If you’ve read my last few letters, you may notice a theme.
Decentralization, the economy (specifically how it works, but isn’t working), inflation, the Federal Reserve, etc.
I mention Bitcoin a few times, but never dive deep into it.
Bitcoin is about to cruise through all time highs, so this article is well overdue.
Today I am going to scratch the surface. The Bitcoin rabbit hole goes deep, and maybe we’ll start waltzing down it soon, but not today.
This is meant for you if you own Bitcoin, if you don’t own Bitcoin, if you heard some guy at a bar who wouldn’t shut up about Bitcoin, or even if you think Bitcoin is garbage but you’re an open minded individual.
This is meant for you if you think our current economic system isn’t working right, if you think the world is changing (For the better? Or worse? You decide).
This is for you if you live on planet Earth.
Are you ready?
Let’s start with the basics… If you’re familiar with this, you can scroll down a bit.
What is Bitcoin?
I’m glad you asked. Bitcoin is a “peer to peer electronic cash system,” as defined in the whitepaper (the term for basically a comprehensive rundown report) released on October 31st, 2008.
But Bitcoin is far more than just that, and we’ll get into it.
Who Created Bitcoin?
Who is Satoshi Nakamoto?
No idea. Seriously. No clue. Could be you. Could be me. Could be a group of people. It’s just a name. Some people have their guesses, but it’s anyones guess really. All we know is whoever it is, they created something incredible.
How many Bitcoin are there?
As of today, about 18.78 million are in existence. But only 21 million will ever exist. That’s it.
How do I get Bitcoin?
Buy it or mine it.
What is Mining?
Bitcoin mining is also known as Proof of Work (PoW). It is basically the process of guessing a very complex hash until you get it right and that block is mined.
In simpler terms, let’s use the ole “square peg, round hole” analogy. Except in this case, you have a ton of square pegs, and you’re searching for that round one that fits. Or rather, your computer is. Over and over and over at crazy speeds.
Mining secures the Bitcoin network. There’s a lot more I could add here, but we’ll leave it simple for now.
When will the last Bitcoin be mined?
Sometime around the year 2140.
Now that we’ve got some basics out of the way, let’s talk about what Bitcoin is and why you need it.
Bitcoin is Trustless
So let me ask you a question. Do you think our monetary system is doing great and is set up for financial prosperity for all into the future?
If you said yes, I will take one of whatever you are having, please and thank you.
I’ve discussed this in previous posts and will continue to do so, but the genesis is that our system is broken. Corruption and manipulation run rampant in the financial markets, and the financial markets run the world, for better or for worse.
Do you think a select few unelected officials should have the power to print 40% of all US dollars that have ever been printed, just in the last 24 months? I keep coming back to this because it is such a pristine example of how far we’ve gone wrong.
This shows the buying power of a dollar since the Federal Reserve was created in 1913.
One thing is certain - the US dollar is not what it used to be.
And neither is Bitcoin.
Bitcoin critics will remark how cryptocurrencies are used for illegal activities, stuff that is off the books and meant to be in the shadows.
While this may have been a piece of the truth at some point, it no longer describes Bitcoin. And let’s not forget that fiat currency is not exactly sterling in its reputation either.
Bitcoin is now the future of money. It is a system for exchanging money in a trustless way.
Trustless? Give Me An Example
Imagine I’ve got the latest release of the new Drake song on my computer. You want to hear it, so I agree to send it to you. I attach it to an email and send it on over.
But technically, I’m not sending you my music file. I’m sending a copy of the original file. I attach it to the email, you get a copy of it, and I keep my original.
But you don’t care that it’s a copy of the original because you can listen to the song anyway. It’s a perfect copy.
But when it comes to money, you need to know if I just sent you a counterfeit version or if you have the authentic file, without a third party (like a bank) verifying that.
What is Blockchain?
The name is incredibly fitting.
It’s a chain... Of Blocks... Of Transactions.
Let me explain.
Each block is a ledger, recording all of the transactions that occurred within that block.
I think the best way to understand this is to borrow an analogy from @Pomp, otherwise known as Anthony Pompliano, a big figure in the Bitcoin space (with a great podcast too).
Think of Bitcoin like playing the game Monopoly. Each player lays their money out on the table and starts playing. Everyone can see how much money the other people have, and everyone watches as transactions take place.
There’s no hiding that I landed on Broadway and have to pay you $500 (and if you could stop putting hotels on Broadway, that would be great. Thanks). The transactions are also peer to peer, there’s no intermediary or third party facilitating the transaction itself. I hand the money directly to you.
Now imagine during this game, we start recording all of the times money trades hands on a pad of paper. A new Bitcoin block is mined roughly every 10 minutes, so imagine that every 10 minutes we rip off the top sheet of the paper and start a stack of papers. Everyone gets to see what is written on this piece of paper, and we all agree that what is being written is a correct representation of what actually happened.
So now we’re 40 minutes into the game, and there’s 4 pieces of paper piled up with all of the transactions that have taken place, in 10 minute intervals. If you want to go back and see how much I paid you the second time I landed on Broadway, you can go back into the papers and see exactly what time and how much it cost me (again, please stop with the Broadway hotels).
So now you understand what the blockchain is. Instead of papers stacked on top of each other, the blocks are chained together, creating a verified ledger that we all agree upon and it’s completely transparent to all of us.
Ok, I get Blockchain, but why is it so great?
You can be in the mountains of Timbuktu, or down in the Mariana Trench, but if you have an internet connection you can buy, sell, and store Bitcoin without asking permission from anyone.
You also can sleep at night knowing that no decision from any single person (or group of people) can change the features, or monetary policy of Bitcoin. Bitcoin cannot be altered, and the blockchain is visible and accessible to everyone at all times. No decisions by the Federal Reserve changing how much your dollars are worth overnight. Impossible.
And if you think that’s cool, just you wait.
I heard something about Bitcoin chopping in half?
Every 210,000 blocks (which works out to roughly 4 years), the rewards for mining a block cut in half.
The rewards (or block subsidy) started at 50 Bitcoin per block. Today, it is 6.25 BTC per block, or roughly $369,377 dollars worth. 900 Bitcoin per day are released into the market.
Come 2024 (the next halving), only 450 Bitcoin per day will be released each day.
This creates scarcity as less and less Bitcoin come into the world everyday and it also creates an incentive for miners to mine Bitcoin and secure the network.
And like we noted at the top, in the year 2140 the last Bitcoin will be mined.
Because of how Bitcoin works, it cannot be devalued. Whereas the dollar inflates and everything gets more expensive relative to it, Bitcoin does the exact opposite. Bitcoin rises in value because it is a scarce asset.
Ok so what if we hook up the most powerful computer EVER and mine Bitcoin. Will it break (or will I get rich?)
No it won’t break, and no you can’t steal all the Bitcoin for yourself because Satoshi thought of this exact contingency.
Satoshi knew that humans would eventually find a way to optimize mining, just like we’ve found a way to optimize nearly everything else in our lives.
Enter the Difficulty Adjustment. Ooooh.
Every 2,016 blocks (or roughly 2 weeks since each block is designed to take, on average, 10 minutes), the blockchain readjusts the time it takes to mine a block (on average).
The blockchain uses the data from the last 2 weeks, if for example, it took 14 minutes to mine a new block on average, then it will compensate for that and maybe allow blocks to be mined every 6 or 7 minutes in the following 2 weeks.
“To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.” - Satoshi Nakamoto, 2008
The idea is to always keep the average block time around 10 minutes. And it does a remarkable job at doing so.
So even if you built the worlds most powerful computer (or a ton of them), the blockchain will adjust accordingly. Nice try though.
Gold vs. Bitcoin
Think for a moment, why is gold valuable?
I’ll propose this. Gold is valuable because it is outside of the system and nobody can artificially create more of it.
So in essence, gold is the physical version of Bitcoin… Kind of.
If you hold a lot of gold, you tend to agree that it is an inflation hedge, it’s scarce, etc. And you’re right. I call this sound money. It’s value that no one can artificially mess with or create more of.
Now let me ask you a question, do you think technology will be used more in the future or less?
I can’t imagine a world that goes back to pushing paper, so I’m gonna go ahead and say that it’s a pretty sure thing technology will continue to be widely used in the future.
Value and wealth are now created in the digital world, and have been for the last few decades.
So who wouldn’t want the digital version of gold?
But I can’t hold it, how does it have value?
I’ve heard this one before. There’s a ton of things in the world now that you can’t hold but have a ton of value.
I’ll give you an example.
How much do you think Google.com is worth? Facebook.com? Apple.com?
You can’t hold a URL, but there are plenty of URL’s that are worth millions of dollars. I consider these to be digital real estate. A lot of the time this digital real estate is worth far more than physical real estate.
So now that we’ve got the digital qualms out of the way, let’s talk about what Bitcoin is great at.
Is Bitcoin a store of value or a medium of exchange?
It’s both. And people will treat it as such for a long time.
Bitcoin is a great store of value for the reasons we talked about above. Only 21 million coins will ever exist, and it’s a fair, transparent system.
Personally, I don’t buy stuff in Bitcoin often. That’s not because I don’t want to, but because adoption isn’t quite there yet (but also, I don’t want to give up my precious sats - the name for the smallest denomination of Bitcoin). However, it’s on the horizon.
The Lightening Network
A common critique of Bitcoin is that transaction fees are too high to pay for everyday items. I totally understand and agree, as I’m not about to pay the equivalent of $15 extra dollars just to buy a coffee.
Enter the Lightening Network.
Built on top of Bitcoin (layer 2), the Lightening Network allows for peer to peer transactions that are crazy fast for next to nothing in fees.
I’ll discuss the Lightening Network in depth in the future, but for now we’ll leave it here. The key thing to know is that it is not only possible to use Bitcoin daily, but it’s already being done in places like El Salvador.
Countries are adopting Bitcoin
On September 7th, 2021, El Salvador made Bitcoin legal tender. According to President Nayib Bukele, over half of the El Salvador population have downloaded a Bitcoin wallet, and use of Bitcoin is slowly spreading across the country.
It took 20 years for 1.8 million Salvadorans to get bank accounts.
It took 20 days for 3 million Salvadorans to get Bitcoin wallets.
The world is changing quickly, and access to financial applications that Americans take for granted will spread like wildfire to those that have never had them.
The rollout was admittedly not completely smooth sailing, but then again, did you ride your bike perfectly the first time you tried it? Other countries will follow, and they will learn from the mistakes El Salvador made.
El Salvador now owns 700 Bitcoin on their balance sheet, worth about ~$40 million dollars at the time of writing this.
Institutions are also adopting Bitcoin
According to JP Morgan Chase analysts on October 8th, 2021, “Institutional investors appear to be returning to Bitcoin perhaps seeing it as a better inflation hedge than gold.”
Bloomberg Senior Analyst Eric Balchunas gives it a “75% chance” that the SEC will approve a Bitcoin futures ETF this month (October 2021).
Here are a few public companies that currently hold Bitcoin on their balance sheets, as of 5/5/2021. I expect this list to grow exponentially. Also check out how much Bitcoin MicroStrategy has amassed!
There’s also been 4 Bitcoin ETF’s approved in 2021 for trading on the Toronto Stock Exchange.
You can also get exposure to Bitcoin directly on the NYSE by trading $GBTC, or Grayscale Bitcoin Trust, an ETF created by Grayscale Investments, the largest digital currency asset manager, and facilitated by BNY Mellon.
The tide is turning quick, I believe it’s only a matter of time before companies everywhere start putting it on their balance sheets.
But what if Governments ban Bitcoin?
Imagine you’re in a nation that has a local currency that is failing. Inflation is flying and you don’t know what your money will be worth tomorrow. Or imagine you’re in a nation that exerts authoritarian control over their people (can’t imagine who I would be referring to…)
If your Government said “HEY! Don’t you dare go buy that darn Bitcoin thing!” are you going to listen?
Or are you going to wonder why they don’t want you to buy that darn Bitcoin thing.
We’ve seen it play out time and time again. After a country attempts to ban Bitcoin, adoption in that country soars as people ask just that question and go figure out what it is, and why their government sees it as a threat.
For example, China has tried to ban Bitcoin in some way shape or form fourteen separate times. Check this out.
It has a tiiiiiiny effect on the short term price of Bitcoin… And then it pops right back up and keeps chugging along.
China banned Google and Facebook once, and it worked. So why do they need to keep banning Bitcoin?
Are they not just admitting that by repeatedly trying, they cannot actually ban it?
Bitcoin is so expensive now… Maybe I’ll wait for a drop before I buy?
What’s the difference between a million dollars and a billion dollars?
The answer is about a billion dollars.
Same principal applies. No, Bitcoin isn’t $1 anymore (I missed the boat then too), but it’s a hell of a lot cheaper than it will be in the future.
How am I so sure?
Roughly 8% of Americans own cryptocurrencies in some form. Only 8%!
The market cap of Bitcoin is just north of $1,000,000,000,000. That’s 1 trillion dollars.
The market cap of gold is $11.3 trillion dollars.
The market cap of the top 100 stocks on the NYSE is $36 trillion dollars.
What do you think will happen to the price of Bitcoin as adoption grows and money begins to flow out of these and into Bitcoin? Remember, there’s only so many Bitcoin to go around.
Give me a price prediction!
It wouldn’t be a Bitcoin article without one, would it?
This is @PlanB’s Stock to Flow Model, that has become increasingly popular and widely accepted in the Bitcoin community.
The model treats Bitcoin as being comparable to commodities, like gold and silver, since these are “store of value” commodities as they retain value over long periods of time due to scarcity.
Stock to flow ratios are nothing new, but they evaluate the current stock of a commodity (current amount available) against the flow of new production (amount minted that specific year).
High ratios mean two things. First, that these commodities are not being consumed by industrial applications, instead they are used as a monetary hedge.
Second, the higher the ratio means the more scarce the asset is, and therefore more valuable as a store of value.
As you can see, the price of Bitcoin has followed the S2F model remarkably well since it’s inception. On the right (and in the colors), you’ll see a representation of when the next halving is (remember we talked about it chopping in half earlier?).
The maroon line is a 365d moving average, designed to smooth out the variance in the price movements caused by the halvings.
At the bottom is a divergence chart. Showing the difference between the price and the S2F model throughout market cycles over time.
I won’t go deep into on chain metrics today, but I’ll tell you this.
Over the last 30 days, 92% of coins in existence have not changed hands.
Over the last 90 days, 85% of coins in existence have not changed hands.
What does that mean? It means that Bitcoin is scarce, and people are buying and holding. They know their Bitcoin is valuable and they don’t want to part with it. This is a key element of the supply and demand dynamics, and it will only increase exponentially as more people decide they want some Bitcoin too.
You wanted a price prediction, so here goes. I think we see all time highs in Q4 2021. Maybe even 100k. One can only hope.
If you made it this far and you still aren’t convinced, do me a favor and hedge your bets. If I’m right, you’ll make a lot of money and be part of a global financial revolution. If I’m wrong, well, come show me this article in 10 years and I’ll buy you a beer and tell you where it all fell apart.
Thank you for reading! If you enjoyed, please consider subscribing to the Decentralized Way (it’s free!). Or find me on Twitter @decentralizedJ