When entering the discussion of cryptoassets in general or bitcoin in particular, basic knowledge is essential.
More than Digital Gold
Bitcoin is often referred to as digital gold. Like the precious metal, Bitcoin is not dependent on a central issuer, cannot be manipulated by any authority, and has basic properties of a medium of exchange and store of value.
Unlike gold, Bitcoin is easy and cheap to transfer. Verification of authenticity is trivial. Moreover, the cryptoasset is programmable, which allows for easy transfers and flexible custody. The right to access Bitcoin can reside with individuals or groups of multiple individuals, and the possibilities for programmatic design are almost limitless. All of this works without a central institution to manage the process or regulate transfers and access rights.
“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”
A milestone in Computer Science
Real digital money has been a goal of many computer scientists and specialists in cryptography since the 1980s. With functioning public key cryptography, the foundation for such a development was laid as early as the 1970s. A number of cryptographers and so-called "cypherpunks" recognized the possibility of creating digital money that was not controlled by any one person, company or state. Interest grew, as did the number of research and development projects.
But there were problems. While the cryptographic methods that made digital money theoretically possible already existed, two problems remained unsolved for a long time. One was creating workable incentive structures for the creation of new money. The second was solving the "double spend" problem. This refers to preventing transactions in which an owner tries to make multiple payments with a given amount of Bitcoin, i.e., spend money multiple times.
The white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" published by Satoshi Nakamoto in October 2008 presented elegant solutions to both problems.
“Bitcoin actually has the balance and incentives right, and that is why it is starting to take off.”
Decentralized and tamperproof
The owners of the private keys have sole and full control over their Bitcoin. There is also no dependence on third parties for the execution of transactions. This is in contrast to existing structures and is also different from any other form of digital payment. Be it a bank account, a credit card, or an account with Paypal or Venmo, there is always someone who authorizes transactions on behalf of the user - or not. Not so with Bitcoin. Owners can use their private keys to submit transactions directly to the Bitcoin network, where all processing is then decentralized.
This complete control prevents Bitcoin from being blocked or expropriated. Unlike any other form of digital money, there is no one who can simply seize Bitcoin with the stroke of a pen or the click of a mouse on a computer system. Permanent influence on the value of Bitcoin by external intervention, such as an expansionary central bank policy or currency reform, is also technically impossible.
The raison d'être of a forgery-proof digital object that cannot be reproduced at will is obvious. This is particularly true in a world in which an increasing proportion of economic processes take place via digital networks. Compared to gold or other physical assets such as art, the digital asset is easier and cheaper to use. Transfer is trivial and safekeeping is possible without significant effort.
“Virgin Galactic is a bold entrepreneurial technology. It’s driving a revolution and Bitcoin is doing just the same when it comes to inventing a new currency.”
A new Asset Class
Bitcoin is an asset that in many respects has similarities to gold. However, due to the additional characteristics as a digital asset, Bitcoin and other cryptos can be seen as representatives of a new asset class.
If Bitcoin or other tokens become established and are integrated into existing systems or even replace parts of the old world, then an asymmetric risk/reward profile is created. Even small allocations can have a noticeable impact on the development of a portfolio in such a constellation.
For portfolio managers, the low correlation of cryptoassets to conventional asset classes is also interesting, making them potentially strong diversifiers.
“I really like Bitcoin. I own Bitcoins. It’s a store of value, a distributed ledger. It’s a great place to put assets, especially in places like Argentina with 40 percent inflation, where $1 today is worth 60 cents in a year, and a government’s currency does not hold value.”
The Currency of the decentralized Internet
In the 1980s, the importance of a digital currency for networked systems was recognized. However, transferring the existing centralized monetary system did not seem sensible, as otherwise the decentralized idea of the Internet was in danger of failing. Since then, highly centralized structures have developed on the World Wide Web, which is merely a service on the Internet. While the Internet has by no means failed, the advantages of the decentralized structure are not being exploited.
With the development of cryptoassets, there is now an opportunity to replace the existing centralized structures with decentralized ones. These structures offer numerous advantages, including privacy protection and security from repressive third party interference.
The fundamental differences of cryptoassets from all other digital payment methods, as well as their open and programmable nature, make them the natural currency of a decentralized digital network. Leading technology experts such as Marc Andreessen, the founder of Netscape, and Jack Dorsey (Square, Twitter) refer to Bitcoin as the money of the Internet.
“Bitcoin may be the TCP/IP of money.”
Bitcoin proponents have called the cryptoasset a revolution from the beginning. This stems in part from the freedom-loving motivation of the "cypherpunks," who rightly categorize private digital money as a powerful tool for free trade around the world. Such a development would also bring about a reduction in the influence of governments.
This spirit of meaningful and peaceful change has not been lost. Many see Bitcoin and other cryptoassets not just as a technology, an investment, or an economic experiment, but rather as a movement and an expression of freedom. Sound and independent money, in this view, is an elemental prerequisite of real freedom.
“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.”