2. Bitcoin, the perfect store of value?

On October 31, 2008, a link to a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. The author’s name was Satoshi Nakamoto, but no one knew who he was. We now know that Satoshi Nakamoto is a fictional name used by the creator of Bitcoin, but we will probably never know who he really is. This is really important in my opinion, because Bitcoin’s creator let his cryptocurrency be, he does not consider himself more important than anyone mining, developing or transacting with Bitcoin. In blockchain, the first block is called the genesis block; Satoshi Sakamoto mined Bitcoin’s genesis block on January 3, 2009; this is the birthdate of the Bitcoin network. It is the first cryptocurrency to overcome the popular double-spending problem that digital money had. The blockchain is a decentralized public ledger that underpins the entire Bitcoin network. It contains all confirmed transactions and it enables Bitcoin addresses to calculate their spendable balance, allowing new transactions to be confirmed and ensured to be owned by the spender. Cryptography is used to ensure the blockchain's integrity and chronological order. All of the Bitcoin addresses are present on the Bitcoin distributed ledger, which is like a digital book of all the addresses.

Here is the order of events for a Bitcoin transaction:

1. Bitcoin transaction order is sent.

2. The transaction is recorded online in a block.

3. The block is broadcast to the entire Bitcoin network then checked.

4. The Bitcoin Network approves the block and validates the transaction.

5. The Bitcoin transaction is complete.

To understand Bitcoin you need to know about 3 things: nodes, mining and proof of work. They are directly related to steps 2, 3 and 4 of the transaction and they form the protocol used by the Bitcoin network to validate transactions and create new blocks. This protocol can vary from one cryptocurrency to another, depending on its blockchain rules embedded in the code.

Nodes make sure that the sender of a transaction is not spending the same amount of Bitcoin twice and did not create it out of nothing. Once nodes validate a transaction, it is shown as “pending” until a specialized node (a miner) or a collective of miners (a mining pool), picks up the transaction. Bitcoin miners are located all over the world and compete to confirm the pending transactions. Going from a “pending” to “confirmed” state means that the transaction has been added to the blockchain, allowing the recipient of the transaction to send it to someone else. Miners batch pending transactions into blocks, and the confirmed block is broadcast across the entire network back to all nodes to ensure the block is valid. Once validated, the nodes add the block to the previous blocks, creating a blockchain. At this point, the entire network has witnessed the transaction being sent by the user, validated by each node, and confirmed by the miner. Final settlement is achieved and funds are irreversibly passed from the sender to the receiver. This process, relying on thousands of volunteer nodes and competing miners distributed across the world, is repeated for each and every transaction.

Bitcoin uses the proof of work system, which is the system explained right above. Anyone can run a node or be a miner, and you can mine Bitcoin from any place that has electricity and an internet connection. The miner who solves the next block is awarded an amount of BTC in return. However, this causes an issue: say you’re a miner with one computer competing against millions of other computers to solve the next block and get the *quite big* reward… Your probability of success is tiny. The solution is for people to join massive mining pools in which they combine their processing power to get a higher probability of finding the next block, while distributing the fixed reward.

Note that running a node does not offer any BTC or monetary rewards.

Some important facts:

· The block reward halves every 210,000 blocks.

· A new block is mined every 10 minutes, this results in a halving event every 4 years (approximately).

· The block reward started at 50 BTC (in 2009), it is currently at 6.25 BTC.

· The next halving event will take place sometime in 2024.

There are three types of Bitcoin addresses:

· P2PKH (Pay to Public Key Hash) Legacy Address Format

P2PKH is a vintage bitcoin address format, it is one of the oldest ones. Users can still transmit bitcoins to other segwit addresses despite the fact that it is not segwit compliant. Because P2PKH addresses are longer and take up more space, they are slightly more expensive than other segwit addresses. These addresses start with “1”, like this one: 12ab8dc588ca9d5787dde7eb29569da63c3a238c

· P2SH (Pay to Script Hash) Address Format

P2SH is a newer version of P2PKH that starts with 3 instead of 1. P2SH is a little more sophisticated than its older predecessor P2PKH, and it has a few more features. P2SH transactions are more complex, and it includes high-security features such as a multi-signature facility.

· Bech32 Segwit Address (I use this one)

Bech32 is a relatively new bitcoin address, and it is the most advanced of the three. It is lengthier than P2PKH and P2SH and it starts with "bc1." Bech32 is a segwit address that enables numerous wallets and a variety of different addresses. Bech32 transactions are faster and have lower costs as well as a lower risk of human error, which makes it the most used address.

They’re all compatible with each other so you can send BTC from any type of address to another. What is nice is that no one has the authority to stop you from sending or receiving Bitcoin. Even if a government bans it, you can’t kill the Bitcoin network until you destroy all of the heavily distributed & decentralized computational power behind it. If the USA bans Bitcoin, Bitcoin will simply go somewhere else. More on Governments and Crypto later…

Bitcoin Market and Price Fluctuations

If you’re a newbie, you probably found the previous part very technical and boring. Bear in mind that it is essential to know how Bitcoin actually works if you want to understand the hype behind it. If you ignore the technology (like myself before 2021), you will think that Bitcoin and Crypto is a stupid trend that will eventually go away. Here’s a fact: it won’t.

I’ve heard people saying: Bitcoin doesn’t produce anything, it doesn’t have profits like a company, it’s useless, it will go to zero.

Okay… first of all, Bitcoin is a currency, not a stock, not a company, it doesn’t need to produce anything to be a store of value; what it offers is what I just said, secured value storage: similar to gold, but better. Why would you keep ALL your money in USD or USD related assets? (or any fiat currency like the LBP…lol).

Second, you just cannot describe the asset with the fastest transaction time as useless (before you scream Ethereum or Cardano in your head, you can also include them with Bitcoin, more on these later). So, take Bitcoin as an asset class and compare it to Equity in a publicly traded company (Stocks), Debt (Bonds), Real Estate and Gold; which of these can you send anywhere in the world in ten or less minutes? You could choose to carry 10 kilos of Gold with you everywhere you go… What about bank wires? International transfers take up to five Business Days to complete, and they ask you everything about your life as if you belong to them, I just don’t get it, it’s my money and they want to know what I eat at lunch before approving a money transfer. What about Real Estate? You can transfer home ownership in a matter of days or weeks (still more than 10 minutes), but you sure can’t move the house. As for Stocks and Bonds, they require you tons of rules and regulations depending on your country if you want to move Equity or Debt Ownership to someone else. Keep in mind that I love all these asset classes, I’m just comparing the speed and ease of transferring value to someone else, to prove all people saying it’s a useless asset wrong.

About market volatility: there are many reasons for the high volatility in the cryptocurrency market. First, it’s a new technology, which gives it a lot of hype. When there is a lot of hype, the prices go up very fast, which gives previous investors an incentive to take profit; what goes up very fast goes down very fast. Second, the market is unregulated, Bitcoin is not registered as a Security (at the SEC), so speculation and market manipulation is higher than average. Third, *everyone* can buy bitcoin because of low fees and easy access to exchanges; you could set up a Binance account in no time and start trading with tiny fees (Binance is the biggest crypto exchange). This gives access to middle and low-income earners, people who don’t usually invest in assets. Keep in mind that you can’t make an accurate valuation of Bitcoin, it’s not a stock. Additionally, the Crypto Total Market Cap (how much value is present in crypto) stands today right below 2 Trillion USD; let’s compare that to some other assets:

· S&P 500: 39 Trillion USD

· Global Real Estate: Above 100 Trillion USD

· Gold: 11.36 Trillion USD

Logically, the asset class with the lowest market cap is the most volatile, because as the market value goes up, we would need exponentially more trading volume to move prices; this is also why Bitcoin is the LEAST volatile of all coins.

Why Bitcoin is King

Bitcoin is the top cryptocurrency in terms of market cap, meaning that it highest total value out of all cryptocurrencies. At the time of writing, Bitcoin’s market capitalization stands at a modest 873 Billion US Dollars, giving it a dominance of 42% (Bitcoin MktCap / Crypto MktCap). Number two is Ethereum at 379B, and people are saying it’s going to surpass Bitcoin in the next few years. It’s certainly possible, and if it does, then it will do it at the most euphoric phase of the market, I highly doubt it will last once the market goes down again. The argument is that the Ethereum network is cheaper, it offers decentralized products (ERC-20 Tokens, DeFi, NFTs, etc… more on that later) and while that is completely true, Ethereum has only been here since 2015. Remember The Bitcoin Network’s launch year is 2009, it gives it more trust and confidence as it stood the test of time longer than Ethereum has. Bitcoin is also the first cryptocurrency ever created, and no face is associated to its creation (Satoshi Nakamoto is a fictional name). I am not ruling out Ethereum surpassing Bitcoin one day in the future, we cannot know what will happen, but for now, Bitcoin is King. BTC is the preferred cryptocurrency of institutions and big investors, it has the lowest risk because it dictates the crypto market; if BTC goes up, alt-coins historically follow (alt-coin is a term used for any other coin than Bitcoin). The problem with holding alt-coins is that when Bitcoin is bearish (low market confidence / sustained downtrend), alt-coins get absolutely wrecked.

Bitcoin’s future as a store of value

What exactly is a store of value? Let’s say you win a hundred million US dollars at the lottery in cash, congratulations. You now spoil yourself with a new big house, a couple of new cars, you buy some other houses for the family, you take the family and some friends on a trip, etc… You still have 80 million left, what do you do with this money? That’s an 80 million dollar problem… The smart thing to do is to store it in something that has value, you want that 80 million to preserve your purchasing power because inflation is not your friend. Real Estate, Stocks, Precious Metals, Diamonds, Colored Stones, Paintings, Art, Classic Cars… these are all examples of value storage, but where does Bitcoin fit in all of this? For more and more people, Bitcoin sits right beside these assets; they are realizing the potential it has as it generally trend up with time, based on the data we have. That said, more and more institutions (most notably Tesla) are investing in Bitcoin instead of holding cash on their balance sheet. Here are the biggest companies holding Bitcoin today:

- MicroStrategy Inc

- Tesla

- Galaxy Digital Holdings

- Square Inc

- Grayscale

Side note: what is nice is that Square Inc explained how they purchased their Bitcoin holdings, I will briefly explain later, but you can also check out their full PDF if you search for it.

With time (and over the next decade), more and more institutions will do the same.

The Bitcoin Network’s future

As time passes, the Bitcoin Network will become more scalable and more efficient, that’s because the Bitcoin community constantly looks at ways to improve the network. Twitter’s CEO Jack Dorsey is the latest big name to commit himself to Bitcoin Innovation; he announced plans to build an open platform to launch a Bitcoin DEX (Decentralized Exchange), similar to what Ethereum has, but I really doubt this can work on the Bitcoin network. Jack also sees Bitcoin becoming deeply integrated into Twitter products and services, including subscriptions, commerce, a Tip Jar and Super Follows.

We previously said that Bitcoin is completely decentralized, but there are ways to influence the network. Bitcoin’s stakeholders are all incentivized to work in the best interests of the network; they include miners, exchanges, programmers and whales (whales are people that hold enormous amounts of crypto, probably from the early days)

Bitcoin’s next upgrade is called Taproot, it launches in November 2021. Taproot will update Bitcoin’s back-end code, increase privacy and improve Bitcoin’s smart contract capabilities. After Taproot, the Bitcoin Network will support DeFi apps and simple scripts.

The Bitcoin Lightning Network speeds up transactions and reduces costs by skirting the main Bitcoin blockchain, the network is unstructured and set up on a layer above the blockchain.

Lightning Network Channels are peer-to-peer connections through which unlimited payments are made, but only two individuals or accounts can transact in a channel, a channel of three or more accounts cannot be made, which is why layer 2 scalability could be very interesting for Bitcoin. Again, this is similar to what Ethereum has, with the Polygon Network for example.

To continue reading, proceed to the next section available in the home page: 3. Ethereum, an extra step into blockchain.