Hello <<First Name>>,
Welcome back to KryptoConnect.
It's been since before Christmas when we last posted, and we have much to update you on (and will do so soon). For those of you that like podcasts, we have published our first one on the Christo Partners web site here or you can get to it on the Apple podcast app on your phone or mac here.
For the moment, let us get on with KC Issue No. #8.
This week we are going to circle back get 'down and dirty' with a few of the basics of Bitcoin. For some, it will be a revision and for others, it will be a chance to shift your understanding of Bitcoin and digital assets in general into 'muscle memory'.
What is bitcoin?
This is a fundamental question that I think a lot of people don’t understand. Bitcoin has so many interpretations that it becomes a little bit confusing when one tries to explain it. At its most basic form Bitcoin is simply a record of transactions (a ledger if you like) that copies itself across a number of different computers around the world (we call those copies nodes). That interoperation of the ledger transactions is the way these computers reach consensus on what are legitimate transactions. The fact that we have thousands of exact copies across thousands of computers and locations is, simply speaking, how holdings are protected.
It is impossible to change the balance of anyone's account, across thousands of computers because it would take a phenomenal amount of computing power just to do one set of recent transactions, much less all of them. The consensus framework means that once a transaction is verified six(6) or more times, it is deemed immutable and impossible to reverse.
The process by which nodes agree on the Bitcoin blockchain as a valid representation of all the transactions also how new bitcoin is created (or mined). Miners compete with each other to create the latest block of transactions and connect it to the blockchain of transactions. The winner of that competition has the right to add a number of Bitcoins to their account. The reward started at 50 BTC, and then every 210,000 blocks, the reward halves. It's gone from 50 to 25 to 12.5 and now is in a couple of months going to 6.25. Look at what price has done in the graphic below.
If the above gets you closer to the equivalent of understanding how your car engine works without being a mechanic, I will have achieved my goal.
Is that all it is?
At a more macro level, Bitcoin is so much more than just a ledger and software talking smartly to each other. Bitcoin is a system by which individuals can transact, a monetary system that does not need a centralised trusted authority by way of a bank to issue money and control interest rates. It’s a system that has no use of a government-issued piece of paper representing a promise to pay, Bitcoin is the payment, the money and the settlement. It's a store of value, a currency, its immutable, private and borderless.
To me, Bitcoin #BTC is new digital money that is controlled by maths and logic embedded in software and is unable to be debased like all other fiat currency. Bitcoin is money issued by the people of the planet for the people of the planet. No debasement allowed, it is a fixed supply and it requires no trust of third parties top work!
Why do we need it?
I did a quick calculation on the value of $100 (AUD) in 1965 to now in 2020. Interestingly the value came in at about $1600 in AUD’s present value. That means the inflation rate, which has been managed by governments has eroded the value of the Australian dollar over that time to the tune of 94.75%.
USA M2 money supply in 1959 was at $286 Bn, and now in 2020, it is at $15 Trillion (debt is over 30Tn BTW), annualised that's 6.7% (approx). Well, that's been property and the bigger indexes like DowJones also. Granted property has the utility of providing shelter, but where is the real growth? Printing money does not create any real 'hard money' store of value wealth.
Additionally, since 1971, when the world unpegged the dollar to gold, we (the people) have been part of an experiment that has not served us. It has widened the gap between rich and poor and forced taxpayers to bail out banks (in the USA at least).
Holding Bitcoin as an investor
I know many of our readers consider holding Bitcoin as an investment and, of course, that is perfectly fine. For me, however, it has a massively bigger value to offer. I am 'long' on Bitcoin (I do expect it to go up), but my view is that it is a hedge to everything else I am doing in the normal economy, my work, my savings and investments.
I view Bitcoin as a hedge against bad monetary policy (across all the interconnected economies), pumping money into the economy and driving debt to unprecedented levels while expecting us (and our kids and grandkids) to pay for it. I am of the view that sooner or later something has got to give, so holding some Bitcoin gives me an alternative way to operate in the new economy. This is not just my opinion, many macro investors like Dan Tapiero and Trace Mayer and a bunch more have talked about this for a while.
Bitcoin won’t replace the financial system?
No, it won't, well not for the near term anyway. The financial system is however in the process of changing albeit slowly. Here in Australia, we have the government proposing legislation to ban cash forcing everyone into the arms of the bankers. The same bankers that were hauled over the coals in the recent royal commission that found them wanting and driven by anything other than the interests of their depositors and customers.
A cash ban is designed to make every transaction electronic and trackable (eyes of the state in our wallets) so they can prevent a run on the banks (under the guise of countering the black market and money laundering). We now have the lowest interest rates in history (0.5% as at writing this) and imminently negative interest rates (completely uncharted waters).
On the positive side, we have 'peer to peer' lending, we also have the emergence of DeFi (de-centralised finance), where digital asset are used as collateral (Bitcoin mainly) to back other financial agreements eg: Hedges, Loans, Insurance etc.
Ok, that is it for today... and remember:
"Our goal is to be active participants in a destiny that is both possible and plausible."
Feel free to reach out with your thoughts, criticisms or ideas.
Peter Christo & Mark Sefton
Christo Partners (c) 2019