An Introduction to Bitcoin: This study primer helps investors grasp Bitcoin fundamentals. Learn how the technology works, Bitcoin’s current and future state, how to value it, and the risks. Bitcoin may hedge global economic upheaval as the first “digital gold” store of value. Bitcoin rose over 120% in the last three years, making it one of the best-performing assets of the decade.
Bitcoin currently has a market valuation of about $540 billion. The rest of this research will illustrate that Bitcoin and its technologies have future promise. The first table below shows Bitcoin’s price, circulating supply, and market capitalization. The second table shows Bitcoin’s asset superclass ranking among equities, commodities, real estate, and others.
How Bitcoin Works
In Addition, How does Bitcoin work? Bitcoin’s main innovation is peer-to-peer, decentralized internet transactions. The ledger or blockchain acts as the asset’s balance sheet, while Proof of Work mining provides security and verification.
Bitcoin Blockchain
In Addition, A blockchain is a data structure, like an Excel sheet, that stores a growing collection of cryptographically linked information, called blocks. A blockchain’s blocks are ordered and contain hashes of their predecessors, the date and time they were produced, An Introduction to Bitcoin, and transaction data. The Bitcoin network stores all finalized transactions in blocks.
Blockchains help store sensitive data with excellent security, safety, and integrity. Blockchains are usually preserved on a network of internet users that copy the Bitcoin blockchain. A blockchain block cannot be changed retroactively without altering all following blocks unless the majority of the network agrees.
Mining Proof of Work
In Addition, Bitcoin network transactions and blocks are added by Proof of Work (PoW) mining. It also adds Bitcoin to the money supply. In theory, Proof of Work resembles gold mining. A proof of work is created by stakeholders (called “miners”) using supercomputers to process an algorithm. Proofs of work are difficult to solve and involve a lot of processing power, capital, and energy. Once a miner finds a solution, An Introduction to Bitcoin, Bitcoin network members may easily verify. Miners solve a proof of work every 10 minutes and receive 6.25 BTC every block, or $218,750, for their efforts.
The Bitcoin Situation
In Addition, Bitcoin’s market capitalization is above $540 billion, and crypto assets market capitalization is over $1 trillion since its introduction on January 3, 2009. We believe Bitcoin, the first digital gold and peer-to-peer, Bitcoin as a new asset class, decentralized asset class, will change finance. Bitcoin is extremely limited due to its programmed maximum supply of 21 million ending in 2140. Recent years have seen Bitcoin evolve as an investment product and institutionalize. The figure below demonstrates how Bitcoin’s supply approaches 21 million and follows a regular schedule. The current block reward is 6.25 BTC, which will be lowered by 50% during Bitcoin’s impending halving, possibly in Q1 or Q2 2024.
Along with adoption, Bitcoin has a vibrant technological and developer community that will continue to expand technical tools to interact with the Bitcoin network, making it easier to self-custody assets, transact cheaply, and understand blockchain data.
Bitcoin’s Future – Tech Investment
In Addition, Bitcoin is appealing because of its untapped potential, whether in technical advances that enable more transactions and faster transaction speeds or blockchain infrastructure innovation. The Lightning Network, Rootstock, and Stacks are promising scaling solutions for Bitcoin, allowing for more complex transactions. Ordinal inscriptions, similar to NFTs, allow for digital content inscription on the Bitcoin blockchain.
With the Lightning Lab’s taproot improvement, Bitcoin is poised to compete with Ethereum as a stablecoin and real-world asset settlement platform. Developers may now build and manage a larger range of assets on Bitcoin, with over 2,000 tokens already created on the test net, indicating demand and supporting BTC as a medium of exchange. Experimental projects like Bitcoin VM and Bitcoin Spiderchains strive to enhance Bitcoin’s capabilities by providing scaling solutions without altering the underlying code. Their impact is questionable due to their early development.
Several cryptoassets, known as “forks” have been inspired by Bitcoin’s technical infrastructure or extensively taken from its software. This allows Bitcoin innovation to permeate the rest of the sector, driving the cryptoasset industry’s innovation.
In Addition, Bitcoin verifies, settles, and secures transactions using mining, a computationally and energy-intensive lottery. A PoW network like Bitcoin’s original asset is its output, the Fastest growing asset class, not an input. So we call PoW cryptoassets “crypto-commodities.” Bitcoin has also become a store of value due to its programmed scarcity. Thus, like gold, Bitcoin is a consumable and store-of-value asset in the asset superclass.
Market Size
In Addition, Bitcoin’s main value is as a store of value. Thus, market sizing research is the best technique to predict Bitcoin’s long-term value. Thus, we can estimate a target price using simple market sizing. The method establishes a Total Addressable Market (TAM) and a market penetration percentage for the item. An investor may price Bitcoin by capturing a percentage of gold’s market value, the ultimate store of value.
Bitcoin’s market valuation is estimated at $526 billion, with a price of $26,970 as of September 30. Gold has a $12.12 trillion market cap. Thus, we may utilize market sizing to predict BTC’s potential price if it captures a certain percentage of gold’s market value. For example, Figure 4 indicates that BTC would cost $59,908 if it captures 10%. Under the most optimistic scenario, BTC might reach 30% of gold’s market worth, resulting in a price of $179,724.
Bitcoin’s intrinsic value (production cost)
In Addition, For crypto-commodities, the marginal cost of production determines the price floor at which miners are ready to sell. Start by emphasizing that we are not advocating for BTC pricing based on its marginal cost of production. A labor theory of value, which is untrue, would be require. Investors can predict a lower bound price for BTC and other crypto-commodities using the marginal cost of production.
Read More: Ethereum and Bitcoin, Solana Gains in 2024
In 2019, Charles Edwards suggested a method to determine the global average US dollar cost of generating one BTC. The process begins with the Cambridge Bitcoin Electricity Consumption Index (CBECI), which estimates the Bitcoin network’s daily electricity demand. Production cost per BTC is estimate by Edwards:
- Calculating daily BTC mining (based on miner rewards)
- BTC mining daily electricity cost calculation
- Estimating the global average “Elec-to-Total Cost Ratio”: (Bitcoin Electrical Cost) / (Daily
- Bitcoin Mining Business Cost)
Investors calculate Bitcoin Production Cost by dividing (Daily Electrical Cost) by (Elec-to-Total Cost Ratio). Finally, the Bitcoin Production Cost is comparing to the “Bitcoin Miner Price,” which estimates miners’ earnings per BTC. Bitcoin Miner Price = BTC Price + (Daily Transaction Fees) / (Daily BTC mined). When the BTC price is below the cost of mining one BTC, Bitcoin miners may be struggling and experiencing short-term losses.
In Addition, On September 30, 2023, the anticipated global average electricity cost to mine one BTC was $18,771.5, and the expected total cost was $31,285.8. To restate, investors should see this range as an estimate of Bitcoin’s price floor based on miner profitability and behavior patterns, not its inherent value.
Discover the latest version of our comprehensive Portfolio Allocation Primer for insights into Bitcoin in a portfolio context and optimal allocation strategies. Link
Risks
Economic Risk
In Addition, Bitcoin halvings and lower block rewards are two sides. Post-halving supply shocks frequently lead to new all-time highs, but it is also one of Bitcoin’s biggest long-term concerns. Transaction fees and new Bitcoin (block rewards) fund Bitcoin miners. Miners will eventually be paid entirely by transaction fees when this block reward declines. Some study suggests that halving miners’ block payouts may be problematic. For instance, transaction fees may not be enough, or their fluctuation may encourage miners to reverse transactions using “51% attacks.” Bitcoin’s economic security could suffer from both. New Bitcoin improvements, as proposed in this article, could generate sustainable incentives for miners and maintain network security. In conclusion, Bitcoin’s block reward halving threatens network security, but there are various solutions.
Environmental Risk
In Addition, Proof of Work mining is energy-intensive and can cost miners up to the current Bitcoin price in marginal expenses to mine one Bitcoin. The University of Cambridge Centre for Alternative Finance predicts that Bitcoin uses 55.33 Terawatt Hours a year and will grow as the network grows. We agree that the Bitcoin network’s energy usage will rise as the mining sector professionalizes and its popularity grows. Bitcoin mining’s energy mix is unclear. Bitcoin mining is likely fuelled by non-renewable energy, which may worsen climate change. It’s hard to verify such data, however, a lot of Bitcoin mining uses renewable energy. However, the consensus is that Bitcoin mining wastes energy.
Geopolitics Risk
In Addition, Countries have different views on Bitcoin and cryptoassets. Some accept them, while others restrict or forbid them. The best example is China’s 2021 crypto mining ban. Even if miners relocate abroad, regulatory uncertainty might pose legal and compliance issues for Bitcoin ecosystem participants. Globalization makes Bitcoin subject to geopolitical tensions and conflicts. As a tool to avoid economic sanctions or capital controls, governments may crack down on Bitcoin and try to control its use.
Technological Risk
In Addition, Like any technology, Bitcoin has flaws. Quantum computing’s hazards are becoming more concerning as technology advances. Quantum computers could threaten Bitcoin’s cryptographic security if matured enough. Quantum-resistant cryptographic techniques and continuous research are need to mitigate this risk. Like any computer code, they can have bugs.
One example is CVE-2018-17144, a 2018 coding vulnerability that might double-spend bitcoins. This problem was never exploit on the Bitcoin mainnet, and most full nodes switch to Bitcoin Core versions unaffecte by it, but it emphasizes the significance of acknowledging and fixing such dangers. In October 2023, the Bitcoin Lightning Network discovered a vulnerability that might allow an attacker to steal cash from Lightning Network channels using Hash Time Lock Contracts. These contracts enable counterparty payment exchanges without trust. Interim patches have been release to fix this issue.
Continuous development, peer review of code updates, and focus on decentralization and security help the Bitcoin community manage these technological concerns. To maintain Bitcoin’s resiliency, miners, developers, and consumers must keep informed and adapt to changing technological difficulties.
