Notes – Bitcoin A Novel Economic Institution and Bitcoin as An Investment
Bitcoin: A Novel Economic Institution
P. 5
financial systems founded on a trust-based model fail to provide predictable economic assurances.
If one transaction can be censored and controlled, can’t all transactions be censored and controlled? Can’t the powers-that-be deprive participants of the ability to exchange value globally and freely?
leading to a highly fragmented global financial infrastructure.
P. 6
In the long run, institutions risk making decisions favoring those in control at the expense of customers, users, or citizens.
P.8
Since the advent of fiat currency, hyperinflation has destroyed purchasing power 29 times,15 often with a cascading impact on weaker monetary regimes. In the last century, three monetary policy changes cascaded, cutting the purchasing power of almost half of the world’s currencies by 50%
P. 9
In a more consumer friendly regime, participants would be able to audit and verify the integrity of the monetary system, evaluating whether or not the enforcement of assurances is consistent and objective.
P. 11
Lowercase ‘b’ bitcoin, the asset, is a standardized unit of value embedded in the network. Its value acts as the signaling mechanism that aligns network stakeholders. In some ways, we believe it is the purest form of money ever created:
• It is a digital bearer asset similar to a commodity.
• It is scarce, divisible, portable, transferable, and fungible.
• It is an asset that can be matched by equity and custodied without liability or counterparty risk.
Importantly, bitcoin’s properties are native to the Bitcoin network. While existing institutions must coordinate the functions of a financial system, Bitcoin operates as a single institution. Instead of relying on accountants, regulators, and the government, Bitcoin relies on a global network of peers to enforce rules, shifting enforcement from manual, local, and inconsistent to automated, global, and predictable.
P. 13
While centralized services like PayPal might provide a more convenient means of payment, unlike Bitcoin they do not provide censorship-resistant guarantees. Once secured by a miner, a Bitcoin transaction is irreversible, with settlement guaranteed.
Bitcoin As An Investment
P. 5
Since December 2010, the media has declared bitcoin “dead” more than 380 times,10 while institutions have zeroed in on its unique monetary properties,11 particularly its store of value potential as digital gold, as well as the foundation it is laying for transparent finance and the hedge it offers against the existing monetary world
P. 8
a sensible allocation to bitcoin would approximate the probability that a corrupt or misguided regime will confiscate assets – whether by fiat money inflation or by outright seizure – during an individual’s lifetime.
If that probability were 5% on average globally, bitcoin’s market capitalization, or network value, could vault more than 10-fold from $200 billion to $2.5 trillion, as shown below.
P. 9
Supporters often refer to bitcoin as digital gold because it improves upon many of physical gold’s characteristics. Not only is bitcoin scarce and durable, but it also is divisible, verifiable, portable, and transferable, all of which protect from the threat of centralization.
P. 10
Untethered from traditional rules and regulations and, generally uncorrelated to the behavior of other asset classes, bitcoin could serve as a strategic allocation in well-diversified portfolios, despite its volatility. We believe the low correlations among traditional asset classes and bitcoin, as shown below, should minimize idiosyncratic risks and lower overall volatility, resulting in higher risk-adjusted returns.
P. 11
we believe the correlations will revert toward 0 until asset allocators routinely include bitcoin and until the traditional financial system incorporates Bitcoin technology into its infrastructure.
P. 13
Buy-side and sell-side institutions are evaluating whether or not bitcoin is ready for prime time. Buy-side institutions are analyzing whether the maturity of the cryptocurrency market structure is sufficient to accommodate substantial allocations of capital. Sell-side institutions are evaluating the depth of the market as they plan to offer products and services to buy-side institutions.
Steve Miller
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