Bitcoin Fundamentals

Much like most other assets, 2020 was a volatile year for bitcoin. It began the year around $7,000, dropped to a low of $3,800, only to end the year up more than 300%. With the New Year came new all-time highs, bringing bitcoin’s price to $40,000! In recent months, the Bitcoin network grew in size, as more and more people and companies began to contribute to the network. 

Well-known investors such as Paul Tudor Jones, Bill Miller, and Stanley Druckenmiller publicized their support for bitcoin in the face of growing concerns about inflation as the Federal Reserve expands the money stock at unprecedented rates. On a corporate level, Square, MassMutual, and MicroStrategy have all announced multimillion dollar direct investments in bitcoin, and PayPal expanded its service to allow customers to buy, hold, and sell cryptocurrency directly from their account, signaling the beginning of mainstream acceptance of the digital asset.

In light of the recent all-time highs and renewed interest in bitcoin, it may prove beneficial to review some of the fundamentals of the crypto currency. These fundamentals are specific to bitcoin and should not be applied to other crypto currencies. Bitcoin comprises both a network and a digital asset. The network consists of millions of individuals and companies all around the globe who dedicate computing power to maintain and secure the network. The network allows participants to interact with one another by storing and communicating value in a secure manner; to date, it has never been hacked or compromised in any way. It is built upon the Bitcoin protocol, which governs how value is communicated over a communications channel. The Bitcoin network is not managed by a central body, but employs open source software, allowing any individual or entity to participate in a permissionless way. The bitcoin digital asset is a barer instrument that does not produce income or cash flows, but gives its holder the ability to participate in the Bitcoin network. 

Bitcoin has experienced rapid price appreciation over its 12 short years of existence, largely due to the attractive inflation hedge it can provide investors, and also the exciting possibilities of participating in a new value network. The base layer of the Bitcoin network, with its secure value transmission, introduces a new protocol upon which many new applications are being built. The Bitcoin network has the potential to radically change how the global financial system functions. Updating remittance payments, asset transfers, trade settlement, and allowing for new automatic value transmissions all are made possible by this new programmable form of value.

Although the Bitcoin network is still in its infancy, and faces significant risks and unknowns going forward, it has managed to capture the imagination of millions, and continues to gain more adopters with each passing day, many of whom are dedicating resources to further develop the network. In these early innings, it is difficult to see how the network might be incorporated into our financial lives, but if bitcoin’s history is any sign of its future, it is likely to be an exciting ride!