Bitcoin

Bitcoin

Official logo of Bitcoin
Denominations
Plural	Bitcoins
Symbol	₿ (Unicode: )
Code	BTC, XBT
Precision	10−8
Subunits
1⁄1000	Millibitcoin
1⁄1000000	Microbitcoin
1⁄100000000	Satoshi
Development
Original author(s)	Satoshi Nakamoto
White paper	"Bitcoin: A Peer-to-Peer Electronic Cash System"
Implementation(s)	Bitcoin Core
Initial release	0.1.0 / 9 January 2009 (2009-01-09)
Latest release	25.1 / 19 October 2023 (2023-10-19)
Code repository	https://github.com/bitcoin/bitcoin
Development status	Active
Written in	C++
Source model	Free and open-source software
License	MIT License
Ledger
Ledger start	3 January 2009 (2009-01-03)
Timestamping scheme	Proof-of-work (partial hash inversion)
Hash function	SHA-256 (two rounds)
Issuance schedule	Decentralized (block reward) Initially ₿50 per block, halved every 210,000 blocks
Block reward	₿6.25
Block time	10 minutes
Circulating supply	₿18,925,000
Supply limit	₿21,000,000
Valuation
Exchange rate	Floating
Demographics
Official user(s)	El Salvador
Website
Website	https://bitcoin.org

One of the best ways to maintain the purchasing power of a currency is through decentralisation, and Bitcoin is designed to leverage this by operating on a distributed network, minimising central control and potential points of failure.

Bitcoin is a currency. What makes the currency unique is that it's the most popular cryptocurrency. Research suggests that the most popular cryptocurrency will maintain its purchasing power for much longer than any other currency. In other words, the cryptocurrency will be a much better currency.

The degree of risk associated with an investment in Bitcoin is 'medium', with the shares having an adjusted beta that is 42% above the market (1.42 vs. 1).

Assuming Bitcoin's share of the money supply increases to 10% (from 2.2%) and the value of the global money supply remains unchanged (at $35.2 trillion), then that equates to a Bitcoin price of $167,619 per coin (from $41,458), and upside of 4x.

Operations

How did the idea of Bitcoin come about?

The idea of Bitcoin, as well as the broader concept of cryptocurrencies, originated from a long-standing interest in digital cash and decentralised financial systems. Bitcoin itself was first introduced in a 2008 white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" by an individual or group using the pseudonym Satoshi Nakamoto.

Several key factors and ideas contributed to the development of Bitcoin:

1. Cypherpunk Movement: The Cypherpunk community, a group of activists advocating for the use of cryptography to bring about social and political change, laid much of the philosophical and technical groundwork for cryptocurrencies. They promoted the idea of using cryptographic techniques to create secure, anonymous digital currencies and transactions.
2. Earlier Digital Cash Experiments: Before Bitcoin, there were several attempts at creating digital cash systems, like David Chaum's DigiCash, which used cryptographic protocols to ensure privacy. While these systems had innovative ideas, they often relied on central authorities and didn't achieve widespread adoption.
3. Double Spending Problem: A significant challenge in digital cash is preventing double spending, where the same digital token is spent more than once. Traditional digital transactions require a central authority, like a bank, to validate transactions. Nakamoto's Bitcoin solved this with a decentralised ledger, the blockchain, which is maintained by a network of nodes following a consensus protocol.
4. Blockchain Technology: The introduction of blockchain technology was a key innovation of the Bitcoin paper. It's a decentralised ledger that records all transactions across a network of computers. This makes Bitcoin resistant to fraud and censorship.
5. Economic and Political Context: The development of Bitcoin was also influenced by the economic environment, particularly the financial crisis of 2007-2008. This period led to increased skepticism about traditional banking systems and interest in alternative forms of currency that weren't controlled by governments or central banks.
6. Influence of Previous Concepts: Bitcoin combined concepts from previously proposed systems like b-money and Bit Gold, which outlined ideas for decentralised digital currencies, but never fully developed them into working systems.

In summary, Bitcoin emerged from a confluence of ideas from the Cypherpunk movement, previous digital cash experiments, cryptographic advancements, and the socio-economic context of the time. It was the first successful implementation of a decentralised digital currency, solving key issues like the double-spending problem through its novel use of blockchain technology.

What's the mission of Bitcoin?

The mission of Bitcoin, as outlined by its creator Satoshi Nakamoto, is to provide a decentralised digital currency that enables peer-to-peer transactions without the need for a central authority, such as a bank or government. This is aimed at creating a financial system where transactions are transparent, secure, and accessible to everyone, regardless of their location or status. Bitcoin's design seeks to offer an alternative to traditional financial systems, emphasising financial freedom, privacy, and reduced reliance on centralised institutions. This mission is rooted in the belief that a decentralised approach to currency can offer enhanced security, lower transaction fees, and resistance to censorship.

What's the main problem that Bitcoin is designed to solve?

The main problem that Bitcoin is designed to solve is the issue of trust in financial transactions. Traditionally, trust has been established through intermediaries like banks or financial institutions. Bitcoin, through its decentralised blockchain technology, solves this problem by allowing for peer-to-peer transactions without the need for a centralised authority. This design addresses several key issues:

1. Double Spending: It prevents the same digital currency from being spent twice.
2. Censorship Resistance: Transactions cannot be easily blocked or censored by governments or institutions.
3. Reduced Dependency on Intermediaries: It minimises the need for third parties, reducing potential points of failure and costs associated with transactions.
4. Global Accessibility: Bitcoin offers a global, digital form of currency accessible to anyone with an internet connection, not limited by national borders or traditional banking systems.

What is Bitcoin?

Bitcoin is a currency.

What's unique about Bitcoin?

What makes Bitcoin unique is that it operates on a decentralised network (i.e. without the need of a central entity, such as the Bank of England), and the supply of the currency is limited (at 21 million coins).

The main benefit of operating on a decentralised network (rather than a centralised network) is that within the network, there is no single point of failure. In a centralised network, if the central entity that operates the network fails, then the whole network - and the currency that operates on the network - fails (i.e. there is a single point of failure in the network), whereas in a decentralised network, becasue there is no central entity, there is no single point of failure, and therefore the network - and currency - is likely to last for much longer, possibly forever.

For example, the world's first ever known currency is the Mesopotamian shekel, and it was operated by a central entity (The Kingdom of Lydia). When the central entity failed, so did the currency.

Another key benefit of transacting on a decentralised network is that transaction costs are likely to be lower.

Competition

Currency competition

Item	Bitcoin	US Dollar
Does the currency operate on a decentralised network?	Yes	No
Is the supply of the currency limited?	Yes	No
How likely is the currency to act as a store of value?	High	Low

The four functions of money

Item	Bitcoin	US Dollar
Medium of exchange	Yes	Yes
Measure of value	Yes	Yes
Standard of deferred payment	Yes	Yes
Store of value	Yes	No

Cryptocurrency competition

Item	Bitcoin	Ether	XRP
Does the currency operate on a decentralised network?	Yes	Yes	Yes
Is the supply of the currency limited?	Yes	No	No
Is the cryptocurrency the most popular one?	Yes	No	No
How likely is the currency to act as a store of value?	High	Low	Low

Market

Total Addressable Market (TAM)

The TAM for Bitcoin is indeed the global currency market. This includes all forms of money circulation worldwide — from fiat currencies held in banks and cash reserves to investments and digital transactions. This encompasses every potential user or entity that could theoretically adopt Bitcoin, either as a means of transaction, a store of value, or for investment purposes. It represents the maximum possible market opportunity for Bitcoin, assuming universal adoption and acceptance.

The global currency market, including fiat money and investments, is vast. As of 2023, the total value of all the money in the world, including broad money (M3), which covers cash, bank deposits, and money market securities, was estimated to be in the range of approximately $100 trillion USD. Bitcoin's TAM, when considering the potential to replace or complement global currency usage, would thus be a fraction of this amount.

As of July 2023, the total value of narrow money globally, which includes all physical money (notes and coins) and money deposited in savings and checking accounts worldwide, was approximately $40 trillion. This figure represents the M1 money supply, a classification of money that covers the most liquid forms of currency in circulation​.

Serviceable Available Market (SAM)

The SAM narrows down to the global cryptocurrency market. This is the market segment that Bitcoin is actually equipped to serve and includes all individuals and entities currently engaged in or open to engaging with cryptocurrencies. This market is more specific to Bitcoin's capabilities and reflects the growing interest and acceptance of digital currencies for various uses, including remittances, investment, online transactions, and as a hedge against traditional currency fluctuations.

The global cryptocurrency market is a subset of the broader currency market. As of 2023, the total market capitalisation of all cryptocurrencies was fluctuating around $1 trillion to $2 trillion USD. Bitcoin, being the largest cryptocurrency by market cap, dominates this space, but the SAM for Bitcoin would include the total market cap of all cryptocurrencies, considering that these users are potentially open to using Bitcoin.

Serviceable Obtainable Market (SOM)

The SOM further narrows down to the U.S. cryptocurrency market. This represents the segment of the SAM that Bitcoin can realistically expect to capture in the near to medium term. It takes into account factors such as Bitcoin's current market penetration in the U.S., regulatory environment, competition from other cryptocurrencies, technological advancements, and market trends within the United States. The U.S. market is particularly significant due to its substantial economic size, high level of technology adoption, and its influential role in global financial systems.

Estimating the U.S. cryptocurrency market is more complex, as it would involve considering the proportion of the U.S. population or financial sector engaged in cryptocurrency usage. As a rough estimate, if we consider the U.S. as accounting for about 20-30% of the global cryptocurrency market (a broad assumption based on its economic size and level of investment in cryptocurrencies), the SOM for Bitcoin in the U.S. could be a proportion of the global market cap, roughly in the range of $200 billion to $600 billion USD.

Risks

As with any investment, investing in Bitcoin carries a level of risk. Overall, based on the Bitcoin's adjusted beta (i.e. 1.42), the degree of risk associated with an investment in Tesla is 'medium'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report.

The key risks can be found below. For us, currently, the biggest risk to the valuation of the currency relates to the strong competition from other cryptocurrencies and traditional financial systems (i.e. competition risk).

1. Volatility: Bitcoin is known for its high price volatility. Its value can fluctuate dramatically over short periods, influenced by factors like regulatory news, technological developments, market sentiment, and macroeconomic trends.
2. Regulatory Risks: The regulatory environment for cryptocurrencies is still evolving. Changes in regulations, both in the U.S. and internationally, can impact Bitcoin's adoption, usage, and value.
3. Security Risks: While the blockchain technology underlying Bitcoin is secure, exchanges and wallets can be vulnerable to hacking and other security breaches.
4. Market Adoption and Competition: Bitcoin's long-term success depends on its widespread adoption. This is uncertain and can be affected by several factors, including competition from other cryptocurrencies and traditional financial systems.
5. Technological Risks: Issues like scalability, transaction speed, and energy consumption are technological challenges that Bitcoin faces. How these challenges are addressed can affect its future utility and value.
6. Limited Historical Data: Compared to traditional assets, Bitcoin has a limited track record, which can make it difficult to predict future performance based on past trends.
7. No Intrinsic Value: Unlike stocks or bonds, Bitcoin does not represent a share in a company or a claim on assets, and it does not generate income. Its value is largely driven by supply and demand, making it more speculative.
8. Legal and Tax Implications: Depending on the jurisdiction, there can be legal and tax implications associated with trading and investing in Bitcoin, which can affect returns and complicate compliance.

Valuation

The total value of narrow money globally is estimated at $35.2 trillion as at May 2020, according to The Money Project.

The total value of Bitcoin as of today (20th March 2022) is $787 billion.

Accordingly, Bitcoin's share of the global money supply is 2.2%.

Bitcoin currently trades at $41,458 and the maximum number of coins is 21 million.

Assuming Bitcoin's share of the money supply increases to 10% (from 2.2%) and the value of the global money supply remains unchanged (at $35.2 trillion), then that equates to a Bitcoin price of $167,619 per coin (from $41,458), and upside of 4x.

Actions

To invest in Bitcoin, click here.

Appendix

Below is a table covering some of the most well-known cryptocurrencies and their unique characteristics.

This table provides a snapshot of the unique qualities of each cryptocurrency.

Cryptocurrency	Unique Feature
Bitcoin (BTC)	The first cryptocurrency, it introduced blockchain technology and operates on a proof-of-work model.
Ethereum (ETH)	Introduced smart contracts, allowing decentralised applications (dApps) to run on its blockchain.
Ripple (XRP)	Focused on international money transfers, it offers fast transaction speeds and low fees.
Litecoin (LTC)	Similar to Bitcoin but with faster block generation rate and a different hashing algorithm (Scrypt).
Cardano (ADA)	Uses a proof-of-stake model and focuses on security through a layered architecture.
Polkadot (DOT)	Enables different blockchains to transfer messages and value in a trust-free fashion; betting on blockchain interoperability.
Chainlink (LINK)	A decentralised oracle network designed to connect smart contracts with data from the real world.
Binance Coin (BNB)	Originally created as a utility token for the Binance cryptocurrency exchange, it now fuels its blockchain ecosystem.
Solana (SOL)	Known for its high throughput and low transaction costs, it uses a unique proof-of-history mechanism.
Dogecoin (DOGE)	Began as a meme but gained popularity and use, particularly for tipping and charitable donations.
Uniswap (UNI)	Pioneered the decentralised finance (DeFi) movement with an automated liquidity protocol on Ethereum.
Monero (XMR)	Focuses on privacy and anonymity, using ring signatures and stealth addresses to obscure transaction details.

Beta risk profile

Beta value	Risk rating
0 to 0.50	Low
0.50 to 1.50	Medium
1.50 to 3.00	High
3.00 and above	Extremely high

Bitcoin adjusted beta calculation

Date	iShares MSCI World ETF unit price (USD)	Bitcoin share price (GBP)	iShares MSCI World ETF unit price change (%)	Bitcoin share price change (%)
01/11/2018	86.21	4,017.27
01/12/2018	78.87	3742.70	-8.51%	-6.83%
01/01/2019	84.96	3457.79	7.72%	-7.61%
01/02/2019	87.49	3854.79	2.98%	11.48%
01/03/2019	88.79	4105.40	1.49%	6.50%
01/04/2019	92.09	5350.73	3.72%	30.33%
01/05/2019	86.76	8574.50	-5.79%	60.25%
01/06/2019	91.02	10817.16	4.91%	26.15%
01/07/2019	91.86	10085.63	0.92%	-6.76%
01/08/2019	89.84	9630.66	-2.20%	-4.51%
01/09/2019	91.78	8293.87	2.16%	-13.88%
01/10/2019	94.12	9199.58	2.55%	10.92%
01/11/2019	96.76	7569.63	2.80%	-17.72%
01/12/2019	98.78	7193.60	2.09%	-4.97%
01/01/2020	97.73	9350.53	-1.06%	29.98%
01/02/2020	89.67	8599.51	-8.25%	-8.03%
01/03/2020	77.93	6438.64	-13.09%	-25.13%
01/04/2020	86.36	8658.55	10.82%	34.48%
01/05/2020	90.7	9461.06	5.03%	9.27%
01/06/2020	92.14	9137.99	1.59%	-3.41%
01/07/2020	96.65	11323.47	4.89%	23.92%
01/08/2020	102.96	11680.82	6.53%	3.16%
01/09/2020	99.52	10784.49	-3.34%	-7.67%
01/10/2020	96.53	13781.00	-3.00%	27.79%
01/11/2020	108.94	19625.84	12.86%	42.41%
01/12/2020	112.41	29001.72	3.19%	47.77%
01/01/2021	111.49	33114.36	-0.82%	14.18%
01/02/2021	114.27	45137.77	2.49%	36.31%
01/03/2021	118.49	58918.83	3.69%	30.53%
01/04/2021	123.61	57750.18	4.32%	-1.98%
01/05/2021	125.6	37332.86	1.61%	-35.35%
01/06/2021	126.57	35040.84	0.77%	-6.14%
01/07/2021	128.83	41626.20	1.79%	18.79%
01/08/2021	132.02	47166.69	2.48%	13.31%
01/09/2021	126.46	43790.89	-4.21%	-7.16%
01/10/2021	133.84	61318.96	5.84%	40.03%
01/11/2021	131.1	57005.43	-2.05%	-7.03%
01/12/2021	135.32	46306.45	3.22%	-18.77%
01/01/2022	128.32	38483.13	-5.17%	-16.89%
01/02/2022	124.58	43193.23	-2.91%	12.24%
01/03/2022	128.16	45538.68	2.87%	5.43%
01/04/2022	117.42	37714.88	-8.38%	-17.18%
01/05/2022	117.94	31792.31	0.44%	-15.70%
01/06/2022	106.88	19784.73	-9.38%	-37.77%
01/07/2022	115.57	23336.90	8.13%	17.95%
01/08/2022	110.28	20049.76	-4.58%	-14.09%
01/09/2022	99.95	19431.79	-9.37%	-3.08%
01/10/2022	107.42	20495.77	7.47%	5.48%
01/11/2022	115.44	17168.57	7.47%	-16.23%
01/12/2022	109.25	16547.50	-5.36%	-3.62%
01/01/2023	117.01	23139.28	7.10%	39.84%
01/02/2023	113.98	23147.35	-2.59%	0.03%
01/03/2023	117.67	28478.48	3.24%	23.03%
01/04/2023	119.79	29268.81	1.80%	2.78%
01/05/2023	118.6	27219.66	-0.99%	-7.00%
01/06/2023	124.52	30477.25	4.99%	11.97%
01/07/2023	128.54	29230.11	3.23%	-4.09%
01/08/2023	125.7	25931.47	-2.21%	-11.29%
01/09/2023	120.17	26967.92	-4.40%	4.00%
01/10/2023	117.11	34667.78	-2.55%	28.55%
01/11/2023	122.84	37313.97	4.89%	7.63%

Bitcoin beta and adjusted beta value

	Beta	Adjusted beta	Comment(s)
Consistent (monthly) intervals between data points	1.64	1.42

Glossary

Here's a glossary of key terms commonly used in the cryptocurrency and blockchain space:

1. Blockchain: A digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
2. Bitcoin (BTC): The first and most well-known cryptocurrency, which introduced blockchain technology.
3. Ethereum (ETH): A blockchain platform known for its smart contract functionality, allowing developers to build decentralised applications.
4. Smart Contract: A self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code.
5. Ripple (XRP): A digital payment protocol and cryptocurrency known for its digital payment protocol more than its cryptocurrency.
6. Litecoin (LTC): A peer-to-peer cryptocurrency often considered the silver to Bitcoin's gold.
7. Cardano (ADA): A blockchain platform that aims to be a more secure and scalable infrastructure for developing decentralised applications and smart contracts.
8. Polkadot (DOT): A multi-chain interchange and translation architecture which allows customised side-chains to connect with public blockchains.
9. Chainlink (LINK): A decentralised oracle network designed to connect blockchain-based smart contracts to external data sources.
10. Binance Coin (BNB): Originally a utility token for the Binance cryptocurrency exchange, now used to power its ecosystem.
11. Solana (SOL): A high-performance blockchain supporting builders around the world creating crypto apps that scale today.
12. Dogecoin (DOGE): A cryptocurrency that started as a meme but grew to have a large online community and real-world usage.
13. Uniswap (UNI): A popular decentralised trading protocol, known for facilitating automated trading of decentralised finance (DeFi) tokens.
14. Monero (XMR): A privacy-focused cryptocurrency that obfuscates sender, recipient, and amount in transactions.
15. Proof of Work (PoW): A consensus mechanism that requires participants to perform computationally intensive tasks to validate transactions and create new blocks.
16. Proof of Stake (PoS): A consensus mechanism where validators are chosen to create new blocks based on the number of coins they hold and are willing to "stake" as collateral.
17. Decentralised Finance (DeFi): Financial services, including lending, borrowing, and trading, provided on a decentralised network typically built on blockchain technology.
18. Non-Fungible Token (NFT): A type of cryptographic token on a blockchain that represents a unique asset, such as digital art, collectibles, or real estate.
19. Cryptocurrency Wallet: A digital wallet used to store, send, and receive cryptocurrencies like Bitcoin and Ethereum.
20. Decentralised Applications (dApps): Digital applications or programs that exist and run on a blockchain or peer-to-peer network of computers instead of a single computer, and are outside the purview and control of a single authority.