Bitcoin Basics
It is well enough that people do not understand our baking or monetary system, for if they did, I belive there would be a revolution before tomorrow morning.
-Henry Ford on banking
The most powerful attribute of bitcoin is self sovereignty.
Similar to cash, you do not need any central service or authority to complete a transaction. You can take, move and travel with all the wealth you wish without anyone’s permission. Unlike cash, you can move your bitcoin across the world in a second.
Conceptually, bitcoin is a digital ledger that exists on top of the internet. When you buy, sell or send bitcoin, you are making entries into this ledger that associates your bitcoin with your keys. Everyone can see this entry and everyone (who runs a full node, more on that later) has a copy of this. This entry is anonymous but can be traced back to you unless you take additional steps.
Bitcoin, The ASSET –
Represents a hard capped supply of tokens with a predetermined and non discretionary rate of issuance. Bitcoin represents the first engineered monetary system that is governed by rules instead of rulers. This monetary system has been willingly accepted by millions of people globally as a preferred alternative to the local system they are born into that is often enforced through violence.
Bitcoin has been classified as Property by the IRS in 2014 which means capital gains is imposed when selling bitcoin for dollars. We do not recommend the trading of bitcoin but instead focus on converting all the wealth you want to retain for the future into bitcoin. Consider bitcion as the best performing asset of the decade therefore there is nothing to trade it for.
In the coming decade bitcoin the asset will follow the fundamentals of supply and demand. As a billion users move their monetary energy into the asset, as corporations adopt a bitcoin standard and as municipalities and central banks adopt bitcoin we will see the value continue to increase. This price discovery is almost guaranteed to be volatile but our choices are volatile appreciation or steady devaluation.
Bitcoin, The NETWORK
Represents the most powerful computing network humans have ever built. This allows us to instantly transfer value over the internet, any where in the world without a trusted third party of central authority. This network is operated by Nodes and Miners who have chosen to participate out of free will and economic opportunity.
NODES are small and simple computers that store every transaction of the bitcoin network and run the bitcoin core software. These nodes ensure that all transactions and other nodes are operating within the predetermined rules of the software. The network is designed purposefully so that anyone with an internet connection and $100 in computer hardware can run a node and verify transactions and the the total bitcoin supply.
MINERS are specially designed computers known as ASIC’s which combine energy and computation to ‘mine’ bitcoin the asset and secure bitcoin the network. Bitcoin represents a monetization of energy and can be considered ‘backed by energy’ similar to how the dollar was ‘backed by gold’ then ‘backed by the US Military.’ Energy is a critical part of the progression of civilization and bitcoin is helping humans find the most economical ways of producing energy and salvaging stranded energy.
In the coming decade, bitcoin the network will provide the most innovation for humankind. On top of this monetary network will be layers that provide instant and free transactions, payment streaming, messaging, content production and so much more.
Total Supply
There will only be 21 million bitcoin ever created. Each bitcoin is divisible into 1/100 million units which are known as satoshi. Currently 87% of total bitcoin have been minted.
Rate of Issuance
Bitcoin follows an exponentially decreasing rate of issuance through ‘four year cycles’. Upon bitcoin’s launch in 2008, there were 7,200 bitcoin created every day. In 2012 this was cut in half to 3,600 and in 2021 there are 900 created every day. This cycle will continue until the final bitcoin is created in 2140. However, this final bitcoin, number 21,000,000 will take nearly 40 years to mine!
Bitcoin Mining
Mining is performed by specialized computers known as ASIC’s which perform computational work to solve advanced algorithms which form a new block in the chain. In essence these computers are playing a very advanced guessing game which is hard to solve but easy to verify. When a computer gets the right answer, it is rewarded with the current block reward and receives the fees from all the transactions that are finalized in the block.
Satoshi Nakamoto
The pseudonymous founder/discoverer/creator of bitcoin. In October of 2008 Satoshi published a whitepaper amongst an online cryptography forum detailing how he had solved the primary issues with decentralized digital cash, double spending aka the byzantine general’s problem. In January, 2009 he published the source code to github and a few weeks later the network went live. For nearly 2 years bitcoin existed amongst a small subset of cryptographers with no monetary value. Then, on May 22nd in 2010 the first transaction with bitcoin was made when 2 large pizzas were purchased for 10,000 BTC. IN ______ the first exchange listed bitcoin and on _____ bitcoin reached dollar parity.
Exchange
A liquidity provider where you can swap your dollars for bitcoin. These are typically centralized services requiring identity verification but there also exist decentralized peer to peer services.
Custodian
A centralized service which holds your bitcoin and provides an IOU and exposure to bitcoin price. This situation should be avoided at all costs as you are open to counterparty risk. True bitcoin provides self sovereignty by removing the need of trusted third party or central authority.
Keys
Your private and public keys are how you send and receive bitcoin. Your private keys are represented by a 12 or 24 word phase, which in turn represents a SHA256 binary string. These words provide access to your funds anywhere in the world without the need of anyone’s approval.
Wallets
Hot Wallet:
This is a wallet connected to the internet, typically an app on your phone. This wallet will sign your transactions to send and receive bitcoin with a single step while being connected to the internet. It is a convenient way to manage your transactions but provides more risk.
Cold Wallet:
These are hardware devices that hold your private keys and require multiple steps to sign transactions. Typically you will build the transaction on an internet connected device, send the transaction to your key via bluetooth or sd card, add your signature, then transmit to the internet. These offer higher security but less convenience.
Cantillion Effect
During monetary expansion or ‘money printing’ those with privilaged access to the new money benefit the most while those furtheset from the money printer experience the negative effects of inflation the most.
Typically asset prices experience the most inflation, things that are scarce while many consumer goods prices are kept low due to technological deflation. Ultimately asset owners see continued increase in wealth while non asset owners find themsleves priced out of homes, stocks, bonds and more.
Stock to Flow
A Stock to Flow(SF) measures the scarcity of an asset. The ratio of the current supply or ‘stock’ compared to its growth rate or ‘flow.’ Gold has a flow of approximately 1.6% annually which means it will take 62 years to double the current supply of gold. This represents the hightest SF of any monetary commodities.
Currenty (2021) bitcoin has a stock to flow of 56 and following the 2024 halving the SF will increase to 94. This will make Bitcoin the most scarce monetary asset in the world and this analysis predicts a total market value of $5.5T.
Stock to Flow – Value through Scarcity
Stock to Flow – Cross Asset Model
Bearer Asset
Bearer Assets are investment instruments that are not tied to specific or underlying debt. Most assets such as stocks, bonds, homes and even dollar bills, are the physical side of a debt.
Stocks certificates are liable to company debts.
Bonds are debts to be repaid.
Homes have mortages.
Dollars are debts issued from the treasury.
The primary two bearer assets today are physical gold (bullion and coins) and self custodied bitcoin.
Bitcoin is a digital bearer asset, the only in the world. Not only is it free of any underlying debt or counter party risk, it is also dematerialized on the internet able to be transfered anywhere at anytime.