Spotlight on Bitcoin: The First Decentralized Global Currency

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Bitcoin Spotlight

Bitcoin in a Nutshell

Bitcoin is a monetary system controlled by the community as opposed to being controlled by governments or banks. The Bitcoin network successfully allows for secure payments to be sent directly from one person to another, anywhere in the world, without needing to trust an intermediary such as a bank to process the transfer.

The Need

The 2008 financial crisis sparked increased distrust of the banking system and sovereign (government-controlled) monetary systems. Greed in the banking system caused a massive loss of value; banks were bailed out by governments around the world, and policies like “quantitative easing,” or the printing of money, led to a devaluation of the money supply.

With Bitcoin, control has been taken away from governments and banks that may, wittingly or not, affect the value or supply of money without the consent of the community.

Major Use Cases

Bitcoin can be used for payments of all types: cross-border payments, domestic payments, and micropayments.

In addition, because Bitcoin is an independent monetary system with predictable inflation rates, it acts as a global a store of value as well as a hedge against unpredictable monetary policy in state-backed currencies.

Major Innovations

The Trustless, Decentralized Network/Monetary System

Through a combination of blockchain technology, the Proof of Work consensus mechanism, and cryptography, anonymous programmer(s) Satoshi Nakamoto effectively created a trustless, decentralized monetary system.

In short, the Bitcoin network was built with a set of incentive systems that create trust in the network itself, without having to place trust in any other network member: everyone in the network is able to agree on what transactions have taken place and how much Bitcoin is in each account at any particular time.

Controlled Supply and Inflation Rate

We know exactly how many new bitcoins will be created each year and that the maximum number of bitcoins will be 21 million in the year 2140. Bitcoin has a transparent supply and scheduled inflation that cannot be altered without the permission of the community. This can be compared to the numerous sovereign currencies around the world that are subject to unpredictable inflation rates and devaluation.

Short-Term Outlook: Driven by Continued Investment

Today Bitcoin is largely used as an investment or investment tool instead of as a day-to-day means of transaction.

Many investors and speculators alike buy and hold Bitcoin in hopes of price appreciation. Other purchasers use or hold Bitcoin because it is one of the easiest ways to purchase or invest in other cryptocurrencies (via trading or ICO investment). And still more Bitcoin investors hold Bitcoin in their cryptoasset portfolios to act as a hedge: during bear movements Bitcoin typically outperforms most other cryptocurrencies, which tend to lose value relative to Bitcoin.

We can see the part investment plays when analyzing Bitcoin’s recent transaction history. In the following two charts, notice how transactions, trade volume, and Bitcoin price all experience a run-up in December and January:

Daily Bitcoin Transactions

Daily Bitcoin Transactions June 2017-May 2018. Transactions are down from a peak of almost 500k/day to 150-200k/day. From bitinfocharts.com.

Bitcoin Daily Trade Volume

Daily trade volume skyrocketed during the price run-up in late 2017/early 2018. Source CoinMarketCap.com.

Clearly, transactions peaked as more and more investors wanted in on market action and sent Bitcoin to or from exchanges. This is further proven by examining the median (middle) value sent per Bitcoin transaction:Bitcoin Median Transaction Value

The median transaction amount skyrocketed from just under $1,000 to over $5,000. Source: Bitinfocharts.com.

As both the number of transactions and median transaction amounts rose in tandem, we can determine that high-value transactions made up the bulk of additional transaction volume, supporting the theory that investment-related transactions are drivers of overall Bitcoin activity.

Due to a number of market-wide factors that affect the degree to which Bitcoin will be used as a day-to-day means of purchase, investment will likely remain Bitcoin’s primary use in the near future as it remains the dominant cryptocurrency, both by name and due to its utility as the asset most widely used to purchase other cryptoassets.

Factors Affecting Bitcoin’s Long Term Future

There are a number of systemic (market-wide) factors that will affect most cryptocurrencies; though due to the already large size of the Bitcoin network, I do see Bitcoin as being able to weather a storm better, and longer, than most other cryptocurrencies.

Still, there are also a number of Bitcoin-specific factors I see affecting the cryptocurrency’s long-term prosperity, and they all revolve around Bitcoin’s ability to innovate versus its competitors:

Highly Competitive Use Case: Bitcoin’s primary use is to securely transfer and store value, a use case that a number other public blockchains are attempting to accomplish. Many of these competitors are faster and cheaper. Bitcoin has advantages with its name brand and huge network, but Bitcoin must innovate to continue its dominance of the crypto market, especially as now-niche cryptocurrencies become more readily available for purchase with fiat or other cryptocurrencies. Bitcoin has a substantial lead for now, but communities are quickly growing around alternatives.

Will the Lightning Network Bring Scalability?: A successful launch of the Lightning Network may solidify Bitcoin’s place as the most dominant crypto and may be a watershed moment for cryptocurrency adoption as a whole. It promises secure, instant transaction settlement, negligible fees, and a throughput capacity to handle millions of transactions per second. The Lightning Network could also be a death sentence for fledgling blockchain networks lacking additional differentiation.

Energy Consumption: Bitcoin’s Proof of Work (PoW) mining network is power hungry, on track to consume an estimated 0.5% of the world’s electricity usage in 2018, and electricity usage to power the network will only continue to rise as Bitcoin’s price rises.

Though the PoW method certainly has merit in securing the network, other cryptocurrency networks are already using or plan on using more energy-efficient consensus methods like Proof of Stake (PoS). Arguments have been made that PoS won’t be as secure as PoW; however, great minds are flocking to the cryptoasset field, and many of them will be looking to create ever more secure and innovative consensus methods. I’m no programmer, but I’d bet on technology advancing – it always does.

How the Bitcoin community responds to advancement in consensus methods or a shift in public sentiment against massive energy consumption may prove critical to Bitcoin’s long-term trajectory.

Biggest Advantages Over Other Cryptocurrencies

Bitcoin already has a large network of developers, miners, and users.

Bitcoin is the primary means to buy other cryptocurrency; many cryptocurrencies can only be bought with Bitcoin.

The Bitcoin network is battle-tested. It has consistently remained secure and has never been hacked.

Bitcoin has a widely-known brand name and substantial first-mover advantage.

Basic Statistics & Tokenomics

Currently, there are just over 17 million Bitcoin, and the number of Bitcoin will reach 21 million in the year 2140. However, up to an estimated 4 million Bitcoin have been lost for various reasons. Few cryptocurrencies have as low a total supply as Bitcoin.

The current block time (time it takes before a new block is created) is about 10 minutes and current network capacity is about 7 transactions per second.

Resources to Learn More

Developer Jameson Lopp’s website has one of the most comprehensive resource pages about Bitcoin, blockchain, and the Lightning Network.

Andreas Antonopoulos has written multiple excellent books about Bitcoin. Without getting too technical, The Internet of Money Vol 1 & The Internet of Money Vol. 2 both explain the impact Bitcoin & blockchain technology can have on the world. Mastering Bitcoin: Programming the Open Blockchain is for those who want a deep dive into technical details.

Fun Fact

Bitcoin has been declared dead nearly 300 times. Huh.