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Why should you take BTC seriously?

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"You're betting on human fallacy, not human ingenuity."

Original title: "Viewpoint丨Why you should take BTC seriously?" "

Original source: Crypto Valley live

The first time you heard about Bitcoin Where is the time? If you asked the average person what they think of Bitcoin, they'd probably say, "What, the hype thing from a few years ago? That was a classic bubble. I wasn't interested then, and I'm not interested now!"

However, don't dismiss it just because your knowledge is limited or what your friend said in a bar years ago. Take the time to investigate and come to a thoughtful opinion. The idea is too big to ignore, and many believe that now is the perfect time. Proponents of Bitcoin see it as a curious amalgamation of an early-stage technology company and a store of value like gold. Let me explain.

Bitcoin as the dominant network of electronic money

So what exactly is Bitcoin? Some say it's an anonymous digital currency used by criminals to launder money, while others see it as just a speculative craze that will soon be history. I look at it another way: Bitcoin is a decentralized currency, just like the internet is a decentralized version of information.

In the days of analog circuits before the Internet, sending a message to someone over a long distance was relatively time-consuming and expensive. Information flow must be coordinated by a central entity, such as the postal service or a telephone exchange. What made the Internet so disruptive was that it dramatically lowered the cost of sending and receiving information. Sending a message can take many forms: using a price comparison site, you can easily find the best price on a product from many different retailers; you can call and talk to a friend on the other side of the world for almost nothing.

However, creating an Internet of equal value is much more difficult. Why is this? Consider the information network. If I send an email attachment to one friend, I can easily send the same attachment to another friend, no problem. However, if I send some money to a friend, it is a big problem to send the same money to another friend. If everyone could create new currencies at will, the value of these currencies would collapse rapidly and become worthless very quickly. This is why creating a decentralized monetary network is much more difficult than creating a decentralized information network - this problem is an example of the so-called "Byzantine problem".

This is how financial institutions don't have to be forced to fundamentally change their operations after the internet revolution, like travel agencies and media One of the reasons for the way. We still need a central entity like a bank to check that the money we transfer has not been spent before. Until—Bitcoin came along.

The genius of Bitcoin is that it is the first digital currency that does not require a central entity to verify transactions . How does it do it? Rather than having a central database controlled by one party (such as a bank), network members collectively verify transactions, thereby checking whether the same money has been spent twice. Disagreements of opinion are resolved by majority voting — if more than 50% of the network’s computing power validates a transaction, it is entered into the distributed database (this consensus mechanism is called “proof of work”).

Members of the network (we call them "miners") are rewarded in bitcoins for performing this important duty. Just like gold diggers expend energy to mine gold, bitcoin miners expend computing power and earn bitcoins. Bottom line – you can’t control the Bitcoin network (and any “double spending” of Bitcoin) unless you control more than 50% of the network’s computing power.

This gets to the heart of why Bitcoin is so dominant as a money network and hard to compete with . The Bitcoin network is the cryptocurrency network with the most computing power, which in turn means that Bitcoin tokens are worth more than other tokens — more computing power means the network is less likely to be compromised. This leads to a growing network, because mining Bitcoin is more profitable than any other coin, which leads to a higher Bitcoin price, etc. This self-reinforcing cycle continues.

So Bitcoin is the first monetary digital network that does not have to rely on a central entity, such as transferring value from a to b Banks, as currently the largest decentralized money network (over a considerable distance), are unlikely to be surpassed. If the history of the internet has taught us anything, it's that the dominant web will win.

Don't just take my word for it; What do people who switch to Bitcoin think? His name is Michael Saylor and his company is Microstrategy. As a contrarian, Salor thinks it's a good investment:

“I like market caps over 1000 $100 million and 50x bigger than the next competitor, they will eat the world, 99% disagree with me."

As for the best time to invest, he said:

“The best time to invest in anything The timing is when it's big enough that it's sure it's going to be successful... when it's dominant in the industry and small enough that no one else understands it and most people aren't sure "what's that?"

Many people believe that Bitcoin is here and now. It has been in operation for 12 years and is worth more than $300 billion. You might be thinking that if its design was fatally flawed, or if it was going to be overtaken by a competitor, that's already happened by now. On the other hand, while it entered the public consciousness a few years ago, most of the public (including those with money) haven't really given it much thought. An interesting combination. Salor then explicitly likens Bitcoin to investing in tech giants 10 years ago:

“Apple puts everything in your hands It's all materialized, and it's worth $2 trillion. Facebook dematerialized social energy, Google dematerialized libraries, information, and video. These are trillion-dollar ideas. If you invested ten years ago They, that's a good idea. If you look at who's doing it today, bitcoin is a dematerialized monetary network, it's still very early in its life cycle."

So Bitcoin can be likened to an early investment in technology stocks, but why is it also often referred to as a store of value? To do this, we need to delve into the history of the currency itself.

Bitcoin as a store of value

In October 2009, a seminal moment occurred when someone on a now-defunct Internet forum bought 5,050 bitcoins for $5.02 at an exchange rate of 1,006 bitcoins to 1 Dollar. How is this value determined? That's just the electricity cost to mine those bitcoins. Bitcoin has become something worth buying and selling.

Now, 1 Bitcoin is worth more than $10,000. But why is it still such a good store of value now that the price has risen so much? To explain this, we have to delve into the history of money.

In pre-money societies, the only way to exchange goods was by barter. If I have some fish and need some wood, and you have some wood and need some fish, we can make a deal. But if I don't want wood and just want something else, we can't trade. This is the so-called "demand coincidence" problem, and as society develops, this problem becomes more and more serious. The solution is to find something that we all agree has intrinsic value and trade that instead. So I can trade my fish for this valuable substance and then use it to buy other things I might need. This is what we call money - we buy it not to consume but to exchange for other goods.

So, what kind of items are good currency? Sound money has historically had all three characteristics.

1. Store of Value - If an item retains its value over a period of time, then it is a A good store of value. As a result, fruit becomes a poor store of value while it rots. But some things don’t need to physically rot to lose their value, a quote that makes sense to those who have recently lived through Venezuela’s hyperinflation.

2. Medium of Exchange - This is the key quality of money, its ability to be easily exchanged with other commodities and service transactions. The ideal medium of exchange should be portable, divisible (for purchasing goods of different value), and widely accepted.

3. Calculation unit - when one A currency becomes a unit of account when it is considered both a store of value and widely used as a medium of exchange. We started to "think" in terms of money. For example, the fish will cost me $5, and so on.

Today we are used to money being issued by the government, but that was only the case in the last century or so. Over the years, people have used many different substances as money, from gems and beads long ago, to monetary metals like silver and gold, and more recently government-backed money (also known as "fiat" money).

What all of these forms of money have in common is that they are or were scarce. Because the key point about money is this - money is only valuable if it is difficult to produce more of it, and is a good store of value. Sustaining this is harder than it sounds. If something is widely accepted as a form of money, people will go to great lengths to produce more of it. As a thought experiment, let's imagine a day when everyone in the world decides to use the metal copper as their primary form of money. The price of copper will skyrocket because the demand for copper as currency will far outstrip industrial demand for copper. Still, the skyrocketing price of copper means that mining for copper will be one of the most profitable things you can do.

The mining of copper is relatively easy, the supply of copper will increase rapidly, and the inflation of copper money will also increase (copper chasing the same amount of goods and services), so copper will no longer be a good store of value, so not a good currency.

A more formal way of saying this is that while copper "inventories" (everything produced in the past, minus consumption or destroyed) will increase slightly, but the "flow" (extra production in a specific time period) will increase several times. Therefore, good stores of value are those with as high a stock-to-flow value as possible.

This is why gold has been such a good store of value for thousands of years. Gold is chemically stable and thus nearly impossible to destroy (so "inventory" remains high), so far it has proven impossible to synthesize gold from other materials, and is also very difficult to mine (so "flow" remains low ). The stock-to-current ratio of gold is about 58.36. In other words, the "inflation rate" of gold is about 2%. Therefore, gold's high value is not because it provides an income, but because it is the "hardest" of the physical currencies - it has the highest stock float.

Source: "Bullish Case for Bitcoin"—Vijay Boyapati

So where does Bitcoin fit in all of this? The total supply of bitcoins is 21 million. How is this going? Bitcoin's "inflation rate" is predetermined. Every 4 years there is a so-called "halving", where the number of new bitcoins produced is halved every 10 minutes. The most recent halving was in May 2020, reducing the number of bitcoins generated every 10 minutes from 12.5 to 6.25. As a result, Bitcoin currently has an annual "inflation rate" of about 2%, and its stock-to-flow ratio is 56, very similar to gold.

As this halving happens every 4 years, Bitcoin will become increasingly difficult to mine. Therefore, over time, Bitcoin's inflation rate will tend to zero, and the stock flow will tend to infinity.

Take a moment to think about how unusual this is. Because no matter how high the price rises, there is no currency in the world whose supply does not increase. If the price of Bitcoin goes up 100x, that will absolutely have an impact on its supply. One of the advantages of Bitcoin is that the more miners there are, the supply of Bitcoin does not change, but as discussed earlier, the security of the network increases instead. Bitcoin is the "hardest" form of money.

The next obvious question is, how much is this scarcity worth? An anonymous Twitter user named "PlanB" created a model based on the concept of "stock flow". He plotted Bitcoin's monthly market capitalization versus stock-to-flow ratio (see chart below).

Source: "Bitcoin Stock-to-Flow Cross Asset Model" by PlanB

As shown by the different clusters in the graph, Bitcoin has gone through 4 different phases in its 12 year life stage. Clusters represent the market value of Bitcoin during each halving cycle. The historical trend is remarkable - there is a strong correlation between Bitcoin's market value and its stock-to-flow. Every 4 years, Bitcoin's stock-to-flow increases (after each "halving"), and historically, Bitcoin's market value rises by an order of magnitude or more (note the logarithmic scale on the graph ). After the halving in May 2020, we are currently approaching the start of Phase 5.

The advantage of a stock-to-flow valuation of Bitcoin is that its valuation can be compared with other stores of value such as Gold and Silver) for comparison. It is worth noting that both gold and silver are on the same trend line - there does seem to be a quantifiable value of scarcity.

At the time of writing, the stock-to-flow ratios of gold and bitcoin are about the same, but the total value of all gold is estimated to be about $10 trillion, and as of December 1, 2020, the total value of all existing bitcoins is about $350 billion. But remember, in 2024, there will be another halving, which will bring the stock-to-flow value to around 100. So, if this model is anywhere near correct, Bitcoin could have some huge gains in the future.

You may be thinking how can something be a good value if it is so volatile What about storage? Proponents of Bitcoin argue that its volatility is only a function of its stage of development. Currently, the vast majority of investors in Bitcoin are retail investors, not institutional investors. Volatility is likely to decrease as more money flows into Bitcoin from institutions and general adoption of Bitcoin increases.

In fact, there are signs that such institutional acceptance has already begun. Announcing the company's investment in Bitcoin, Michael Saylor said:

“This investment reflects our belief that Bitcoin As the world's most widely adopted cryptocurrency, it is a reliable store of value and an attractive investment asset with greater long-term appreciation potential than holding cash."

Saylor is not alone in taking a stand on Bitcoin. Legendary investors Paul Tudor Jones and Stan Druckenmiller both revealed this year that they hold bitcoin primarily to protect against a spike in inflation.

Bitcoin vs Government Currency

Most of us never stop to think about what money really is. We trade our labor for it, we spend it on things we need and want, and we try to save it to buy things we might want in the future. The dollar bill in your pocket has no intrinsic value - it has value only because other people think it has value. In this sense, money is a collective belief.

If we think of Bitcoin as another form of money, how does it compare to government issued money? As far as short-term saving is concerned, government money is undoubtedly more advantageous at present. Government currency is a medium of exchange and therefore a unit of account. This is because most governments require taxes to be paid in their national currency and have passed fiat currency laws that restrict payment for goods and services in other forms of money.

But for long-term savings, it's less certain. Sovereign currencies have proven to be poor stores of value for a long time, and I'm not talking about failed currencies like the Zimbabwean dollar or the Venezuelan bolivar. Think about how much more you can get for $10 or £10 now than you did 20 years ago, and remember that those 20 years were a period of relatively low inflation.

Plus governments' responses to the coronavirus pandemic. Quantitative easing in Western democracies has grown out of scale, dwarfing the scale of QE during the financial crisis. There are 22% more dollars in the world this year than last year. You might think that printing money is a good thing or a bad thing. What matters is that it happened. Intuitively, if the production of something increases, its value will decrease in the form of inflation, either inflation of the cost of goods and services or inflation of the cost of assets.

Summary

Using investment It seems fitting to end with the words of author and Bitcoin enthusiast Paul Tudor Jones. He recently said:

“I’ve never seen a store of value, but you’ve also seen the huge intellectual capital.”

He went on to say that if you are worried about inflation, you can do other transactions:

“You are betting on human fallacies, not human ingenuity.”

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In Paul Tudor Jones’ view, Bitcoin is a double bet: not only a bet on human ingenuity (the ability to use technology and the digital revolution to solve problems ), and also bet on human fallacy (inclination to print money to debase currency).

You may agree or disagree with some or all of the above. But hopefully you think Bitcoin deserves further investigation and should be taken seriously. The idea is too big to ignore.