#22. The Bitcoin Vote
What does Trump’s bold Bitcoin promise mean for Bitcoin?
Former US President Trump made a headline appearance at a Bitcoin conference in Nashville this week as keynote speaker. This marked another significant milestone for Bitcoin, cementing its rise from unknown digital token to potentially a “Strategic National Reserve” asset. This comes as no suprises for those who’ve followed Bitcoin for several years. The properties that define Bitcoin make it becoming a national asset inevitable.
For those unfamiliar with Bitcoin or who don't fully understand it, here’s a breakdown of how it’s gone from drug money to hard money.
Genesis
Bitcoin, the first cryptocurrency, was born in 2008 when an anonymous figure/s, known as Satoshi Nakamoto published a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This document laid the groundwork for a decentralized digital currency, proposing a revolutionary system that eliminated the need for a central authority by using blockchain technology.
In 2009, Nakamoto mined the first block of the Bitcoin blockchain, commonly referred to as the "genesis block," officially launching the Bitcoin network. Nakamoto released Bitcoin in the midst of the financial crisis that had shaken public trust in banks and central authorities. The genesis block itself carried the headline of the Times: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." The message was clear.
Bitcoin’s innovative property is its decentralized nature, ensuring transparency, security, and immutability without the need for intermediaries.
What is Bitcoin?
Bitcoin is a digital currency that operates on a decentralized network using blockchain technology.
Unlike traditional currencies issued by governments (fiat currencies), Bitcoin is not controlled by any central authority. Instead, it relies on a distributed ledger maintained by a network of computers (nodes) that validate and record transactions.
This means that Bitcoin has no Governor, Chairman, CEO... There is no altering of monetary and fiscal policy. It purely exists on the network, performing its role to transfer value from address A to address B. All the monetary policy has been coded since inception and is unalterable.
This makes it predictable.
The Tech
Bitcoin transactions are processed through a ‘blockchain’, which is a public, transparent ledger that records all transactions in chronological order. In layman’s, here’s how it works:
Transactions: When someone sends Bitcoin to another person, the transaction is broadcast to the network. Each transaction includes the sender's and receiver's Bitcoin addresses and the amount of Bitcoin being transferred.
Verification: Network nodes, called miners, validate transactions by solving complex cryptographic puzzles. This process is known as mining. Miners group validated transactions into blocks and add them to the blockchain.
Consensus: The Bitcoin network uses a consensus mechanism called Proof of Work (PoW). Miners compete to solve the cryptographic puzzles, and the first to solve it gets to add the block to the blockchain and is rewarded with newly minted Bitcoin.
Immutability: Once a block is added to the blockchain, it cannot be altered. This immutability ensures the security and integrity of the transaction history.
21 Million
Bitcoin has a fixed supply limit of 21 million coins. Nakamoto embedded this cap in the Bitcoin protocol to ensure that there will never be more than 21 million Bitcoins in existence. This scarcity is designed to mimic the finite nature of precious resources like gold, contributing to Bitcoin's value proposition as "digital gold."
When Bitcoin was launched back in 2009, miners received 50 Bitcoins per block as a reward for adding a new block to the blockchain. These block rewards are the primary means by which new Bitcoins are introduced into circulation. Over time, the block reward decreases through a process called "halving."
Approximately every four years, or every 210,000 blocks, the reward for mining a new block is halved. Here’s how it has unfolded:
Initial Reward (2009): 50 BTC per block.
First Halving (2012): Reduced to 25 BTC per block.
Second Halving (2016): Reduced to 12.5 BTC per block.
Third Halving (2020): Reduced to 6.25 BTC per block.
Fourth Halving (2024): Reduced to 3.125 BTC per block.
Future Halvings: The next halving, expected around 2028 will further reduce the reward by 50%.
This halving mechanism will continue until the block reward approaches zero, around the year 2140. By that time, the maximum supply of 21 million Bitcoins will have been reached.
The halving adds a deflationary element to Bitcoin by reducing the amount of Bitcoin added into circulation every 4 years. This is contrary to fiat currencies where “quantitative easing” or as we know it, money printing happens often at the discretion of the central bankers.
As Bitcoin becomes a more attractive proposition, Nakamoto envisaged a rush to accumulate. As part of the protocol, Nakamoto added a difficulty level for miners. The difficulty level is a measure of how hard it is to find a new block compared to the easiest it can ever be. It adjusts approximately every two weeks (or every 2,016 blocks) to ensure that the rate of block creation remains roughly constant, at about one block every 10 minutes, regardless of the total computational power of the network.
The adjustment mechanism works as follows:
Increased Difficulty: If more miners join the network and the total computational power increases, blocks are found more quickly. To counteract this, the difficulty level increases.
Decreased Difficulty: Conversely, if miners leave the network and computational power decreases, blocks are found more slowly. The difficulty level then decreases to speed up block discovery.
The difficulty adjustment ensures the stability and security of the Bitcoin network by maintaining a steady block production rate, despite fluctuations in mining power.
Remember this is all embedded in the code already and will not change.
Purposes
Bitcoin serves multiple purposes, ranging from currency to an investment asset:
Medium of Exchange: Bitcoin can be used to buy goods and services from merchants that accept it as a payment method. There is no middleman [Visa, Mastercard, Amex etc..]. This means that only the sender and receiver are involved in the transaction with the miner acting as the validator.
Store of Value: Often referred to as "digital gold," Bitcoin is seen as a hedge against inflation and a store of value.
Investment: Bitcoin has gained popularity as an investment asset, with individuals and institutions buying and holding it for potential long-term gains.
Remittances: Bitcoin enables low-cost, cross-border transfers, making it an attractive option for remittances.
Smart Contracts: Although more commonly associated with other blockchain platforms, Bitcoin's scripting language allows for basic smart contracts.
While fiat currencies lose value every year, Bitcoin continues to gain it, making it a significant hedge against inflation.
Why Bitcoin?
Bitcoin addresses several key issues associated with traditional financial systems:
Decentralization: By removing the need for intermediaries, Bitcoin reduces the risk of centralized control and manipulation.
Financial Inclusion: Bitcoin provides access to financial services for the unbanked and underbanked populations, enabling them to participate in the global economy.
Security and Fraud Prevention: Bitcoin's blockchain technology ensures the security and integrity of transactions, reducing the risk of fraud and counterfeiting.
Transparency: The public ledger of the blockchain provides transparency, allowing anyone to verify transactions.
Lower Transaction Costs: Bitcoin transactions can be more cost-effective, especially for international transfers, compared to traditional banking and remittance services.
Strategic National Reserve
“Bitcoiners” tend to be anti-government / anti-establishment by nature. Distrust in those institutions is what pushed them down the road to non-government money. It therefore makes sense that Trump sees an opportunity. to capture those votes by attending the conference. What was eye-catching however was his promise to setup a Strategic National Bitcoin Reserve if elected.
Now clearly if Trump is elected he may set it up, he may not. As we all know, a politician’s promise is as solid as a chocolate teapot. Nevertheless, this will get him votes and with more people attracted to Bitcoin, it will be in their financial interests to get Trump in office as it is likely to further accelerate Bitcoin mainstream adoption as well as creating a surge of interest from nation states. A state Bitcoin reserve would symbolize 1st world governmental recognition [outside of obscure country’s like El Salvador] and validation. Traders and investors might anticipate a supply shock if the government begins accumulating Bitcoin, driving prices higher. As more states fight for the Bitcoin that’s on the market, prices will increase significantly.
To give you an idea, Gold has a marketcap of 15 trillion dollars. Bitcoin? 1 Trillion. Even if Bitcoin were to achieve half the marketcap of Gold, that would put the price of 1 Bitcoin at $333,000.
Game, Set, Match.
Game theory, the study of strategic decision-making among rational actors, provides a robust framework for understanding Bitcoin's mass adoption. Key concepts such as the Nash equilibrium and network effects are particularly relevant in this context.
A Nash equilibrium occurs when no participant can benefit by unilaterally changing their strategy, assuming other participants' strategies remain constant. In the context of Bitcoin, mass adoption could reach a Nash equilibrium where individuals and institutions continue to adopt Bitcoin because doing so is beneficial and deviating from this strategy would result in a relative loss. Bitcoin's value and utility increase as more participants join the network, creating positive feedback loops.
Trump has set his stall out and if he is to be elected, Bitcoiners and the wider crypto community have significant skin in the game. They will want to ensure that promise is fulfilled. If it is, game theory will kick into hyperdrive. If he doesn’t, a lot of people will be burned .
It was rumoured that Kamala Harris would also attend however she did not. Whether that is a policy issue or a schedule issue is yet to be seen. The democratic party have appeared to be less enthusiastic about Bitcoin, natually, as it is a threat to the dollar stability.
Nevertheless, the fact that Bitcoin has gone from obscure drug money to the campaign trail, once again shows it’s explosive trajectory.