May 23, 2022
Bitcoin: Answering the “What” and “Why”? — VegaX Research Report
Bitcoin: Answering the “What” and “Why”?
Anyone with even a cursory interest in digital assets has likely heard of Bitcoin before — but many are still confused — what is Bitcoin, really? Is it money, property, security, or a payments network? And why should an investor consider holding bitcoin as part of their portfolio?
Since its creation in January 2009, Bitcoin has emerged as the world’s premier digital asset boasting a global market capitalization of $726 billion at the time of writing. Many, many alternatives to bitcoin have been created in the meantime, a few of which have succeeded, while the large majority fail and become worthless. All the while, bitcoin has retained a ~40% market capitalization dominance over the broader digital asset market.
The purpose of these Bitcoin-centric articles is to provide investors with educational content to support VegaX’s flagship investment product: VEBE “VegaX Enhanced Bitcoin Exposure Strategy,” and other Bitcoin-focused investment products to be released in the future.
The following article will:
- Provide a non-technical explanation of what Bitcoin is, including the philosophical/geopolitical context for its creation.
- Review a number of reasons why an investor might want to have some level of exposure to the asset.
What is Bitcoin?
In order to fully grasp what Bitcoin is, and why many consider it to be the most revolutionary technology of the 21st century, it is important to understand the philosophical and geopolitical context surrounding its genesis.
Bitcoin was first introduced to the public in January of 2009 by a developer — or group of developers — under the pseudonym Satoshi Nakamoto. During this period, the world was still reeling from the financial crisis of 2007–2008, caused in large part by institutional liquidation cascades as a result of mismanaging (or intentionally obfuscating) risk in mortgage-centric derivative instruments.
“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” — Satoshi Nakamoto
Satoshi Nakamoto, along with prominent figures in the cryptography/cypherpunk space — notably Hal Finney — were clear that a primary intention behind the creation of the Bitcoin blockchain was to give ordinary people the chance to participate in a global payments network that was uncensorable and unmanned by the usual financial gatekeepers.
The question remains… what is Bitcoin???
Bitcoin is a permissionless, trust-minimized, peer-to-peer global payments network that is implemented as an immutable, distributed ledger software program (which is completely open-sourced).
At its base, Bitcoin is a software program. Once downloaded onto a suitable device (laptop, desktop, micro-computer), that device connects to other devices on the network. These devices all share a file with each other, that file is called the blockchain, which is itself just a list of transactions unanimously agreed upon by the network.
How do new transactions get added to the blockchain?
As stated above, Bitcoin is a permissionless payments network, as such, anyone is free to utilize the network and create transactions. The way that new transactions become a part of the blockchain happens through a process called “mining.”
New transactions are first listed on a node’s waiting queue (the same node by which they are connected to the network), called a memory pool, and sit for ~10 minutes — until all nodes in the network have a copy of the most recently published transactions. In the meantime, mining nodes (specialized hardware devices) compete with each other to create the next publishable “block” of transactions to be added to the blockchain.
Simply put, miners run these blocks of transactions through what is called a hashing function — which is meant to compress the list of transactions into an alphanumeric string of characters, called the block hash. In order for a block to be published, its hash value must be underneath a specific threshold, which all nodes on the network agree to.
The first miner who successfully clears the threshold then publishes this block onto the greater blockchain, and shares a copy of the updated blockchain around to all nodes on the network. For their trouble — expending processing power via electricity — miners earn a “block reward” paid in bitcoin. Effectively, this process of mining is where “new” Bitcoins come from.
Why would an investor want exposure to Bitcoin?
While there are valid reasons why one might have a position in Bitcoin on a short/medium term basis, this section will focus more on the reasons to hold for the longer term.
It is no secret that fiat currencies around the world have been suffering a precipitous decline in purchasing power over the last few years and that this purchasing power has been dramatically worsened by the conflict in Ukraine. As “high yield” savings accounts move closer to 0% APY, investors are desperate to find investment vehicles that promise a return that outpaces jurisdictional inflation.
One critique of Bitcoin as an investment vehicle is that it is too volatile an asset to reliably defend an investor’s purchasing power. While *might* be true on a short and medium-term basis, those investors whose time horizons are 5, 10, or 20 years have seen returns that have far outpaced inflation and even broadly representative instruments, such as index funds. In short, volatility is “smoothed out” the longer one holds Bitcoin.
Circling back to the “What is Bitcoin” section: Bitcoin is, at once, a permissionless, trust-minimized, peer-to-peer global payments network, AND a digital bearer asset — meaning that the asset itself derives value from the process by which it was created (mining). While transacting on the base layer (bitcoin blockchain) is relatively cheap, and ultra-secure due to node consensus — settlement in ~10 minutes may not be scalable for all use-cases.
Enter: the Lightning Network. Without exhausting all the content from the next installment of this educational series, the Lightning Network is a payment network built on top of bitcoin. It allows for nearly instantaneous settlement at a cost of nearly $0. So, in fact when one has exposure to bitcoin as an asset, one also has exposure to TWO revolutionary payment networks.
During periods of macroeconomic uncertainties, markets tend to gravitate towards commodities, as these resources not only have directly applicable use-cases but are also scarce.
Is Bitcoin scarce? Yes. In fact, the supply of the digital bearer asset, BTC, is hard-capped at 21 million coins — no more, no less. The issuance of new coins is programmed to be cut in half every ~4 years (called the “halving”). It is also widely accepted that somewhere between 2–4 million coins are irretrievably lost in some way.
Bitcoin further differentiates itself from commodities by the ease with which it can be verified and stored. As a comparison, $100 million worth of physical gold is somewhat easy to verify — so long as one has access to an expert. But storing $100 million worth of gold would necessitate a significant capital investment toward a secure storage facility. Bitcoin, on the other hand, can be verified by any device (node) that is connected to the network, and $100 million worth of BTC can be stored — indefinitely — in an investors’ pocket if they so choose.
Unlike commodities, which can be (and have been) physically seized by governments, court orders, and other entities, bitcoin can only be transferred by using the cryptographic key which controls the funds.
Conclusions
Whether one is interested in finding an investment vehicle to preserve purchasing power, or that outpaces traditional sources of return (market composites). There exist several reasons why an investor ought to consider allocating funds to gain exposure to bitcoin.
As more people around the world find themselves in need of a permissionless, trust-minimized, peer-to-peer global payments network (two, counting Lightning), the value of the network will increase. Hence, the digital bearer asset, the fruit of the Proof-of-Work mining process will also increase in value — this is not considering all use cases that are today unfathomable!
Current macroeconomic conditions indicate the need for an asset that is easily verifiable, transportable across borders, and not able to be seized by any entity.
At VegaX, we offer our clients access to VEBE, the Enhanced Bitcoin Exposure Strategy product. By investing in VEBE, investors gain all the benefits of bitcoin exposure discussed above PLUS the additional passive revenue generated from the innovative buy-write options strategy utilized by the product.
Please reach out to VegaX Holdings if you or your firm are interested in gaining exposure to the most revolutionary technology of the 21st century.
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