Bitcoin is back in vogue, so I decided to write about it. As of November 11th, 2024, Bitcoin surpassed silver in market cap. The price of 1 BTC blew past $88K this week, and the price action caused BlackRock’s spot bitcoin ETF to generate $4.5 billion in daily trading volume. This is what most headlines focus on (price action), but Bitcoin represents so much more.

This is deeply personal to me, as Bitcoin was the reason I started to explore blockchain and crypto more deeply. Because of the personal nature of this post, I must stress that the views and opinions hereafter are solely those of the author and do not necessarily reflect those of the author's past or current employers. Bitcoin is volatile and not suitable for everyone. This is not financial advice, and readers should conduct their own research.

What is it?

The Bitcoin network is a distributed system of computers and nodes that enables you to send and receive value to anyone in the world using a computer and an internet connection. The network has secured trillions of dollars of value, processed trillions of dollars of transaction volume, and maintained 99.989% uptime since 2009 without any intermediaries.

The asset on this network is called bitcoin, which is the native token of the system (the one with a market price). For the first time, we have a globally accessible, scarce, non-sovereign public form of capital that can’t be inflated away due to its hard-coded supply cap of 21 million units. Bitcoin (the asset) has outperformed all major asset classes in 7 out of the last 10 years, leading to returns in excess of 100% over the last decade.

Why should you care?

Bitcoin's unique combination of monetary characteristics, particularly its enforced scarcity and decentralization, position it as a compelling store of value asset (“digital gold”). Bitcoin's network effects, resilience, and fundamental innovation in solving the problem of digital scarcity make it difficult to replace or copy.

To appreciate Bitcoin's significance, it's essential to understand the evolution of capital. Capital represents economic potential energy (e.g. deferred consumption), serving as the driving force behind economic growth and human flourishing. We think of capital today as fiat money, a social technology that has evolved over millennia to facilitate trade, store value, and serve as a unit of account. Bitcoin represents a new form of first-layer money—digital, decentralized, and without counterparty risk that combines the desirable properties of physical commodities with the advantages of digital technology (read “Layered Money” by Nik Bhatia or see “The Layers of Money” in the Appendix for more detail)

Fiat money (e.g. USD) and its reliance on trusted intermediaries—banks, governments, and financial institutions—has been both a strength and a weakness of the traditional fiat system. While these entities facilitate transactions and provide stability, they also hold significant power over the creation and distribution of money. The centralization of fiat money creates incentives to favor short-termism and leads to issues like inflation, currency debasement, and financial exclusion.

The US figures paint a stark picture: U.S. government deficits have doubled over the past decade to exceed 6% of GDP, while public debt has exploded to $35 trillion, or ~$107K per individual. $51 trillion in new wealth was created this decade but it flowed disproportionately to already-wealthy individuals and institutions. The wealthiest 10% of Americans to now control 60% of the nation’s wealth, while families in the bottom half of the distribution hold only 6% of wealth (according to a report from the Congressional Budget Office). Furthermore, the top 10 companies now control 36% of total stock market capitalization - the highest level since 1980.

The downsides of fiat centralization are becoming evident:

• Essential goods are becoming unaffordable for many Americans due to the erosion of their purchasing power (inflation)

• Financial decision-making power is concentrated in fewer and fewer hands

• The system's growth increasingly depends on continued government borrowing

Enter Bitcoin

Bitcoin's technical foundations—comprising the peer-to-peer network, blockchain, proof-of-work mechanism, difficulty adjustment, and cryptographic keys—collectively enable a decentralized, secure, and immutable monetary system without the need for central intermediaries. I won’t get into all of these concepts today, but I have included a “Technical Details of Bitcoin” section in the Appendix below if you wish to nerd out.

For now, just know that Bitcoin offers a monetary alternative that realigns economic incentives towards hard money and long-term capital accumulation. Bitcoin's unique positioning as a scarce, decentralized store of value asset distinguishes it from other digital assets and solidifies its role as “digital gold” (see more here). Furthermore, its utility as a global, open-source, and non-sovereign payment network is also unique.

Addressing Common Criticisms

Of course, not everyone is a fan of Bitcoin. I have attempted to address some common criticisms below, but this is by no means comprehensive (if you want a more detailed view, Fidelity did a great job addressing common criticisms here).

Intrinsic Value: Critics argue that Bitcoin has no intrinsic value because it does not generate cash flows or contribute to traditional economic production. The implication is that Bitcoin’s price movements are driven purely by speculative demand. However, this narrow definition of value is not fair or sufficient.

Instead of being backed by cash flows, utility, or decree, Bitcoin is backed by code that is brought to life through its social contract with users. Bitcoin's value stems from multiple sources: its digital scarcity and role as a non-sovereign store of wealth (similar to gold); its utility as a payments network that processes trillions of volume monthly; and its network effects that increase utility as adoption increases. Bitcoin represents a new asset class requiring different valuation frameworks (if you don’t believe me, ask Larry Fink who said: “We believe Bitcoin is an asset class in itself. It is an alternative to other commodities like gold”)

Volatility: Bitcoin's price volatility is often cited as a fatal flaw. However, bitcoin’s volatility results from its inelastic supply (21M hard supply cap) and free market dynamics (e.g. no central bank intervention). Over the past decade, there has been a significant decline in Bitcoin’s daily realized volatility (in fact - Bitcoin is currently less volatile than many S&P 500 stocks). As adoption increases and Bitcoin ETF options get approved, volatility may decrease further.

Conclusion

Hopefully this gave you something to think about. Bitcoin demonstrates that money can emerge from code and collective consensus without central authority. Perhaps you'll find that Bitcoin challenges your assumptions about our financial system, the importance of decentralization, and the power of cryptography. If you want to learn more please read some bitcoin books (recommendations here). If you enjoyed this post, please consider subscribing and sharing it with friends.

Appendix

The Layers of Money

Money has historically existed in layers:

1. First-Layer Money: Physical commodities like gold and silver coins, which have intrinsic value and no counterparty risk. They serve as the foundation of the monetary system.

2. Second-Layer Money: Promissory notes, bills of exchange, and banknotes issued by banks or governments, representing claims on first-layer money. These instruments introduce convenience and liquidity but require trust in the issuer.

3. Third-Layer Money: Bank deposits, digital balances, and credit instruments that represent claims on second-layer money. They offer even greater convenience but further increase counterparty risk.

Each layer builds upon the previous one, adding complexity and reliance on trust. Throughout history, this layering has allowed for greater economic growth and velocity of money but has also led to systemic vulnerabilities, as seen in financial crises.

Technical Details of Bitcoin

Blockchain

At the heart of Bitcoin is the blockchain—a distributed ledger that records every transaction ever made. This ledger isn't stored on a central server but is distributed across thousands of nodes worldwide. Each node maintains a complete copy of the blockchain, ensuring transparency and preventing any single point of failure.

Bitcoin achieves what previous digital currencies could not: a payment network requiring no trusted intermediaries. The system's core innovation lies in its ability to create absolute digital scarcity. The network accomplishes this through three key mechanisms:

1. Proof-of-work mining converts electricity into verifiable, undisputed records

2. Difficulty adjustments automatically calibrate the network's security to its value

3. Full-node verification ensures rules remain immutable without central control

Network security increases with value, as rising prices incentivize more mining power, which in turn makes the network more resistant to attack. Unlike any previous form of money, increased demand cannot induce increased supply.

Decentralized: No central authority controls it.

Bitcoin operates as a peer-to-peer (P2P) network, allowing transactions to occur directly between individuals without intermediaries like banks or payment processors. This restores the person-to-person nature of cash in a digital form. Each participant runs Bitcoin software (a node), which enables them to validate transactions, maintain a copy of the blockchain, and contribute to the network's security. By distributing power and decision-making across the network, Bitcoin eliminates single points of failure and control. In this trustless system, participants don't need to trust each other or any central authority—only the protocol and mathematics.

Immutable: Can’t double spend tokens; transactions cannot be altered once confirmed.

One of the critical challenges in digital currencies is preventing double-spending—the risk of the same digital token being spent more than once. Bitcoin addresses this through its consensus mechanism. When a transaction is initiated, it is broadcast to the network. Miners validate transactions to ensure the sender has sufficient balance and hasn't already spent those bitcoins. Once validated, transactions are grouped into a block and added to the blockchain, making it computationally impractical to alter past transactions. Bitcoin's immutability means that once transactions are confirmed, they cannot be altered or reversed.

Scarce: Supply limited to 21M units

Bitcoin has a hard cap of 21 million coins, a limit embedded in the protocol. However, each bitcoin can be divided into 100 million units (satoshis), making each unit divisible. The issuance of new bitcoins follows a predictable schedule, with the block reward halving approximately every four years in an event known as the "halving." This controlled supply introduces absolute digital scarcity—no matter how much demand there is or how much effort miners expend, the supply cannot be increased beyond this cap.

To maintain a consistent block creation rate (approximately one block every ten minutes), Bitcoin employs a difficulty adjustment mechanism. Every 2016 blocks (roughly every two weeks), the network recalculates the mining difficulty based on the time it took to mine the previous blocks. If blocks were mined too quickly, the difficulty increases; if too slowly, it decreases. This self-regulating process keeps the block production rate steady, regardless of changes in the total computational power (hash rate) of the network.

Finally, changes to the protocol require broad consensus among participants, preventing rash decisions and ensuring stability. Every participant has a voice proportional to their computational contribution, aligning incentives towards the network's health and longevity.

Secure: Economically unfeasible for malicious actors to manipulate the blockchain

Mining is the process by which new blocks are added to the blockchain. Miners compete to solve a SHA-256 hash function—a cryptographic hash function that produces a fixed-size output from any input, making it practically impossible to reverse-engineer. This involves finding a number called a nonce that, when combined with the block's data and hashed, produces a result below a specific target value. This process is known as proof-of-work because it demonstrates that computational effort has been expended.

The miner who first solves the puzzle broadcasts their block to the network. Other nodes verify the solution's correctness and, if valid, add the block to their copy of the blockchain. In return for their effort, the miner receives a block reward in the form of newly minted bitcoins and any transaction fees included in the block.

This mechanism secures the network by making it economically unfeasible for malicious actors to manipulate the blockchain. Attempting to alter a past block would require redoing the proof-of-work for that block and all subsequent blocks, demanding control of over 50% of the network's total computational power—a feat considered practically infeasible.

Transparent: The ledger is publicly accessible.

Bitcoin is open-source software. Anyone can view, audit, and contribute to its code. This transparency fosters community involvement and continuous improvement. It also means that Bitcoin isn't owned by any company or individual; it's a global public good shaped by its users.

Ownership of bitcoins is determined by cryptographic keys:

• Private Key: A secret number that allows you to spend bitcoins associated with a corresponding public key. It's crucial to keep this key secure because anyone with access to it can spend your bitcoins.

• Public Key: Derived from the private key, it can be shared openly. It's used to create your Bitcoin addresses and allows others to verify your digital signatures.

When you initiate a transaction, you use your private key to create a digital signature. This signature proves that you own the bitcoins being spent without revealing your private key to the network. Other nodes can verify the signature using your public key.

Bitcoin transactions use a model called Unspent Transaction Outputs (UTXOs). Each transaction consumes UTXOs as inputs and creates new UTXOs as outputs. This model ensures that all bitcoins can be traced back to their origin, enhancing transparency and preventing double-spending. When you send bitcoins, you create a transaction that specifies which UTXOs you're spending and who the new owners will be. Any leftover amount (change) is typically sent back to a new address you control.

Disclaimer

The views and opinions expressed are solely those of the author and do not necessarily reflect those of the author's past or current employers.

This material is for informational purposes only and is not intended to provide legal, tax, financial, or investment advice. Recipients should consult their own advisors before making these types of decisions. The content is based on information from sources believed to be reliable. The author is not responsible for errors, inaccuracies, or omissions of information; nor for the accuracy or authenticity of the information upon which it relies. The author has no responsibility or liability for any decision made or any other acts or omissions in connection with the use of this material.

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