Is Bitcoin Our Greatest Invention?

Bitcoin's strength lies in its decentralized nature.

No single entity controls it, making it resistant to manipulation and censorship. This adds to its value proposition as a reliable store of wealth.

Bitcoin's borderless nature makes it a potential solution for international transactions, facilitating trade and reducing reliance on traditional financial systems.

While price volatility is a current barrier, its long-term stability could make it a viable global currency. The technology behind Bitcoin fuels broader innovation in the financial sector. Decentralized finance (DeFi), smart contracts, and new financial products can empower individuals and promote financial inclusion.

But I want to make the bolder argument: Bitcoin is humanity’s greatest invention.

What’s the Big Deal with Bitcoin?

• Perfect Currency: Bitcoin's fixed supply makes it resistant to inflation, protecting its potential as a store of value.

• Solving Gold's Limitations: Bitcoin is highly portable, divisible, and resistant to seizure, making it superior to gold in key ways.

• Increased Hardness: The stock-to-flow model suggests Bitcoin's value may appreciate over time due to its predictable and decreasing issuance rate.

• Mathematical Brilliance: The underlying technology (game theory, blockchain, Merkle trees, hashing) creates a secure, transparent, and efficient system for transactions.

Perfect Currency

We've spent centuries chasing the idea of a perfect currency—something politicians can't manipulate, something that holds its value over time. Look no further than Bitcoin. They can't just print more of it like they do with dollars. Its supply is capped. That mathematical fact makes it the shield I need against inflation, the savings account that will actually mean something years from now.

• Capped Supply: Bitcoin has a fixed limit, unlike fiat currencies that can be endlessly printed.

• Inflation Shield: This scarcity protects Bitcoin's value from the erosion caused by inflation.

• Long-Term Store of Value: Bitcoin's design makes it ideal for preserving wealth over time.

• Counter to Centralized Control: No government or institution can manipulate Bitcoin's supply.

• True Ownership: You have direct control over your Bitcoin, not subject to third-party policies.

Solving Gold's Limitations

Gold? Forget it. I can't carry a ton of gold in my pocket. Can't send a sliver to someone across the world in seconds. Bitcoin, though...that's digital gold that moves at the speed of light. It can't be confiscated by some government decree. My Bitcoin is mine alone, secure and accessible whenever I need it.

• Digital Portability Bitcoin can be transferred effortlessly across borders, unlike physical gold.

• Infinite Divisibility: You can use tiny fractions of Bitcoin, impractical with gold bars.

• Seizure Resistance: Bitcoin can be stored securely in ways that make it harder to confiscate.

• Global Accessibility: Anyone with an internet connection can potentially access Bitcoin.

• Lower Storage Costs: Securing Bitcoin digitally is far cheaper than storing large amounts of gold.

Mathematical Brilliance

Bitcoin isn't just clever code, it's a masterpiece of synthesized math.

Bitcoin cleverly combined existing mathematical concepts in a unique way. The underlying cryptography (hash functions, elliptical curve cryptography) was already well-established.

Bitcoin's true breakthrough was in how it used these mathematical tools to create a secure, decentralized, and trustless digital currency system. This involved:

• Distributed Consensus: Using Proof-of-Work to achieve agreement on a shared ledger without a central authority.

• Incentive Design: Aligning the economic interests of miners to ensure the network's integrity.

The blockchain is an unbreakable ledger, transactions secured in a way that hackers can only dream of breaking. It's transparency and security rolled into one.

Incentives decide outcomes.. and this is where Bitcoin’s brilliance is clear. The design of Bitcoin's PoW and reward system ensures miners act honestly. It's more profitable to follow the rules than to attempt to cheat the system. Miners compete to solve complex mathematical puzzles (using hash functions) to add new blocks to the blockchain. This secures the network and creates new bitcoins as a reward.

Transactions are grouped into blocks. Each block contains a reference to the previous block creating a chain (hence, 'blockchain').

Bitcoin relies heavily on cryptographic hash functions (like SHA-256). These turn data into a unique, fixed-size fingerprint. Hashing is used extensively in mining, creating addresses, and linking blocks in the blockchain. Bitcoin uses Elliptic Curve cryptography for its public-key cryptography system. This allows for secure ownership and transfer of funds through the use of digital signatures.

And all this, powered by a network no single entity controls.

This is how money was meant to work in the digital age.

• Blockchain Immutability: The ledger of transactions is practically impossible to alter or reverse.

• Cryptographic Security: Advanced cryptography protects transactions and ownership.

• Transparency and Auditability: Anyone can view the blockchain, ensuring accountability.

• Decentralized Control: No single entity governs Bitcoin, reducing points of failure.

• Foundation for Trust: The technical design removes the need for trust in traditional intermediaries.

Increased Hardness

Imagine a resource that gets rarer as time goes on.

That's Bitcoin.

Its supply gets cut in half regularly, a code-enforced scarcity that could make it more and more valuable. Compare that to endless money printing. I'm betting on the thing designed to get harder to find, not the one pumped out with reckless abandon.

• Stock-to-Flow Model: This model suggests Bitcoin's value increases with its scarcity relative to new supply.

• Predictable Issuance: The halving events reduce Bitcoin's creation rate in a known schedule.

• Contrast to Fiat: Central banks have no limits on money creation, potentially devaluing currency.

• Incentive for Miners: The diminishing rewards encourage miners to secure the network long-term.

• Potential for Appreciation Scarcity and demand dynamics could drive up Bitcoin's price over time.

The common definition of "hard" usually conjures up ideas of something tangible and durable. But monetary hardness isn't about physicality, it's about difficulty to create, which makes it to undermine. It's resistance to the inflationary forces we see in fiat currencies. It's about creating an asset that is costly, time-consuming, or even physically constrained in its production.

Stock-To-Flow Ratio: A Metric for Hardness

The Stock-to-Flow ratio (S2F) is how we quantify this hardness.

It's a straightforward calculation: the total existing supply (stock) divided by the annual new production (flow). A high S2F means the annual mining output has a negligible impact on the grand scheme of the existing supply. It would take decades, or even centuries, to significantly alter the stock, making the asset more resistant to inflationary shocks.

This is where Bitcoin's future is truly astonishing. With gold, S2F is roughly 60x. Impressive, but Bitcoin, right now, is closing in on that number, around 57x.

And here's what's fascinating: Bitcoin's supply issuance is cut in half every four years, doubling its S2F in what's known as the halving.

Later this month (April 2024), when the next halving takes place, Bitcoin will become meaningfully harder than gold.

Twice as hard!

And its hardness will continue to exponentially increase with each halving far into the future. Its S2F ratio is on a path towards infinity, which is a concept that boggles the mind when it comes to money.

Hardness has been the primary reason gold has been the choice for store of value for the last 6000 years, watching this inevitable trend play out is going to be rewarding.

What Keeps Bitcoin Up At Night?

Nothing :)

I am sure it keeps lots of people up, however.

There are three main arguments I hear against Bitcoin

• Volatility: Bitcoin's price volatility is a major concern for widespread adoption as a currency for everyday transactions.

• Energy Concerns: The energy consumption used for Bitcoin mining is a valid environmental critique.

• Regulatory Landscape: Risk as Governments grapple with how to attempt to regulate Bitcoin

Volatility matters. But the direction of the volatility matters more.

Yes, Bitcoin's volatility is undeniable, and it's something anyone considering investing should carefully assess. However, it's crucial to see the bigger picture.

Since its inception, Bitcoin has outpaced every traditional asset in terms of growth despite the short-term ups and downs.

Its underlying technology and the fixed supply model suggest the upward trend could continue. For those with a long-term perspective, volatility may become less significant and even present strategic opportunities.

The Regulator question was actually the reason I had the greatest fear rebalancing McDonagh Family Office’s portfolio heavily into Bitcoin.

It’s a constant source of risk.

The energy concern is truly not a concern, at all.

In fact energy utilization is a large part of what gives Bitcoin network value.

Bitcoin's energy usage is the necessary fuel for its unyielding security. This is in direct contrast to traditional financial systems, which rely heavily on trust in centralized institutions.

The Relationship Between Energy, Security, and Value

The energy-intensive Proof-of-Work (PoW) mechanism secures the Bitcoin network. The vast computational power required makes it prohibitively expensive to alter the blockchain or reverse transactions.

This creates trust and immutability, enhancing Bitcoin's value as a store of wealth.

Rise of the Hash Rate

As more miners compete and the hash rate (overall computational power) increases, the network becomes exponentially more secure. This security attracts more users and investors, driving demand and value.

Then the fun part starts.

Increased demand raises the price of Bitcoin, further incentivizing miners to secure the network. This requires even more energy, leading to increased security, which then drives higher value – a self-reinforcing cycle.

We are talking about the “Energy-Value Feedback Loop”.

Is Using Energy to Make Money Environmentally Wrong?

Many miners already prioritize renewable energy sources like hydropower or geothermal. As renewables become more cost-effective, the environmental footprint of Bitcoin mining can shrink significantly.

Bitcoin mining could incentivize the development of underutilized or stranded energy sources.

It could also stabilize power grids by enabling miners to act as flexible energy buyers when demand is low.

Bitcoin is singlehandedly driving investment into energy generation, transmission and storage technology and services, as energy is the primary COGS of Bitcoin.

This means Bitcoin might save our purchasing power and the environment, too :)