Bitcoin – Explained
Current Environment – Why do we need Bitcoin?
When the United States aborted the gold standard in 1934 and allowed a free-floating fiat currency, the national debt has continued to increase and compound due to cycles of central bank and market actor’s recklessness and irresponsibility. The remedy? Print more money and inflate the monetary supply. This burdens taxpayers by debasing and devaluing their wealth and creates the illusion of short-term stability by placing the burden on future generations. As inflation is constant, citizens are incentivized to spend rather than save which gives them a low time-preference. A low time-preference, constant inflation, and expansionary monetary and fiscal policy create unsustainable levels of debt and economies. (Greece, Ireland)
This cycle reached its height in 2008 when the Federal Reserve enacted quantitative easing (QE) by absorbing the toxic assets concocted by Wall Street during the crisis. In effect, these assets became the assets on the Federal Reserve’s balance sheet, which had an equal and opposite effect on the Fed’s liabilities, primarily reserves at U.S. banks. We are still now recovering from the financial crisis yet have not really recovered. Moreover, we’re in the final inning in terms of this cycle and have not deleveraged at all – there’s still $72 trillion in debt on the economy in public and private compared to $51 trillion at the peak of the financial crisis. Additionally, QE has largely reflated asset price and the public stock markets without helping the real economy or real GDP. The last 11 years, real GDP on average is ~1.5%, the lowest in history.
Currently, Trump’s trade war remains uncertain, hanging precipitously by 250-character tweet, the Federal Reserve today revealed it will do what is necessary to accommodate a very long expansion by cutting interest rates and stimulating the economy. Pressure from The European Central Bank (ECB) and Trump encouraging the Fed to cut rates and restart QE as part of an currency war place our economy in a reactive, perilous environment.
Investors realizing this situation quickly crowded into government bonds and safe-haven assets expecting the worst. The Federal Reserve’s decision to leave rates “unchanged” but signaling inevitable rate cuts within a year providing a brief “sugar high” for equities with futures expressing the real worries of the Fed’s future decisions.
Investors must prepare for the uncertainty and fragility of the U.S. and global economy in the near term; uncorrelated assets provide a hedge against market risk and are critical to an efficient portfolio.
Enter Bitcoin: an uncorrelated, anti-fragile, global, decentralized digital currency and deflationary asset, like digital gold; the optimal hedge for liquidity and recessionary risk in the short-term, combined with unprecedented potential upside in the long-term, lets explore Bitcoin.
Bitcoin is an insurance policy on the recklessness and irresponsibility of central banks around the world.
What is Bitcoin?
However, The progression of its adoption and the blockchain technology it is structured on has established it as an entirely new and exciting asset class.
Bitcoin is a decentralized digital currency with a limited supply that can be freely sent around the world without needing or trusting intermediaries. All transactions are recorded on the public and auditable blockchain which provides a single source of truth. The blockchain is maintained by a group of miners that are incentivized to contribute work or computation to the network in return for newly minted BTC. The software, created by early developers, rewards miners automatically and set in stone Bitcoin’s deflationary monetary policy.
Bitcoin is sound money, meaning no one can arbitrarily print more without contributing a proof of work. In this case, miners are rewarded for securing the network by contributing computational capacity to the decentralized network.
Taking a step back it is important to consider the nature of money and its different forms. Money is a social consensus – whether its paper, digital, or a sea shell – its value is derived from the belief that others believe it also has value.
Bitcoin is the first and original fully decentralized digital currency with a predictable, deflationary supply schedule backed by the security and strength of the network.
Anti-fragile systems are those become stronger and
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure , risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes (say, chicken soup or steak tartare with a drop of cognac), the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance … even our own existence as a species on this planet. And antifragility determines the boundary between what is living and organic (or complex), say, the human body, and what is inert, say, a physical object like the stapler on your desk.
The antifragile loves randomness and uncertainty, which also means— crucially—a love of errors, a certain class of errors. Antifragility has a singular property of allowing us to deal with the unknown, to do things without understanding them— and do them well. Let me be more aggressive: we are largely better at doing than we are at thinking, thanks to antifragility. I’d rather be dumb and antifragile than extremely smart and fragile, any time.
It is easy to see things around us that like a measure of stressors and volatility: economic systems , your body, your nutrition (diabetes and many similar modern ailments seem to be associated with a lack of randomness in feeding and the absence of the stressor of occasional starvation), your psyche. There are even financial contracts that are antifragile: they are explicitly designed to benefit from market volatility.
Antifragility makes us understand fragility better. Just as we cannot improve health without reducing disease, or increase wealth without first decreasing losses, antifragility and fragility are degrees on a spectrum.” https://www.amazon.com/dp/0812979680/?tag=farnamstreet-20
- Example: the infamous Mt. Gox exchange hack sent a shock to the early community. However, bitcoin recovered and made the asset more resilient to such shocks in the future.
Decentralized digital currency
- Bitcoin is non-sovereign money, nobody controls the monetary policy or can censor transactions. Bitcoin allows you to be your own bank.
- The Halvening
Bitcoin is a form of digital gold where, from its inception, only 21 million coins could ever exist. Transactions on the bitcoin network are bundled together in blocks. Miners confirm these blocks by contributing computing power to the network and are rewarded with newly generated bitcoin.
The reward paid to miners decreases by half every 4 years, this is referred to as the Halvening, this is Bitcoins way of battling inflation and returning sound money principles.
The Laws of supply and demand dictate that if demand stays the same, Bitcoin should rise after the halving reduces the supply of the rewards. This has historically been true as the year preceding a bitcoin reward Halvening has historically marked the start of a bull-run.
We are currently a year away from this third halvening event, which signals the increasing strength and stability of the network.
We live in an age of change.
The microchip and the internet have fueled exponential growth in global communications and commerce. However, this growth has come with a new set of problems. The world of e-commerce is riddled with fraud, inefficiencies, and barriers to entry that force intermediaries and the costs that come with them. Now, more than ever, there is a need for transparency and trustless protocols.
Since Medici’s revolution of double-entry book-keeping over 500 years ago, ledgers have defined the way people have conducted business. Ledgers document and record transactions. They show proof of ownership, they record the transfer of funds, and they prove value. As our world is rapidly digitized, we need an improvement on one of the business world’s oldest tools.
We need a new ledger.
And that, simply put, is what blockchain is, a technology that allows companies or individuals to create and verify secure transactions instantaneously, without the need of a middle man. This is not just limited to digital cash but extends to digital assets, ownership rights, information and even digital media.
When Bitcoin introduced the concept of secure digital cash and a complete record of transactions, known as the blockchain, the majority of the world could not comprehend the nature or impact this would have similar to the beginnings of the internet.
But a decade later, its adoption rate across nearly every area of industry has proven it wasn’t a trend, but the standard.
- Voting – security and integrity, transparency
- Charity – transparency of transactions and publicly-shared financial reports
- Banking – faster transactions, cost reduction, improved security of transactions, record keeping
- Supply Chain Management – reducing fraud, errors, time, management, improved logistics & efficiency
- Insurance – transparency and relevant record keeping, reduced insurance fraud, cost & processing time
- Financial Services – Decentralized Finance or DeFi allows anyone in the world to access basic financial services.
- Healthcare – a tamper-resistant means of storing medical history, ability for complete medical history and sharing.
- Internet of Things – autonomous functioning of smart devices, trusted data exchange, improved security & privacy