There have been several attempts at creating digital currencies over the decades. Attempts such as Beenz and Flooz emerged during the mid 90's tech boom but inevitably failed due to myriad reasons such as fraud and third party failures.
What is Bitcoin?
At the peak of the Global financial crises in 2008, 6 weeks after the collapse of the Investment bank Lehman brothers , an anonymous programmer under the pseudonym Satoshi Nakamoto released the Bitcoin whitepaper to the cryptography mailing list under the title “Bitcoin: A Peer to Peer Electronic Cash System”.
Bitcoin is the world’s first distributed consensus-based, censorship-resistant, decentralised, permissionless, peer to peer payment and settlement network. Bitcoin (BTC) is a new form of money, a programmable mechanism of storing monetary value.
Bitcoin (BTC) is the native asset built on the Bitcoin blockchain, the world’s first digital currency without a central bank or a third party administrator. It is the first and oldest cryptocurrency in the world and in terms of global market capitalisation and price, it is the largest digitalAsset. To the extent that global macro analysis means forecasting geopolitical trends and trading accordingly, we consider bitcoin (BTC) as a fledging global marco asset .
As an electronic asset, you can purchase bitcoins, own bitcoins and send them across the internet. Bitcoin transactions can be made irrespective of geographical location or jurisdiction. We believe that over the next decades Bitcoin will do to global finance structure what the internet has done to communication.
How Does it Work?
The Bitcoin network is a peer to peer network that runs on a decentralised distributed self clearing ledger called blockchain. Unlike fiat currencies that can be printed and in-effect manipulated by the Federal reserve and central banks at will, Bitcoins have a fixed supply (a hard cap of 21 million).
The Blockchain
A blockchain is a temper proof, encrypted database that serves as an accounting ledger and is kept on a distributed network of computers around the world. Transactions on the blockchain are secured by cryptography, each transaction is signed by private keys and can be verified by public keys.
Bitcoin can be considered as an accounting system built on a distributed self-clearing ledger system.
Bitcoin Value Proposition
There are several arguments for the existence of Bitcoin and this piece will focus on three of them; the peer to peer payment (p2p), the scarcity thesis and Bitcoins as a better form of Gold/the digital Gold thesis.
Payment
Usually, the first thought that comes to mind after getting to know about bitcoin is payment. Every transaction made in the current financial system requires at least one intermediary. Transactions across different continents may require as many as 3 intermediaries with each taking a fee; imagine a world with no bank and clearing house taking huge fees off transactions. Imagine a world where all you need to make a transaction to any part of the globe is a mobile phone and internet connectivity.
Scarcity
Bitcoin was from the onset designed to be very scarce. The main elements implemented in the Bitcoin protocol to ensure continuous future scarcity are
- limited number of bitcoins that will ever be produced
- A planned systematic reduction in new Bitcoins produced in a process called the Bitcoin halving.
The Digital Gold Thesis
Today all government-issued and printed fiat currencies are not pegged to any hard asset. Until 1973, one ounce of gold was redeemable at a pegged value of $35. Due to the desire of governments to relax fiscal discipline, spend more on wars, social programmes etc to win political power, governments had to set themselves free of the restrictive gold standard.
The gold standard was a monetary system in which the standard economic unit (a country’s currency) was directly linked and tied to gold. With the physical quantity of gold acting as a limit to that issuance, a society could follow simple rules to avoid the evils of inflation.
Since the gold standard was abandoned, the value of the dollar has continuously been on the decline year after year whiles gold has risen from $35 per ounce to over $1700
The scarcity of gold has been the foundation for it’s close to $9 Trillion market capitalisation. However, as explained by the creator of bitcoin, Satoshi, imagine there was an element as scarce as gold and can be transported over a communication channel.
In 2013, one bitcoin could buy 0.01 ounces of gold. At the time of writing, one bitcoin can buy 4.27ounces of gold at a bitcoin spot price of $7,168. Bitcoin currently sits at a market capitalisation of $121 Billion, bitcoin analysts and crypto market watchers have estimated the market capitalisation of bitcoin to surpass that of Gold within this decade, should that happen the price of 1 bitcoin will have to be in the region of $450,000.
Considering events such as the decreasing bitcoin supply (scarcity) via the block reward halving, uncertainties around the nationalisation of gold by governments, the continuous irresponsible printing of fiat currencies by central banks, global macro uncertainties, and the pending transfer of over $90 trillion from the silent generation/ baby boomers to the millennial and generation X. We believe the bitcoin market capitalisation surpassing that of gold is not a question of ‘if’ but rather ‘when’. We estimate this will occur within this decade.
It is generally recommended that every investment portfolio be properly diversified to secure the financial future of the investor. This is critical considering current global macro uncertainties, hyperinflation of the South American markets, stagflation of the Asian markets, Japanification of the US and European markets and general inflationary pressures on state backed fiat currencies across the globe.
Bitcoin and other digital currencies as an asset class will play an important role in the future of finance and at Sats Capital we believe bitcoin is among the greatest technological innovation and the single greatest financial innovation in this generation, like the railway mania, early computer age and the dot com era, bitcoin and blockchain technologies will represent the greatest wealth creation and transfer mechanism in our generation.
Mawusi P. Adiamah
Partner @ Sats Capital
Disclaimer:
Investors must have the financial ability, sophistication and experience to bear risk of an investment. This article is intended for those with an in-depth understanding of the high risk nature of investments. This article is not to be considered as investment advice and tax advice. Talk to your accountant and your investment advisor. Do your own research before making any investment decision.
