Last week we covered a broad and general overview on mental framework. The term “boomer” is not delegated to the older generation, it is a *mindset*. Adopt new information and adapt to new technologies. Especially ones that pose a competitive advantage to the incumbent system. We also touched on the current financial state. Dollars printed into the sky, inflated away, savings diluted, and you’re told that it is the reserve currency of the world, and the most efficient and effective means of exchange…we’ll see how long that lasts as they currently work on their own “digital currency”. Think *control*. Lastly the most general concepts around Bitcoin (BTC) were covered.
I told you that I will be covering Bitcoin (BTC) and Ethereum (ETH) this week. The good news for you is that I will be covering these in 2 separate posts. Each one dedicated to a single post. The point here is easily accessing these posts in the future for referencing. This is a resource for *you*.
Rewind back to January 3, 2009 when the very first Bitcoin block was mined, the Genesis Block. This block contained the message “Chancellor on the brink of second bailout for the banks.” This headline was chosen as a message and is indicative for *why* Bitcoin (BTC) was created.
Central Banks (The Federal Reserve and the European Central Bank) print money whenever they want to. Mostly achieved through a *monetary policy* called “Quantitative Easing” where the central bank puts an electronic entry into their balance sheet in CASH and they use that “money” to purchase long term government bonds. The government creates new money to purchase bonds. “Economists” will try to argue that it is an “asset swap” and they’ll nitpick between money supply expansion and how it really isn’t “printing money”. Either way, do either of those sound *good* to you and does that argument make any sense? (Check - inflation).
Now, we have Ex Fed Chair Ben Bernanke (2006 – 2014) stating that “*commodity prices* will not add to inflation going forward. Is he saying that commodities won’t be included in the CPI any longer? Ask the question, how are they *measuring* inflation. See this article from 2006 to see the way people like Bernanke think,
“the day after the release of the May CPI, Bernanke blamed not just higher energy prices but higher commodity prices generally ‘for some of the recent pickup in core inflation.’ Earlier this month, he had noted that possible future increases in these prices remain a risk to the inflation outlook."
Again, realize, this was stated prior to the Great Financial Crisis/ the 2008 Recession. Now, do you really think that nobody realized what was going on back then? (See – The Big Short)
Clearly, Satoshi Nakamoto (pseudonym for the person, or group of people, who created Bitcoin) does not trust Central Banks, the government, “the system” and neither should you.
BITCOIN (BTC)
Bitcoin Whitepaper (Click to read)
Bitcoin is a decentralized peer-to-peer (P2P) electronic currency with a long-term finite supply.
How does it work?
Bitcoin is decentralized, meaning not in one *central* place. All of the node operators, miners, and users, all of it is decentralized. The operations are distributed globally without a central means of power or authority.
The Bitcoin Blockchain is a chronological public record of transactions saved in time, and shared by all bitcoin users. This public ledger secures the history and ongoing use by verifying all transactions to prevent *double spending*
Bitcoin utilizes public key cryptography, proof of work, and peer-to-peer networks. Public Key Cryptography is what secures everything using mathematics. It is used to prevent anyone fund spending another user's bitcoin and accessing their wallet. Simply put, it uses a pair of keys, public and private keys and it is impossible to derive your private keys from your public keys. There is a big difference between public keys and private keys.
Your bitcoin private key is generated in random when you first start using your wallet. It is a sequence of numbers and letters, which enable funds to be spent whenever you want to send a transaction. This private key is impossible to reverse because of the incredibly strong encryption code base within the Bitcoin protocol. A bitcoin private key will always remain mathematically related to the specified user and their bitcoin wallet address. The public key is connected to the public address generated to receive BTC. It is seen by everyone. It is made up of, also, a long sequence (hash) that is compressed and shortened to generate the Bitcoin payment address.
The “wallet” is a device that stores your private keys and enables you to send your coins. It contains the necessary information to access your BTC. It contains the “keys” to your coins, your private keys. These “sign” or produce “cryptographic signatures” to send BTC to another address.
The idea of a wallet can be confusing. Please note that IT DOES NOT “DOWNLOAD” YOUR COINS. You’re not sending them into the wallet. It is used to *access*.
Since it is a peer-to-peer (P2P) electronic currency, BTC are sent/released from the *senders bitcoin address* to the *receivers bitcoin address*. Each Bitcoin user can/should have multiple Bitcoin addresses.
***Your bitcoin address is the ONLY information someone needs to pay you in BTC***
If you plan to purchase Bitcoin and want to be *smart* and secure your assets, you *must* purchase a wallet. Start with a Trezor or a Ledger, or, if you really want to, a ColdCard from CoinKite (BTC only) is the best for security.
Quick Example: To make this translatable, I will use email as an example: You can send and receive from *multiple* email addresses. Each address used for different purposes, it wouldn’t make sense to have ALL your emails coming and going from one address. It wouldn’t be an efficient or effective use of its purposes. Additionally, most people will use multiple email addresses for privacy and organizational purposes.
BITCOIN (cont.)
After each transaction (txn) is sent, it is *broadcasted* to the network so it can be included in the blockchain. The blockchain contains each transaction to prevent the bitcoins being spent twice. This includes a timestamp to lock it in each block and *confirm* it. Once it is confirmed it is broadcasted out to the network. All the bitcoin miners and full node operators validate and see this.
The Bitcoin Miners are complex computers running programs to complete mathematical calculations to secure the bitcoin network and confirm transactions. The reward and “payment” for their work are fees paid to them and newly created BTC. The amount of power this requires is measured in the Hash Rate which shows the true processing power of the network.
The full node operators validate the transactions and blocks. They also provide assistance to the bitcoin network by accepting transactions and blocks from other nodes operators, validate those blocks and transactions, and sending them to more full nodes, further securing the network.
Proof of Work secures all of this. Proof of work (PoW) is a consensus mechanism that requires members of a network to “spend” effort solving a mathematical puzzle to prevent anybody from undermining the system. This prevents other people from undoing or rearranging your BTC.
This is essentially an ongoing “trust test”. It is used for validating transactions and creating new BTC. This solely allows the P2P transactions to occur without the need for the 3rd party verification. Proof of work requires energy, which only increases as more miners join the network. This is the *incentive* that keeps the system trustworthy.
This protocol is an *open source* software. Meaning anyone can download it and use it.
How is it Valuable?
1. Features
Bitcoin is a peer-to-peer (P2P) electronic currency with a finite supply. More importantly, it brings autonomy (sovereignty) to the individual over the legacy financial system. You are operating outside of the banks, and you are becoming your own bank.
It is *permission less and borderless*. Anyone can use it if they want.
It is *censorship resistant*. Nobody can freeze or prevent anyone from sending a transaction.
It is FAST. No waiting for intermediaries. Also, the transactions on the 2nd layer Lightning Network can move at the speed of light. On the base layer they can move slower but are being scaled out now with the ongoing development of the 2nd Layer with lightning transactions.
It is cheap, fees are low to send BTC.
Storage - highly secure and very minimal. Takes up no space. Easy to hide wallet.
No counterparty risk. Once you store your keys and wallet intelligently (more on this later) and your transaction is confirmed, you are set!
2. Monetary Value
It is scarce. The supply now is at ~19 million bitcoins. There are only ~10% left to be mined. There are only ever going to be 21 Million bitcoin (unlike gold or the dollar). This issuance schedule which is reduced every 4 years from the Halving Cycle. Every 4 years, the amount of Bitcoin produced is cut in half. This cuts the amount issued per block in half. We are now at 6.125 BTC per block. Next halving is in 2024.
*This means it is literally programmed to be scarce.*
There is only ever going to be a certain amount. Long term holders and new holders continue to move their BTC off the exchanges, into their personal wallets, and holding. You can see that now on the centralized exchanges like Binance where they are changing the amount you can withdraw. This screams supply and demand.
It is a store of value. Bitcoin cannot be printed or debased (see -US Dollar). Think of the bond market right now, currently the *negative yielding*. People are parking their money here and losing it. Bitcoin’s store of value characteristics should play as a competition to this once people start thinking.
Bitcoin market cap is right under $1T currently. Think that there may be a small chance that money flows into here from negative yielding bonds, alone?
Institutions are also buying this asset as a hedge against inflation. High Net Worth clients at large banks want this asset. Our generation prefers this as they support the ongoing “wave of dematerialization” that is occurring.
Necessary Mental Framework
“ Okay, I understand that….But I see the price of this moving all the time. Wasn’t it just at ~$65K? I would’ve lost money!!”
***1 BTC = 1 BTC***
You will need to understand that and wrap your head around that from this point forward. Think long and hard about this….
To help you understand so this makes sense -> The USD “price action”, AKA – day-to-day price movement, isn’t something to focus on. 1 BTC is 1 BTC.
Again, this was covered last time, but I think it is important to revisit.
This is NOT about making more USD. You absolutely don’t want to be caught up thinking in terms of “the tip of the iceberg”. You want to make more USD to buy more assets. Buying BTC or AAPL shares to earn more USD is thinking small.
You are taking part and getting involved in revolutionary changes in finance and technology. This is much bigger than trading for fiat diluted dollars.
When I have the ability to transact in a currency that cannot be diluted and debased in a matter of a few electronic entries on a central bank’s balance sheet, it is fully backed by code, and I can take it anywhere I want, use it, transact with it 24/7. All knowing that it is programmed to be scarce…why wouldn’t I?
If you have any questions or comments please share!
Disclaimer: None of this is to be deemed legal or financial advice.