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Bitcoin: A Short Summary

Bitcoin: A Short Summary

It’s been 5 years since I became exposed to Bitcoin and the cryptocurrency industry. In that time, I have begun to better understand what Bitcoin and  crypto are. Bitcoin has become too large to ignore, with its over 1 trillion-dollar value and millions of users worldwide. Though I’m not an expert, I’d like to share what I’ve learned about Bitcoin and cryptocurrency.

What Bitcoin Is

  • Bitcoin is speculative. It’s a virtual (as in, not something you can touch) coin that can be traded between people. As such, Bitcoin is prone to speculation as people decide what the price of Bitcoin is worth.
  • Bitcoin is a hedge against inflation. It has a limited supply and is deflationary, meaning that the amount of Bitcoin created over time will decrease. With the number of Bitcoins that will ever exist capped at 21 million coins, over time the value of Bitcoin may rise. This means that Bitcoin could be added to financial portfolios to help balance out the ups and downs of other financial products. In other words, Bitcoin could be used to help diversify our risk as we invest in many financial products.
  • Bitcoin is a new asset class. An asset class is a group of similar financial investments that are regulated with similar rules. Examples are stocks (equities), bonds (fixed income), land, and the money market. Bitcoin was initially proposed as a new type of money, and while it can be used as money to pay for things, Bitcoin has spawned a new ecosystem of new companies, new opportunities, and new applications.
  • Bitcoin is a new store of value. Some people believe that it could be a replacement or an alternative to gold, to which it shares similarities and even some advantages. Bitcoin is portable (gold is very heavy), easily divisible (each Bitcoin can be divided by 100 million), durable (gold can wear away), fungible (Bitcoin has been proven to be interchangeable), and verifiable (the Bitcoin ledger is an open database and can be viewed by anyone).
  • Bitcoin is finite. While gold is scarce, there is always a possibility of more being found, perhaps even on asteroids. However, Bitcoin is capped at 21 million coins; no more will ever be created.
  • Bitcoin is a new high-risk asset. Lately, Bitcoin has become highly correlated to NASDAQ technology stocks. During times of higher inflation and higher interest rates, these technology assets have become risk-off, meaning that investors are selling their high-risk assets. This has meant that investors have also sold off Bitcoin, as it is also viewed as a high-risk asset perhaps even higher risk compared to the technology stocks so it will be sold first.
  • Bitcoin is a new protocol. A protocol is a technology that runs under the hood for a process or thing to work. For example, when we send an email, we use the Simple Mail Transfer Protocol (SMTP), and when we use the Internet, we use the TCP/IP protocol. Bitcoin is not only a coin to trade between people; it’s also the name of a new protocol that allows for the transfer of something digital (the Bitcoin coin in this case) between two people without the need for an intermediary (like a bank) to help facilitate this transfer.
  • Bitcoin builds trust in a trustless environment. This new protocol showed us for the first time how we could now transfer something safely even when we are in an environment that isn’t trusted. 
  • Bitcoin is just code, like Google is code and Microsoft is code. When you purchase and hold Bitcoin, you are investing in the ownership of the Bitcoin protocol and participating in owning the value in the Bitcoin code.
  • Bitcoin is a new type of energy. Electrical energy is the movement of electricity from potential energy (in a battery) to be used at an endpoint (like a lightbulb). Bitcoin represents a new form of energy called digital energy. The Bitcoin coin, when saved in your wallet, represents the potential digital energy stored, as it’s not moving. When Bitcoin is moved to another wallet, or in other words, when a transaction is made, this digital  energy is transferred to a new wallet. 
  • Bitcoin is open (source code is open for anyone to view), public (you don’t need to sign up with an account to use it), borderless (not restricted to any country), neutral (anyone can use it) and censorship resistant.

What Bitcoin is Not

  • Bitcoin is not a stock. A stock is part ownership of a company, and how that company makes or loses money will determine the value of the  company and therefore the price of its stock. When you own Bitcoin, you are not part owner of a Bitcoin company. Bitcoin has no president or owner. 
  • Bitcoin is not a company. The creator of Bitcoin wrote the initial code back in 2008 and brought together the various technologies that run the Bitcoin protocol. They gathered a group of developers to help support the Bitcoin code, to whom the creator left the code to after two years. But what’s most interesting is that the Bitcoin coin and the Bitcoin protocol can keep running with minimal input and support from anyone. No person or company supports or protects Bitcoin, as it has been built in such a way that it protects itself. Bitcoin has built-in mechanisms to reward people to help participate and support Bitcoin which means that Bitcoin can potentially continue in this way indefinitely.

Why does Bitcoin have Value then?

As you can see, Bitcoin isn’t just one thing. It represents something different to many people and it is continually evolving. Its value is dependent upon your view of Bitcoin.

If you see Bitcoin as only having wild swings in price where it can go up and down by $1000 or more in an hour, you will treat Bitcoin as speculative and perhaps hold it when it’s Risk-On and sell it when it’s Risk-Off. Bitcoin will not be stable for you because of these wild price swings, but it could be an opportunity for you to trade the market on a daily basis to eke out a profit. It is then considered fun, like gambling.

But if you see Bitcoin as a new asset class, like land, then your take on Bitcoin might be very different. You may not be willing to sell or trade Bitcoin if  you have this view. For example, if your great-greatgrandparent had owned land in Manhattan New York in the 1800s, it would have been smart for them
to keep that land, rent it out and never sell it. They could have instead willed it or given the land to future generations to continue renting the land and  make more money off of it as the land increased in value over the years. As Bitcoin is purchased and held, it could also become like land you hold and don’t sell, borrowing against it, lending out to earn interest, and willing to future generations. Bitcoin is then considered very scarce and something to hold onto and never sell.

And for those that see Bitcoin as code and a new protocol, it will be an opportunity to invest in a new paradigm shift to help change how the world can safely store and transfer data on the Internet. Bitcoin is a revolution that will (and has) spawned new ideas and new technologies. Since 2008 when Bitcoin was created, there have been many thousands of new crypto blockchains created which all owe their ideas to what Bitcoin first started.

There will only ever be 21 million Bitcoin in existence. It’s been suggested that roughly 3-4 million Bitcoin have already been lost due to forgotten  passwords or discarded computers that held Bitcoin. Based on these numbers, there is not a lot of Bitcoin to go around for the 8 billion people in the world. Although Bitcoin is divisible so it can still be used and traded by many people, doing the math means the price of Bitcoin will be impacted by the more people that want to own even a small amount of Bitcoin and/or use Bitcoin (basic supply and demand). Financial institutions and large companies have also begun to participate in owning Bitcoin, further reducing the supply.

In summary, Bitcoin is very scarce and could potentially become very valuable the more people see a need for it.

My View of Bitcoin

Bitcoin, for me, is amazing. There has never been anything created on the Internet like Bitcoin. Bitcoin is a paradigm shift (a new and fundamental  change in how something is done) in how we can use the Internet to move and save data. It has been designed in such a way that it can’t be easily taken over or hacked, as it is a distributed system of databases running on many thousands of computers around the world. This means that, unless you shut down the Internet, it’s nearly impossible to shut Bitcoin down. And with Bitcoin's current total value hovering around 1 trillion dollars, you can bet that every day someone in the world is thinking about how they can hack the Bitcoin protocol. How many times have you heard about a company’s database being hacked and our client data has been stolen? Bitcoin isn’t one database therefore it can’t be easily hacked. So far, it has never been hacked or compromised, and based on its design, I don’t know how it could be.

Bitcoin is more than just a store of value or digital gold. It is the first global, private (non-government), open source, digital rule based monetary system built on the Internet. When the Internet was first created, a payment ecosystem was never thought of or put in place. The Internet initially was for defense, intelligence, and academic purposes to share and transfer information. The Bitcoin protocol and blockchain technology proved for the first time that a payment ecosystem could work on the Internet.

Despite all these positives, Bitcoin is unfinished and is still in its infancy. I see regulation by governments coming in to give structure to how Bitcoin can and will be used in the future. This will provide the stability companies and institutions need to feel like they can safely participate in owning and using
Bitcoin. As more people own and eventually use Bitcoin, the fluctuations in price will stabilize, allowing Bitcoin to become a more stable asset that people can trust.

I plan to diversify my financial portfolio by owning Bitcoin in addition to owning stocks, bonds and various ETFs. I plan on participating in the new services being created around Bitcoin, one day I will borrow against my Bitcoin, and have my loan automatically paid off by the interest I earn on my Bitcoin collateral.

Conclusion

I’ve barely scratched the surface on Bitcoin, and I haven’t talked about other cryptocurrencies or NFTs. This “crypto” space is a very rich environment with a lot of new ideas and projects all working hard to deliver new solutions.

I don’t need you to love or hate Bitcoin, but I don’t want you to ignore it. My hope is that this post will get you thinking about Bitcoin and become aware of its constant evolution.


References

Here is a collection of sources that have helped me understand Bitcoin better. If you want to learn more about Bitcoin and the Blockchain, I would encourage you to explore their content.

Andreas M. Antonopoulos:
https://www.youtube.com/c/aantonop/featured
Kevin O’Leary:
https://www.kevinoleary.com/
https://www.youtube.com/KevinOLeary
Anthony Pompliano:
https://www.youtube.com/c/AnthonyPompliano
Michael J. Saylor:
https://www.michael.com/
Cathie Wood:
https://ark-invest.com/
https://www.youtube.com/c/Arkinvest2015/videos

Credits

Edited by Ashley McCrea