Introduction to Bitcoin
Pierre Rochard
Bitcoin: digital cash
Cash: payments and savings
Payments
Outflow
Inflow
Balance
Minted gold coins
Fedwire, paper notes
Bitcoin network
Cash payments
Savings
Outflow
Inflow
Balance
Cash savings
Is saving good or bad?
Cash inflow
Producer goods
Holding cash
Consumer goods
Future cash outflows with uncertain timing
Mix and match
Payments can be independent from savings
Ball and chain
Payments can impede and disrupt savings
Savings can have many forms of payment, with different trade-offs
Trade-offs
Savings | Payments |
Scarcity | Utility |
Auditability | Privacy |
Decentralization | Throughput |
Verification | Computation |
Finality | Reversibility |
Trustless | Convenient |
Scarcity!
2,099,999,997,690,000 satoshis
100,000,000 satoshis equals 1 bitcoin
21 million bitcoins
Scarcity?
"crypto" is not scarce
thousands of altcoins
imitators and innovators
Is art scarce?
Differentiation drives scarcity
Fundamental adoption drivers
Aesthetics for art, assurances for monetary systems
Reflexive feedback loops
Keynesian beauty contest, provenance
Monetary system assurances
Permissionless
Seizure resistant
Censorship resistant
Credible, sound monetary policy
Permissionless
Seizure resistant
Censorship resistant
Proof-of-work mining provides probabilistic transaction finality
Currently paid for by new cash emission and transaction fees
Prisoner's dilemma: censoring a transaction gives the fee away�
Sound monetary policy
Automatic mining difficulty adjustment keeps emission on schedule
Impossible trinity
One of the main lessons of monetary theory is that the credibility of future issuance policy is a key aspect to the value of a currency.
- James Bullard, St. Louis Fed President
Credible monetary policy
public, global broadcast of blocks
low cost of verifying transactions and proof-of-work
trustless full verification of cash emission schedule
Bitcoin is an impenetrable fortress of validation
@StopAndDecrypt
Schelling point
Tomorrow you're meeting a stranger in NYC
No communication or coordination possible
Where and when do you meet them?
Bitcoin's consensus rules are a Schelling point
Reflexive feedback loops
First-mover
Brand
Liquidity
Volatility
Mining hashrate
First-mover advantage
Immaculate conception: fair distribution, value started at zero
Lindy effect: future life expectancy proportional to current age
10.5 years of accumulation and distribution
Brand
Bitcoin has a brand
Rest of the market is generic "other cryptocurrencies" (or worse)
Liquidity
Exchange limit orders + OTC desks + orderbook in your head
Bitcoin: more liquidity than the rest of "crypto" combined
Only Bitcoin futures are listed on CME
Volatility
Every day bitcoin’s fundamental value increases
Price oscillates around fundamental value
Herd behavior: people adopt as speculative SoV in waves
Will evaporate when we get to full adoption
Stock-to-flow ratio
Stock-to-flow ratio
Mayer multiple
price divided by 200 day moving average
Bitcoin's 30 day volatility
Drawdowns
Performance
Sharpe ratio
calculated holding for 4 years
Bitcoin savings duration
Expected value
Time
Bitcoin mining hashrate
Bitcoin relative transaction finality
Calculated by Nic Carter, numbers as of 07/15/2019 from coinmetrics.io
Bitcoin is efficient
Energy consumption is the fairest way to distribute new coins
Proof-of-work has the least worst security assumptions
Focus on production of electricity, not consumption
Questions?
Thank you for watching!
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@Pierre_Rochard
Pierre@BitcoinAdvisory.com
Next: Intermediate Bitcoin