their permission.

This introduces risk and uncertainty that bearer assets do not have. Banks have working hours, outside of which your money may be unavailable. Accounts can be frozen, either by accident, or on purpose but for unjust cause. In some situations, people's money can be legally moved out of their account without their permission. Digital dollars require people who are rightful owners of their hard-earned money to be subject to institutions – many of which are increasingly seen as unreliable, untrustworthy, or corrupt.

What makes bitcoin different

Before bitcoin, consumers did not have access to a digital bearer asset. Anyone desiring to transact across the internet had to trust some institution and use their payment rails. Bitcoin is different.

Notably, bitcoin itself is not a "bearer asset" by the standard definition of that term. It exists on the bitcoin blockchain and is not backed by anything. Still, the bitcoin network allows users to use bitcoin in similar ways to bearer assets of the past. 

If this sounds confusing, that’s because bitcoin is an invention that does not fit our pre-existing models for what money is and how it can be used. In practice, bitcoin functions like a digital bearer instrument. Just like anyone can transfer ownership of a physical bearer asset, they can also transfer ownership of bitcoin. Bitcoin is a truly new form of money – a digital bearer asset, the first of its kind.

To move bitcoin from one bitcoin address to another requires knowledge of a secret code called a private key. Whoever knows this secret code is the de facto owner of the bitcoin at that address, because they are the only ones who can move the bitcoin to another address.

This can be done with no intermediary or third-party permission. Like a physical bearer asset, which allows for redemption of a fixed amount of gold, bonds, or another asset, a private key in the custody of a particular individual represents ownership of the bitcoin that can be moved with that key. In other words, when you own bitcoin, it means you have the independent ability to move it.

More recently, innovators have figured out how to engineer physical bitcoin bearer instruments. The Opendime device, which is about the size of a USB stick, is an excellent example: You can transfer bitcoin to an on-chain address that is accessible only with the private key stored on the Opendime. You can then trade the Opendime device itself for goods and services. If the recipient of the Opendime wants to get the bitcoin "out" and move it to another wallet, a seal on the device must be broken, which reveals the private key and effectively destroys the device. The process is similar to disposing of a paper bearer asset upon redemption.

Bitcoin: A bearer instrument for the digital future

Bitcoin offers consumers internet-native money. Combining the best qualities of physical monies with digital features makes it ideal for the modern age. Bitcoin's open-source code base allows for continuous auditing, as well as development of new custody solutions such as physical bearer instrument devices, multi-signature custody, and more. 

Like language, food, and culture, money is integral to our daily lives. It is past time that money got an upgrade. Centuries ago, physical bearer instruments facilitated tremendous growth in commercial activity. Today, and for centuries to come, bitcoin will do the same. Thanks to its utility as a bearer instrument, bitcoin offers something other digital monies cannot: Ownership.