Why Care About Bitcoin
Bitcoin priced at $23,200 on 12/23/2020
Starting off with lots of 1s, 2s and 3s folks. A multi-part series.
Bitcoin ($BTC) is a nearly infinitely divisible digital asset secured by a complex mining procedure which takes place on a digital ledger better known as the blockchain. One Bitcoin is made up of many smaller parts called Satoshis. A singular Bitcoin can be divided up into 100,000,000 Satoshis. This allows anyone with any dollar amount to own a piece of a Bitcoin. For example if you had $100 and you wanted to buy Bitcoin as of writing you would be purchasing 424,355 Satoshis or .00424 of a Bitcoin.
Bitcoins are the product of a decentralized mining network which produces blocks of transactions in the size of one megabyte roughly around every ten minutes, thus creating the blockchain. Every time a block is added the miner/s are rewarded with a certain number of Bitcoins. Put simply, a block is just a list of transactions that have occurred in a set period of time which all other miners in the universe agree on. Without getting too much into the weeds on mining (link to learn more) the Bitcoin network has solved the double spending problem and prevents the “counterfeiting” of Bitcoins. The amount of BTC a miner is rewarded diminishes over time, this is one of the built in scarcity aspects of Bitcoin. Eventually, on or around May 7th 2140 the last Bitcoin will be mined and the supply will be fixed at 21,000,000, forever. Bitcoin is a closed system you can’t get a shovel and dig down to get more.
A thing to take note of: All of this mining is happening with digital computations as opposed to below ground physical mining of gold.
What is the significance you might be asking? Well, there is built in scarcity and if you want to run a quick thought experiment read on:
How many people are on earth? 7.8 Billion. About 19% of the world’s population lives in “first world” countries which is around 1.5 billion people. So let’s assume conservatively that 1 billion people could relatively easily buy some Bitcoin and while remembering that there are only ever going to be 21,000,000 Bitcoin available. That means out of all of the people residing in the “first world” only 2.3% of this population can ever even own one whole Bitcoin. This does not even take into account the fact that around 10% of Bitcoins are lost forever, meaning individuals lost their private key — like this poor man who threw away his hard drive on accident with 7,500 Bitcoins attached to it. His Bitcoin would be worth — as of writing — around $170,000,000.
With all of that being said one of Bitcoins other main value propositions is its extreme portability — anyone with a smartphone can theoretically purchase Bitcoin. You are now probably wondering how many smartphone owners exist on earth; I will tell you because I am your trusty Bitcoin guide. As of writing about 45% of the world population owns a smartphone or 3.5 Billion people. For many folks living outside of first world countries Bitcoin has an even better value proposition, it can become their digital bank in cyberspace which is resistant to government take over, inflation and currency devaluation (see Zimbabwe). So taking into account that 10% of Bitcoins are lost forever and there are 3.5 Billion potential Bitcoin owners on earth only .05% of folks in this category could own one Bitcoin. Exciting, dizzying, intriguing? I think so. This is just a small piece of the puzzle though as big money managers are starting to take notice.
Let’s get into institutions who are purchasing bitcoin or allowing Bitcoin to be purchased. We can start with the recognized digital currency asset management leader, a behemoth in the space called Greyscale (owned by The Digital Currency Group). Greyscale calls 500,000 Bitcoin their own (worth about $11.5 billion usd) and is projected to own about 3.4% of all Bitcoins by next year with no intent on slowing down their purchasing. GreyScale will likely be the largest money manager in the world in the next 5–10 years.
Corporations are also starting to purchase Bitcoin.
Bullet pointing out some key institutional Bitcoin participation in the last 90 days:
- MicroStrategy, $MSTR, trading at $337 — Micheal Saylor who in my opinion is creating the newest and biggest channel for other corporations and money managers to follow into Bitcoin. He has put around $500 Million of MicroStrategies corporate balance sheet into Bitcoin, now worth over $1 Billion USD. For the ultra curious or the insomniac I recommend listening to his historical deep dive multipart series on Youtube here with Robert Breedlove.
- Square, $SQ, trading at $230 — Bought $50,000,000 worth of Bitcoin in October. On top of that they now allow users to buy and sell BTC on their Cash App. Something to note is Bitcoin purchases on Squares Cash App have accounted for 80% of the Cash Apps revenue in 2020, generating $1.6 Billion. Jack Dorsey has created an open source Bitcoin project squarecrypto.org and believes Bitcoin will become the global reserve currency.
- PayPal, $PYPL, trading at $239 — Users on PayPal are said to have bought 70% of all new Bitcoins in November. With 286 Million active users it’s no surprise they are already having a big impact on the market. Dan Schulman PayPals CEO owns Bitcoin and is bullish on its growth as a world reserve currency.
- MassMutual, a 169 year old life insurance company put in $100 Million as well earlier this month… Nothing to see here folks, Bitcoin is definitely a pyramid scheme.
How does Bitcoin compare to the older storer of value, Gold? Gold has an inflation rate of 2% a year, once the price of Gold goes up miners are incentivized to get out and dig, invent new gold mining technology and potentially lasso a meteor full of it to bring back to earth (theoretical). Gold is pretty heavy, it is also very noticeable; if one was fleeing a dictatorial or malicious government it would be very easy to spot in your suitcase at the airport and then be hastily taken from you. If you, say own a large amount of Gold and would like to move it with you to a new location say from California to Texas it might cost $15,000 to rent an armored truck and transport it, which isn’t terribly bad. But if you want to move it across the ocean or globe that gets exponentially more expensive, time consuming and dangerous. Bitcoin solves all of Gold’s shortcomings. It has a definite limited supply (can’t mine more than 21,000,000 coins), it is extremely portable (digital internet money) and is government/nationstate resistant. This is fun!
So how many of these Bitcoins currently exist? As of writing in Q4 of 2020 there are 18,555,125 with a Max supply once again of 21,000,000. And as you learnt a few paragraphs ago new Bitcoins are minted when blocks are mined so that means there are exactly 2,444,875 Bitcoins left to be mined. Unlike Gold and its difficulty to be stored, held and transferred Bitcoin is digital meaning it can be stored in a variety of ways (hardware wallet, software wallet, all in the palm of your hand or inside your brain). And because the blocks are being mined by a decentralized network no one person or entity “owns” Bitcoin. Which actually has a lot of implications; one of those being that Bitcoin can’t be “shut down”, it can’t go bankrupt and any one nation can not just turn it off. Banks historically go through a major catastrophic event every 100 years or so according to history, Bitcoin is buoyant to these events.
It will be interesting to watch and participate in the transformation of the Gold standard to the Bitcoin standard over the next 5–10 years. The market capitalization of Bitcoin is currently climbing up to half a trillion dollars while the market capitalization of Gold is at 8 trillion. It is still early and there is lots of room for growth. With all that being said Bitcoin just reached a new all time high a week before Christmas and historically has 30% draw downs and corrections so we will likely see a drop in price before climbing higher (that is not guaranteed though) and if I were purchasing Bitcoin today I would set a 5–10+ year time horizon.
Last thoughts, Bitcoin since 2016 has a mean annual return of 363% and has beat out every other asset in the world since its founding in 2009 by the anonymous Satoshi Nakamoto. There has never been a technology that has emerged in a 10 year time frame that reorganized the financial world so quickly. As Micheal Saylor says: Bitcoin is a thermodynamic monetary system that will store and channel energy without power loss. It is a closed system — there will only ever be 21,000,000 Bitcoins, you won’t be able to dig the earth to find more. Compare Bitcoin to the invention of Carnegie Steel, the John Stevenson Railroads and Standard Oil.
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