What is Bitcoin?
Michael Nadeau
The DeFi Report | Adviser to Start-Ups & Asset Managers | ex. MITIMCo, Boston Properties
Prior to 2020, I was like most average investors - aware of Bitcoin, but not really sure what it was.?It seemed interesting, but life was coming at me and I never had the time to really get to know Bitcoin. And if you are scratching the surface of Bitcoin, well, then, you're likely confused.?
I was confused. I was looking at it from a surface level perspective.
Bitcoin is a digital currency? The coins are “mined” by computers? The coins are not tangible? It's decentralized and not run by any central authority? It’s anonymous? It’s used by criminals? What???
Just thinking about these concepts can make your brain hurt. I get it.?But I was also curious.?See, any time there’s a large group of people interested in something, there must be something to it.?Right? This is how I think.?And if someone tells me there's nothing there, I'm going to look into it myself.?
After all, these Bitcoiners are pretty vocal.?They are quite loyal. They are passionate fighters.?And they are hodling ?.??
But are they?really?onto something?
My gut told me there was something here.?
I should also mention that I have been investing in gold mining companies since 2009.?An understanding of how money, macroeconomics, and our monetary system works can help immensely when trying to wrap your head around an asset like Bitcoin. That's why my last few articles,?Ray Dalio, Debt, and the Dollar ?, and?What is Money ?will hopefully serve as a foundation for what I will be talking about in this article.?
The goal of this writing is to synthesize hours upon hours of research into an easy to follow, rational, and objective view of Bitcoin. Readers should be able to then decide if they want to follow my lead and further educate themselves.?
This is a two part article.?
We’ll first explore the following:
And in part two we’ll objectively explore the risks and the naysayer arguments around Bitcoin.?These are the things your friends and family will be pointing to when you tell them about Bitcoin.
Bitcoin is everything we don't know about money and technology.?To get Bitcoin, you really need a basic understanding of the history of money, long term debt cycles, our monetary system, blockchain technology, human behavior, revolutionary innovations, and so much more.?
So get comfortable.?Grab a cup of coffee or tea. Maybe a cigar and a glass of wine or bourbon if that tickles your fancy. I’m about to take you on a wild ride through Bitcoin, Blockchain, and around the world.?I often tell people interested in learning about Bitcoin that it's a minimum 200 hour commitment.?Seriously.?This is deep stuff.
Let’s go.?
What is Bitcoin?
Bitcoin is, well, not intuitive.?When you are done reading this, go tell your friends and family about Bitcoin.?Examine how they react.?Now you’re learning about people, human behavior, and confirmation bias. See? I told you Bitcoin was deep.?
If I had to explain Bitcoin in one sentence, I would say that Bitcoin is an insurance policy on our legacy banking and monetary system. It’s similar to gold in this regard. If you’re interested in learning about why this insurance may be necessary, check out my post on long term debt cycles.?
Here’s the longer version: Bitcoin is a decentralized, provably scarce monetary system for the internet. It operates on an open sourced, fully transparent ledger using blockchain technology.??
Blockchain is at the core of Bitcoin.?Blockchain technology combines peer to peer networks that solve the Byzantine Generals Problem.?That is, it allows humans who do not know each other to establish trust with each other.?This is very important because throughout history we have only had a few ways to regulate large groups of humans. We have done that through democracy, aristocracy, monarchy, and corporations.?Now we have another way - groups of people that do not know each other can achieve consensus with each other on the internet.?Welcome to the future.
Blockchain allows us to do things in a decentralized way that otherwise would require a centralized authority.?This has profound implications for the financial services industry and really anything that has an unnecessary middle man. The technology could be used in smart contracts, voting, record management, healthcare, real estate, insurance, and so much more.?
Simply put, blockchain technology is a continuation of the internet slowly disrupting just about every industry on the planet.?The internet changed publishing, the movie industry, e-commerce, marketing/advertising, travel, music, commercial real estate, etc.?And now it looks to be coming after the financial sector.??
For example, with Bitcoin we don't need a bank.?We can transfer money all over the world, at any time, and on any day of the week. No bank needed.?Think about that for a second.?It may not sound like much, but we have never been able to do this in history.?It can take weeks to move money internationally.?Days to do it domestically. And we can do this without a middle man. We can do this with a scarce asset, meaning it's value cannot be debased or inflated away like fiat currency.?And we can transact all over the world without dealing with foreign exchange rates - creating huge potential for growth in international commerce and emerging markets.?
Bitcoin and Blockchain Technology - How it Works
Blockchain is a distributed, open source ledger.?As the name implies, we can think of it as a chain of blocks that store information.?The data stored in the blocks varies based on the type of blockchain.?For Bitcoin, it stores details such as timestamps, the sender, receiver, and amount for transactions. Each block has data, a hash, and the hash of the previous block.?
The hash of a block is simply a unique identifier for that block. You can think of the hash as a fingerprint. It's always unique. Once a block is created, its hash is calculated. Changing anything inside the block will cause the hash to change. This is very useful - if the hash of a block changes, it is no longer the same block and it will no longer point to the previous block.?
The hash of the previous block is critical. This is how the blockchain is formed. Each block has a hash as well as the hash of the previous block.?Block #2 points to block #1.?Block #3 points to block #2.?If a block was tampered with, it would change the hash of that block. This would disrupt the chain and make all of the following blocks invalid. The blockchain can only move in one direction.?
Ultimately, Bitcoin’s security comes from its creative use of hashing and proof of work.?Proof of work is the “mining” function of Bitcoin. Miners all over the world use computing power to compete with each other to verify transactions on the network.?They do this by solving complex math problems with their computing power. And when they do so, they are rewarded with Bitcoin and transaction fees.?This is the incentive for miners to invest their capital in mining equipment and operating expenses.?Bitcoin miners are entrepreneurs who have invested their time and capital for future returns - just like any other business.?
Furthermore, blockchains secure themselves by being distributed and decentralized - the entire network validates and confirms transactions, and there is no single point of failure.?Bitcoin’s blockchain network is worldwide. Instead of using a centralized entity (single point of failure) to manage the chain, blockchains use a peer to peer network open to all.
When a miner creates a new block (solves the math problem with their computer, verifying transactions on the network), it is broadcast to the entire network and each node adds the block to the blockchain. The distributed network of nodes is agreeing about which blocks are valid and which are not. When someone joins the network, they get a full copy of the entire blockchain.?Each node (computer) then can verify that everything on the blockchain is in order.?Blocks that are tampered with will be rejected by other nodes in the network.?To successfully tamper with the blockchain, one would have to tamper with all blocks on the chain, re-do the blocks on the chain, and take control of more than 50% of the entire network.?This is incredibly unlikely.
Blockchain technology is fully transparent, secure, immutable, and auditable.?
It is for this reason that Bitcoin’s blockchain has been around for 12 years and has never been hacked.?
Here’s a visual of the process:?
Source: PricewaterhouseCoopers
Below is a quote from Nick Szabo, one of the visionaries involved with the early development of Bitcoin:
?“If you look at a graph of human capabilities over time it is basically flat - we have not gotten smarter.?Computers have grown exponentially (double every few years) - memory, CPU power, network bandwidth, etc. So we have this surplus of resources and yet we still do things institutionally with armies of bureaucrats. So, does it make sense to take advantage of this surplus? Get greater capability for someone to pay each other across the world without going through a trusted intermediary of human bureaucracy.?What separates humans from other animals is we are social across genetic boundaries.?Homo sapiens believe in things and we communicate stories together. Bitcoin allows for a social form of scalability and to transact securely. Not just money but contracts as well.?We can do it through a computer that removes the layers of humans, bureaucrats, and toll takers from the operation."
How do Transactions work on the Blockchain?
To hold Bitcoin, you need a wallet. This wallet differs from your traditional wallet in that the contents (Bitcoin or other crypto assets) are stored on the blockchain, instead of in your back pocket. You access the contents of your wallet with a private key. Your private key stays with you and should never be shared with anyone. This key allows you access to your Bitcoin for transacting.
You can think of this in terms of how you store you photos in the cloud today. Your photos used to be stored in a plastic photo album. Now they are in the cloud. And you access them with your password.
So how do I send Bitcoin to another individual or business? To do this, your counterparty needs a wallet as well. When they want to receive funds, their wallet, which they access with their private key, produces a public key. The blockchain associates this public key with the private key that generated it. So now the recipient can share their public key with the person they are transacting with. The person sending Bitcoin accesses their funds via their wallet with a private key. They then send their Bitcoin to the recipient using the public key that was provided. And the blockchain validates (via the miners) where the Bitcoin came from and where it went.
It looks like this:
Source:?https://www.preveil.com/blog/public-and-private-key/
We can also think of this in terms of how we use email. We log into our email account with our password which is unique to us. And we send email to an address that is public. The recipient accesses the email by proving that they are the recipient with their unique password for their account.
How can an Investor Value Bitcoin?
Ok, now we kinda, sorta understand how Bitcoin and Blockchain work. Let’s dig into how one could value a Bitcoin.?Bitcoin is very confusing to traditional investors for this reason. They’ll look at it and say “it doesn’t produce anything,” or “it doesn’t have any intrinsic value.”?
We’ll address the intrinsic value question later, but let’s focus on the idea that Bitcoin does not produce anything. This is absolutely true. Most financial assets have a stream of income - real estate has rents, stocks have earnings per share, bonds and credit instruments have a fixed payment schedule.?Investors value these assets by estimating their future cash flows, discounting them back to present value, and weighing their risk premium.
We cannot do this with Bitcoin because it doesn’t produce anything.?This is also true of Gold.?Unfortunately many people stop their analysis right there.?"If it doesn’t produce anything, how could it have value?" Bitcoin has value because of its scarcity (see my prior post on Money for why this matters), and its utility as a means to transport value all over the world, on any day, at any time, with no central authority needed.?This does not exist today.
Additionally, bitcoin can be transacted globally in real time 24/7, 365 days per year. It's network is open and interoperable with all existing payment rails. ?It introduces triple entry accounting - that is, a debit and credit are recorded for each transaction, but every computer node on the network also records each transaction. This is like an automatic audit function. Finally, the Bitcoin network has proven to be incredibly secure. More secure then the Fed wire system which was recently down. Bitcoin has had 100% up time since it was created.
Here is a quote from the anonymous creator of Bitcoin, Satoshi Nakamoto:?
“As a thought experiment, imagine there was a base metal as?scarce?as gold but with the following properties: boring grey in color, not a good conductor of electricity, not particularly strong, not useful for any practical or ornamental purpose, and with one special, magical property:?it can be transported all over the world over a communications channel.”
But there is also another way to estimate value for an asset like Bitcoin.?It’s called Stock to Flow modeling.??
Stock to Flow modeling measures the relationship between currently available stock of a resource and its production rate.?It is a way to value a scarce asset and has been used to value precious metals and other commodities.?
Stock is the size of the existing stockpiles or reserves. Flow is the yearly production of the asset.??
Here are some stock to flow numbers:
We’ll focus on Gold for comparison to Bitcoin here.?The numbers are from 2019, but Gold has the highest stock to flow at 62. This means it takes 62 years of production to get to the current stock of Gold. This is how we know it's scarce.?
So how does Bitcoin compare? Bitcoin currently has a stock of 18,560,000 and an annual supply rate of 328,500 after the May halving.?New Bitcoins are created (mined) every 10 minutes, when a miner finds the hash that satisfies the proof of work requirement, verifying transactions on the blockchain in the process.?The reward is currently 6.25 bitcoins, and about 900 Bitcoins are added to supply each day. This puts Bitcoin’s current stock to flow at 56.5.?Because the amount of new Bitcoin added to supply over time is cut in half (via the Bitcoin "halving") every four years, Bitcoin’s Stock to Flow will rise exponentially over time.?
Below we can see Bitcoin’s disinflationary supply schedule. The Y axis is measuring total Bitcoin supply, and the X axis is measuring the amount of new Bitcoin added over time.?
Source:?https://plot.ly/~BashCo/5.embed
By contrast, below we can see the massive inflationary impact of the dollar and why it has lost 96% of it's value.
Source: Federal Reserve of St. Louis
In 2024, there will be approximately 450 new Bitcoin added per day.?This disinflationary schedule continues every 4 years until the year 2140 when all 21 million Bitcoin will have been mined, and the supply will be locked.?
The basis of the stock to flow model is that scarcity has value. Gold has taught us this throughout history.??3,500 years of history.
What is important to understand is that if the stock to flow is low, producers have control over the price.?This is true of most consumable commodities. If production of a commodity can easily come online when price rises, the price will not continue to rise - in this case supply is elastic. When we think about a consumable like bananas we can see why it has a stock to flow closer to 1. When the supply of bananas is reduced, more bananas will be produced to meet the future demand. This is not the case for assets like Gold and Bitcoin.?
There is one?stock to flow model that is widely used in the Bitcoin world. It was produced by an anonymous fellow who goes by “PlanB” and can be found @100trillionUSD on Twitter. PlanB is a quant who comes from traditional finance. He has spent his 20 year career working for a large institutional investment manager and has chosen to keep his identity secret at the moment.???
The model predicts some pretty explosive prices in the future for Bitcoin. While this is very exciting, we need to understand that all models are wrong, but some are quite useful.?We just want to be roughly right, rather than exactly wrong. Ask any weatherman about this.?
The model serves as a way for us to think about how to value an asset like Bitcoin.??
Now that we have established Bitcoin’s scarcity (supply), we must be able to quantify and estimate future demand.?And we must also be able to estimate the amount of people that will hold bitcoin long term.?
The chart below shows the % of users holding long term since Bitcoin’s inception.
Source: Unchained Capital via Glassnode Studio
The colored bands show the relative fraction of Bitcoin in existence that was last transacted within the time window indicated in the legend.?The bottom, warmer colors (red, orange) represent Bitcoin transacting very recently while the top, cooler colors (greens, blues) represent Bitcoin that hasn’t transacted in a long time.?Bitcoin’s supply grew from 50 BTC to 18.5 million BTC over this time period, so the chart has been normalized by the Bitcoin in existence (left y-axis).?
This is quite compelling evidence that over time, more and more people are holding Bitcoin for longer periods of time.?As it matures, it is proving to be a store of value. The chart is telling us that over 62% of Bitcoin in existence has been held for over a year. 20% of the supply has been held for at least 5 years.?
Furthermore, the price of Bitcoin rose 44% in November.?Were people selling and running for the hills? Below we can see that holders of Bitcoin were unimpressed by the run up in price. We did see a change in the 5-7 year period but this can be attributed by the?recent news ?regarding the $1 billion of Silk Road funds confiscated and moved by the US government.?
Source: Glassnode via Unchained Capital
Ok, so Bitcoin is a scarce asset.?And it looks like it is proving to be a store of value based on the percentage of people holding it long term.??
So where is future demand going to come from?
The demand is largely coming from the macroeconomic backdrop.?You can check out my article on debt levels/long term debt cycles, and interest rates?here .?
领英推荐
There is currently over $15 trillion in debt worldwide with negative interest rates.?30 year Treasuries in the US currently yield 1.68%, with inflation expectations over 2%. This means that Bond investors are likely to start looking for value elsewhere. This is driving interest from billionaires and millionaires hedging against QE, as well as institutional investors discovering the best performing asset class over the last 10 years.?
Publicly traded companies are now investing cash on their balance sheet into Bitcoin. We saw this recently with MicroStrategy ($450 million investment) and Square ($50 million).?MicroStrategy just?announced they are raising another $400 million which they plan to invest directly into Bitcoin. Pretty wild.?How many publicly traded companies out there are watching this right now getting FOMO?
The Grayscale Bitcoin Trust has grown to a $10 billion dollar fund due to interest from the traditional, institutional investment space. Investors can purchase Grayscales Bitcoin Trust (GBTC) through their traditional brokerage service (like any other stock) to get exposure to Bitcoin. This is currently the only way it can be purchased via the legacy financial system.
Fidelity has built out their digital team ??offering “institutional solutions to a new asset class” for their customers. Fidelity currently has over $3.3 trillion under management.?
Legendary Wall Street macro investors such as Paul Tudor Jones and Stanley Druckenmiller have publicly announced investments in Bitcoin over the last 6 months.?Apparently (per Stanley) Paul Tudor Jones called him in 2020 and told him he had data that revealed that as the price of BTC dropped from $20k to $3.5k in 2018, 86% of long term holders didn't sell. Interesting.
Paypal has entered the space and is now allowing their users to transact in Bitcoin.?They will be rolling it out with their Venmo app in 2021. Furthermore, Paypal’s 28 million vendors will be able to accept Bitcoin as payment in 2021.?
Visa is looking ahead ?to a world of digital payments.?
Standard & Poor and Dow Jones Indices are?looking ahead ?to a world of crypto.?
Even the United States Office of the Comptroller is now allowing federally chartered banks to?provide custody services ?for crypto assets.
Meanwhile, my former employer, Massachusetts Institute of Technology is?helping to build? the Lightning Network, a lightweight scaling solution for blockchain networks that will allow for speed of payment and small purchases with Bitcoin and other crypto assets.?
Additional adoption is coming from countries with predatory governments.?These are places that have seen high levels of inflation and hyperinflation.??
When sovereign currencies experience high inflation, Bitcoin becomes quite attractive. This is because Bitcoin has the ability to store wealth while also being highly portable, concealable, and seizure resistant. We can see this playing out in Turkey which is currently the 12th most popular country in terms of Bitcoin exchange visits.
The chart below shows the Bitcoin price denominated in Turkish lira. This looks similar to a chart in USD, except the denominator keeps depreciating, causing the Bitcoin price in Lira to explode to new all time highs.
Credit: Nic Carter, Coin Metrics
Additional currencies where Bitcoin has already hit new highs since 2017 include the Argentine peso, the Russian ruble, the Venezuelan bolivar, the Brazilian real, the Columbian peso, the Lebanese pound, the Sudanese pound, and several others. These countries alone account for 523 million people.?
Other countries topping rankings include those burdened by onerous capital controls like China and Ukraine.?
The bottom line is Bitcoin is a global asset.?And there are real catalysts worldwide driving everyday savers to escape their local currency as they look for stable stores of wealth.?Bitcoin isn’t really intuitive in America just yet.?However, Bitcoin’s value prop is easily seen in places?like Venezuela that have experienced recent hyperinflation.?
Credit: Lyn Alden Investment Strategy
I think we get the point.?There seems to be quite a few reasons for there to be demand in the space.?We know that supply is locked. We can see in the data that holders of Bitcoin are increasingly holding for longer periods of time. We can see an industry forming around Bitcoin and Blockchain.?And we have a macro backdrop (long term debt cycle & interest rates) that indicates the timing is right.?This is clearly a bullish picture for Bitcoin in the coming years.?
What Problems does Bitcoin Solve?
To further expand on Bitcoin’s value prop, let's look into the future and think about some of the problems that Bitcoin potentially solves for the world.
We can talk about inflation for days and why it’s a problem for society.?We’ll keep it brief here by simply saying that a monetary system based on inflation primarily benefits those closest to money creation and those holding assets like stocks and real estate.?This is because those that receive newly created money first (banks, corporations, wealthy individuals) are able to spend it and invest it before prices rise in the economy.?Those impacted by this are the middle and lower class that do not have assets.?These folks are often on fixed incomes. When prices of goods and services rise, they get squeezed.?Simply put, inequality in America is created and exacerbated by our current monetary system which is built on fiat currency and inflation.
A way to think about this could be to simply ask yourself the following question: would you prefer to live in a society of 100 people where 1 person gets to control the supply of money, and that person is not you??Or would you rather live in a society where nobody gets to control the supply of money? If you prefer option #2, you prefer Bitcoin.?It is worth noting that our current monetary system started on a Gold Standard, which is very similar to the structure that Bitcoin provides.
History and human behavior tells us that when we allow people (via government) to control the supply of money, we get corruption.?
Here is a visual of how money flows in society. The reason gold is at the top of the pyramid is because gold is the asset that all monetary systems have been built off of throughout history.?
Credit: Robert Breedlove, Parallax Digital
Below is a quick visual of inequality in America.?The graphic only goes out to 2019.?A recent report by bloomberg indicates that the 50 richest Americans now control more wealth than the poorest 165 million Americans.?
Below we can see how wealth gaps continue to widen in America.
To be clear, I am not trying to say that our monetary system is the only reason for these profound wealth gaps. There will always be winners and losers. We just want to level the playing field for all.?But I do think that if you want to fix the system, you first need to get rid of the system that is at the root of many of the issues.?For example, maintaining the current structure and solely focusing on education will not get the job done.?Ideally, we would focus on both.
2. Fiscal Responsibility. Less Debt.?
Bitcoin is a hard money asset that is programmatically scarce. There will only be 21 million Bitcoin ever in existence.?This means that it cannot be created out of thin air like the dollar currently is.?We’ve printed $5 trillion dollars in the US since March.?With Bitcoin, we would never be able to get in a situation like this.?Money printing is necessary because we have mountains of debt in America.?If we did not print currency, create debt, and bail out failing businesses, the global economy would enter a downward spiral.??
Bitcoin would encourage fiscal responsibility.?Credit would be maintained at manageable levels.?We would not see debt cycle booms and busts as we have over the last 50 years.
Here are a few charts to visualize debt levels currently in America.
Source: Federal Reserve of St. Louis
Total debt in America has exploded since we came off the Gold Standard. We have added $78 trillion in debt since 1978.?$78 trillion.?
And here is a look at government debt to GDP.
Source: Federal Reserve of St. Louis
America’s debt to GDP is currently almost 140%.?This is higher than during WWII.?Back then, we ended up with a new monetary system via the Bretton Woods agreement in 1944.?And we know from history that reserve currencies and the long term debt cycle typically last 75-100 years.
3. International and Domestic Payments.?
Bitcoin can be sent all over the world, at any time, and on any day of the week. Without a bank.?Bitcoin does not take weekends and holidays. Our current system has banks in the middle of every transaction, syphoning fees, and slowing down payments. It can take up to 2 weeks to send money internationally. It can take days to transfer funds domestically.?It takes multiple business days for me to transfer funds from my bank account to my brokerage account.?It takes less than an hour to move Bitcoin anywhere in the world.?
Bitcoin is an international, non-sovereign asset.?This means it can facilitate worldwide commerce with no foreign exchange calculations needed, facilitating a level playing field for emerging markets all over the world.
Here is a quote from Mark Carney, Governor of the Bank of England at the time (2019):
"The dollar's influence on global financial conditions could similarly decline if a financial architecture developed around the new [digital currency] and it displaced the dollars dominance in credit markets. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies."
4. Bitcoin Stores Energy and Time.?
Fiat currency steals energy and time.?Think about it - you work your tail off to get dollars so you can feed your family and put a roof over their head. Maybe go on a vacation once/year.?Meanwhile, your currency is losing value. You have a leaky bucket.?Your time and energy are are being stolen from you. Think about it this way: at 3% average inflation, the dollar loses half its value every 24 years (or 36 years @ 2%). We sacrifice our time and energy to ultimately produce income, so that we can work less.?And that income is disappearing in purchasing power via a hidden tax: inflation.?Therefore, Fiat currency steals time and energy from the people using it. Is it possible the phrase "time is money" will become "time is bitcoin" in the future? Our work, expressed through the time and energy we invest, must be encapsulated in what we produce. This cannot be the case with Fiat currency because of inflation. Bitcoin's scarcity therefore preserves time and energy.
5. Bitcoin Fuels Innovation.?
Why has the government printed $5 trillion since March? They are trying to save failing businesses.?These companies have high debt loads.?We won’t get into the why of that here, but because these debt levels are so high, it makes companies fragile and susceptible to a liquidity trap in a recession.?If they cannot access liquidity, they have to layoff their workforce. Which means that folks have less to spend in the economy. Which means there is less money moving in the economy, leading to a recession or depression.?The government is backing these companies with further debt creation to prevent a massive deleveraging event.
This seems like the right thing to do, right? It is humane and necessary - we won't argue that point. However, I think we all understand that you cannot solve a debt problem with more debt.?If I cannot pay my mortgage, does it make sense for me to get another credit card to do so? Or should I downsize my home. The government refuses to downsize. To take the pain pill.?They would rather kick the can down the road, create even more debt, and cross their fingers that an even larger crisis doesn’t come in the future.?This feels more like hope than a sound strategy.?
What is actually happening here is the government is stifling innovation and creative destruction when they do this. They are keeping zombie companies alive. While it sounds harsh, these businesses are supposed to fail.?This makes way for bright entrepreneurs to fill the gaps of society. To create products and services that people actually want.?Which creates jobs, tax revenues, and productivity.?
To wrap up the value prop, I think we can see that Bitcoin offers plenty of value for society. It potentially solves real problems. It's just that many of us have trouble seeing these problem because they are 2nd and 3rd order consequences of a malfunctioning monetary system.?We feel these problems, but we don't see them unless we look under the hood. One day these problems will become obvious.
We could dive into much more depth on the positive implications a monetary asset like Bitcoin could have on the world, but for the sake of brevity we’ll stop here. This should give you a solid basis for the value prop of Bitcoin.??
Comparing Bitcoin to Gold
Bitcoin is often described as digital gold.?I think this is a largely accurate comparison.?Here are the similarities:
Where do Gold and Bitcoin differ?
Could Bitcoin Capture Golds Market Cap?
At a price of $19,000 per Bitcoin with $18.56 million coins in existence, Bitcoin’s current market cap is roughly $350 billion.?Gold's market cap is roughly $9 trillion.?It would take about a 25x from current levels to get there.?Many believe this is possible in the next 5-10 years.??
Bitcoin’s market cap currently makes up about .18% of the world's Bond and Equity markets ($200 Trillion).?With that said, if just 1% was moved into Bitcoin, the market cap would jump to approximately $2.5 Trillion, or about 28% of gold’s market cap.??
If 5% of the Bond and Equity markets moved over to Bitcoin, the market cap would jump to $10 Trillion and surpass gold. And if 10% of the world's Bond and Equity markets moved over to Bitcoin we would see a market cap of $20 Trillion, or close to $1 million per Bitcoin. These scenarios are obviously pure speculation. This simply helps us to think about the amount of investment required, relative to assets on the market, for Bitcoin to capture golds market cap.
And when we understand that 15% of the world's Bond Market is currently offering negative interest rates, it is plausible to think that investors will begin looking for additional options to store their wealth.?Hint: they already are.
Could Bitcoin be a Reserve Currency?
It is my belief that Bitcoin does have the potential to be the reserve currency of the internet, and therefore the world.?With that said, this possibility would likely be decades away, and the probability is still very low at the present moment.??
Bitcoin is currently too volatile to be a medium of exchange. Many will look at Bitcoin and immediately write it off for this reason.?However, any asset that has accrued massive amounts of value has had high volatility. It just comes with the territory.?We can look at Amazon and Tesla for recent examples. Amazon lost 90% of its value over a two year period early on. Tesla’s market cap has grown from $85B at the start of 2020 to $560b today.?That’s a 6.5x return in less than a year. Will Tesla likely snap back to reality at some point? Absolutely.?But that doesn’t mean Tesla is no longer a strong company in an emerging industry.
It is my belief that if Bitcoin continues to gain adoption, and people are holding it for long periods of time (which the data shows is happening) that the volatility will level out.?This is certainly unknown, but the point is that volatility today should not be viewed as a non-starter when thinking about the future for Bitcoin.?
Many folks will look at Bitcoin and immediately write off the idea that a digital asset has any staying power whatsoever. They will not move past the fact that it is intangible.?However, these same people used to store their photos in physical photo albums.?They used to store their paper files in filing cabinets.?They used to do their marketing on billboards.?They used to do their shopping in stores.?They used to do their reading from the newspaper. They used to use checkbooks. And they used to have business meetings in an office.?
The point is, many aspects of our lives have become digital. Yet we seem to be completely unimaginative when it comes to money. Money will always be the same when everything else around us is becoming digitized? I find this hard to believe.?
Furthermore, as previously mentioned, the United States and many countries around the world are currently exploring Central Bank backed digital currencies. This could potentially be the gateway to mass adoption for blockchain technology.?Citigroup recently announced they are helping Central Banks around the world develop digital currencies.
To imagine a world of Central Bank backed digital currencies, I think we first have to imagine a world where our current financial system has a rather tumultuous demise.?Central Banks are looking into digital currencies because they are well aware of the amount of debt in the world. They are well aware that negative interest rates do not make any sense and cannot go on forever. They are well aware that we have a banking system that is “too big to fail.” They are well aware that Covid has massively accelerated the move to a digital world. Central Banks can see the big move coming and are likely trying to get out ahead of it.
However, if we have a major change in our global financial system, many folks will be hurt.?Inequality gaps are at all time highs in America and around the world.?The fallout from a collapse of our financial system will be painful.?Fingers will be pointed.?Do we really think that people are going to trust governments and central banks to do the right thing with a new monetary system??
Remember, this is all a trust game. Trust is at the absolute foundation of any monetary system.
Therefore, we shouldn't rule out the possibility that the people will want to disentangle government from the creation of money. Bitcoin does this.?Governments can still tax it. We can still have regulation.?We can still live in a civilized society ruled by law and order.?We would just be removing the government's monopoly on the creation of money. Something that is in the best interest for all Americans, and not just a small portion of our population.???
This is one possible scenario.?There are many others. Some folks think that we could possibly go back to a gold standard with a basket of currencies pegged to gold as the reserve asset. Again, I don’t really see this one playing out because gold has failed us in the past as well.???Here is a direct quote on the subject from the Dutch Central Bank in 2019:
"Shares, bonds, and other securities: there is risk to everything. If things go wrong, prices can fall. But, crisis or not, a bar of gold always holds value. Central banks such as DNB have therefore traditionally had a lot of gold in stock. After all, gold is the ultimate nest egg: the trust anchor for the financial system. If the entire system collapses, the gold supply will provide collateral to start over. Gold gives confidence in the strength of the central bank's balance sheet. That gives a safe feeling."
At the end of the day, we do not know what the future looks like. But we do know that changes are coming.?History tells us that monetary systems change.?History also tells us that the world goes through massive structural shifts in terms of technological innovation and how it impacts societies.?It is therefore perfectly reasonable to imagine a future where our money is digital.?Will it be Bitcoin or in some other form? Only time will tell.?
Thanks for reading along.?My next post will drop on Friday and will objectively cover all of the naysayer arguments:
The analysis presented here is for informational and discussion purposes only, and does not constitute investment advice.??
CEO at Spathion DePIN
8 个月Triple entry accounting: One of the greatest inventions of Accounting in the last few centuries. https://www.dhirubhai.net/pulse/triple-entry-accounting-one-greatest-inventions-last-few-mm?utm_source=share&utm_medium=member_android&utm_campaign=share_via
Finance/Markets/Crypto General Counsel
3 年And thank you for your DM with your insights :)
Finance/Markets/Crypto General Counsel
3 年I am looking forward to your next write up with the topics you mentioned especially Bitcoin manipulation, volatility and security. This part was very well written. Well done.