WHAT IS BITCOIN
Bitcoin is a digital store of value and a disinflationary digital currency designed to facilitate financial transactions without a centralized intermediary and government control.
- DECENTRALIZED: No one controls Bitcoin since its blockchain is globally distributed.
- TRUSTLESS: Nobody has to trust anybody else in order for the Bitcoin network to function.
- CENSORSHIP-RESISTANT: Governments and central banks cannot take control of Bitcoin.
- LIMITED SUPPLY: Bitcoin has a disinflationary model and a fixed supply of 21 million.
- FAST SETTLEMENT: Bitcoin transactions are fast, cost-effective, and cross-border.
- IRREVERSIBLE: Bitcoin transactions are irreversible, unlike traditional payments.
- ANONYMOUS: Bitcoin addresses do not contain any personal information.
The Bitcoin blockchain is a distributed ledger of timestamped transactions that are bundled into blocks. The Bitcoin blockchain is immutable and Bitcoin transactions are irreversible. The security of the Bitcoin network is ensured by Bitcoin miners that use powerful computers to solve complex cryptographic problems to validate Bitcoin transactions. This computing process is called “proof-of-work”.
The first Bitcoin miner that finds the solution to the cryptographic problem and creates a new Bitcoin block receives a block award. Besides block rewards, miners earn Bitcoin transaction fees for verifying and processing transactions included in the block they mined and added to the blockchain. Miners are driven by financial incentives and tend to prioritize transactions with the highest transaction fees.
Bitcoin Economic Model
Bitcoin has a unique economic model with the fixed supply of 21 million bitcoins. Roughly 90% of the total Bitcoin supply has already been mined. The current disinflationary Bitcoin economic model will transform into a deflationary model once the last bitcoin is mined. No more bitcoins will be mined beyond around the year 2140, and the total supply will only decrease thereafter for reasons such as lost bitcoins and mistaken transactions.
The current Bitcoin block reward is equal to 6.25 BTC per block, and decreases by half every 210,000 blocks, or approximately every 4 years. Around 900 bitcoins will be mined on a daily basis until the next Bitcoin halving event in 2024. Block rewards will be reduced to 3.125 BTC at this time and the Bitcoin inflation rate will drop below 1% for the first time ever. Notably, the Bitcoin inflation rate will become equal to 0% when the last bitcoin is mined.
Bitcoin Investment Thesis
New asset classes such as Bitcoin are rare and powerful because they may offer asymmetric returns while providing a significant diversification benefit. Bitcoin is an attractive alternative to consider in the context of a multi-asset portfolio aiming to maximize risk-adjusted returns. Even a small allocation to Bitcoin can enhance the risk-adjusted return and improve the overall performance of an investment portfolio.
Production of Bitcoin is cut in half every four years, and the last halving event took place in May 2020. Bitcoin’s inflation rate is decreasing based on a mathematical algorithm, unlike that of fiat currencies. The lack of new supply may cause an increase in the future demand for Bitcoin. Besides that, Bitcoin halving has historically been a positive event for Bitcoin price action.
Bitcoin challenges modern monetary theory and provides exciting investment opportunities, helping investors build more efficient and diversified portfolios with higher returns. The investor demand for Bitcoin is increasing significantly as the market infrastructure matures. Bitcoin is becoming an essential part of the global financial infrastructure because of its increasing global adoption and unique investment characteristics.
The Commodity Futures Trading Commission (CFTC) regulates digital assets that are considered commodities. Bitcoin is considered a commodity under the Commodity Exchange Act and regulated by the CFTC. The U.S. Securities and Exchange Commission (SEC) regulates digital assets that are considered securities. Currently, Bitcoin is not considered a security by the SEC; however, it has issued several important regulations, no-action letters, and enforcement actions concerning digital assets in general.
Financial Crimes Enforcement Network (FinCEN) analyzes digital asset transactions to combat money laundering, terrorist financing, and other financial crimes. The Internal Revenue Service (IRS) is responsible for the collection of taxes based on income received from digital asset investments and transactions. Finally, the Office of the Comptroller of the Currency (OCC), an independent bureau within the U.S. Department of the Treasury, supervises all national banks that provide Bitcoin custody services.
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