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The Bitcoin Company

Newsletter

 

Hey! Welcome to the second edition of our newsletter.

We’re so happy to have you here!

Every two weeks we’ll jump into your inbox to help you understand Bitcoin – not only what Bitcoin is, but what it’s doing and what’s happening in the community around it. We’ll explain known concepts as well as new developments. Let us know what you think! We’d love your feedback.This week we’re talking about something on everyone’s mind right now: INFLATION.

 

By the Numbers

Data source: https://www.cryptocompare.com/

 

  The above chart examines the relative performance of common assets and investments in the US and developed nations.

  In the past 30 days much of the general market has tumbled outside of oil. Investors are likely reacting to the Fed suggesting a minimum of four interest rate hikes in 2022, a maneuver increasing the cost of debt in an economy built on it.

  While historically this can benefit commodities, banks, and industrial stocks, a burning question is how this affects bitcoin – which has never really seen a high interest rate environment.

  Our take is that bitcoin is likely to perform well in the future regardless of the Fed’s decision making. There are really only two scenarios: (1) the Fed is bluffing and will return to more money printing and low interest rates or (2) the Fed attempts the impossible of deleveraging the market, reducing money printing, and combatting inflation.

  Both scenarios are plausibly bullish for bitcoin. The first has been the environment bitcoin has thrived in over the past 12 years and the second, while minutely possible, has the high risk of destabilizing the economy, causing people to lose faith in the dollar and to flow to bitcoin.

 

 

1https://www.cnbc.com/2021/11/03/fed-decision-taper-timetable-as-it-starts-pulling-back-on-pandemic-era-economic-aid-.html

2https://www.nytimes.com/article/omicron-coronavirus-variant.html

3https://www.reuters.com/technology/bitcoin-extends-downtrend-falls-121-47176-2021-12-04/

Sources from left to right:

  1. https://twitter.com/sats_per_dollar
  2. https://twitter.com/BtcThis
  3. https://bitcoin.clarkmoody.com/dashboard/
  4. https://bitcointreasuries.net/
  5. https://twitter.com/BitcoinStimulus
  6. https://pricedinbitcoin21.com/landing
  7. Clark Moody Dashboard
  8. https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2022-January/date.html

Build your Bitcoin Knowledge

Each issue we will define a new Bitcoin term or highlight an element relevant to the ecosystem. If you want to explore more on your own we recommend checking out

Clark Moody’s awesome dashboard here:

https://bitcoin.clarkmoody.com/dashboard/

Difficulty Adjustment

Since the day that the Bitcoin network was born, it has been secured by a network of computers commonly referred to as miners. In the humble opinion of the Bitcoin Company, bitcoin is the hardest money the world has ever seen (learn what “hard money” is here), but in order to truly fit the definition, it must be backed by something. Fiat currencies like the US dollar are backed by political will and military firepower. In the case of Bitcoin, backing is provided by miners who run the bitcoin mining software on specialized hardware called ASICs, or Application Specific Integrated Circuits… essentially computers specifically built to perform one task in a hyper-optimized fashion. Every day these machines - located across the globe - are constantly working in a race against each other to solve a puzzle. In practice they execute a ‘hashing’ equation over and over until the ‘correct’ hash is found and a new block is mined. These computers are really not doing any advanced math; they are just guessing a random number, or “nonce”, over and over and over and over, and then hashing the result until they find an extremely rare hash output. When one of these computers finds a satisfactory nonce whose hash satisfies the puzzle, they tell the rest of the Bitcoin network about their success, add a new block to the blockchain, and then everyone starts the race over again to find the next block. There are tons of computers optimized for this guessing game and each second the network of miners makes approximately 190 quintillion guesses (that’s 19 plus 19 trailing zeroes!). 190,000,000,000,000,000,000 per second!

 

The time and energy expended in this constant race to find the next block is what makes up Bitcoin’s proof of work (commonly referred to as PoW) enforcement mechanism. The first miner to solve each new puzzle earns the privilege of constructing the next block in the chain and is compensated for their work with a block reward, which consists of a combination of transaction fees and the block subsidy.

 

 

 

You may have heard that there will only ever be 21 million bitcoin in existence. This is because the block subsidy adjusts downward over time. Every 210,000 blocks, or roughly four years, the block subsidy is cut in half (commonly referred to as the “halving”). When the Bitcoin network began, every new block had a subsidy creating 50 new bitcoin. After four years, that was cut in half to 25 BTC. After another four years, it was cut down to 12.5 BTC. And again, after another halving four years later, it was cut to 6.25 BTC per new block. The exponential decay of block subsidy rewards is written into the Bitcoin protocol and is what ensures that there will only ever be 21 million bitcoin in existence.

 

One of the most important parts of the Bitcon protocol dictates that these blocks should be found on average every ten minutes. As we discussed in our last newsletter, the regularity brought on by this ten minute target is why some people call the Bitcoin blockchain a “timechain” and regularly compare it to a clock or calendar. Naturally, as miners join or leave the network, the time it takes to find a block will decrease or increase, respectively. In order to counter this variability in hashrate, Satoshi created something which we now know as the difficulty adjustment.

 

To account for changes in mining power, the network recalibrates the difficulty of the puzzle every 2016 blocks (~two weeks). If the hashrate is low (meaning new blocks are coming in slower than the target time of ten minutes), then the network will make the puzzle easier to solve. If the blocks are coming in fast, then the network makes the puzzle more difficult to solve. Today, the majority of the reward that miners are paid for finding new blocks is made up of newly issued Bitcoins (from the block subsidy), the difficulty adjustment also keeps the issuance rate steady over the long term (check out ‘Bitcoin Fundamentals’ below). The US dollar has no algorithm controlling it’s issuance. Unless you’re one of the handful of appointed (not elected) bureaucrats that controls the currency, you have no way to be sure how much government printed money will exist at any given point in time. In fact, 37% of all US Dollars that have ever existed were created in 2020. This is the main reason we are seeing souring asset prices and inflation in our economies around the world. If you keep creating dollars out of thin air, assets naturally reprice and costs go up.

 

In stark contrast to the unpredictable nature of fiat money, Bitcoin miners just keep chugging along predictably. The supply issuance of bitcoin remains unchanged, transparently enforced by the code in the Bitcoin protocol that all participants are aware of and agree to. Right now, blocks are coming in on average every 10 minutes and 42 seconds, which is just slightly slower than the 10 minute target. If this above-average block-time persists over the next few days, the network will adjust the difficulty of finding a new block downward, and make the mining puzzle about 7.1% easier to solve, aka a -7.1% difficulty adjustment. .

 

Fight the FUD

Each week we will highlight a common (or obscure) critique of bitcoin and explain how to argue with integrity.

“There will only ever be 21 million bitcoin”

The story behind fixed supply

TBC_ BIP infographic

Unlike the ever changing monetary policy of the US Dollar, the monetary policy in Bitcoin has been clearly defined from the beginning. Simply put, there will only ever be 21 million bitcoin. This clear cap is one of the most important tenants that all participants of the network agree to. Bitcoin is frequently compared to gold since both are scarce, but with gold there is no clear definition on how scarce it is and there is no way to predict that the rate at which gold is mined will remain consistent.

 

In the modern financial world, central bankers are like ringmasters at a circus. So much as one errant word in a speech can trigger trillions of dollars of market movement. Some traders even study the body language of central bank figures in hopes of learning something. It is rather absurd in a world where limitless information is at the fingertips of anyone with an internet connection, a handful of unelected officials can easily exert a high level of manipulation over the money we rely on. As we’ll discuss more in this week’s highlight story, Satoshi was driven to create Bitcoin by the uncertainty in modern currency regimes. His vision was to create a money that did not need ringmasters.

 

The code defining the issuance of all 21 million coins is rather simple. For every block that is found or mined, new coins are minted and given to the miner who solves the hashing puzzle. These new coins are created from a “coinbase transaction” and are added to the circulating supply. In the early days of Bitcoin, each block that was found by miners yielded a coinbase reward of 50 bitcoin (in addition to any transaction fees that were paid by users submitting transactions). This will be cut in half every four years until - around the year 2140 - no more bitcoin will be mined.

 

But if the government or central authority has a monopoly on money, they will abuse the power to print more of it. Countries that trade with each other will benefit from printing more, faster than their competitor countries. This devolves into who can devalue their currency faster. Unlike centrally planned currencies, Bitcoin is predictable and unalterable. Simply put, Bitcoin is reliable.

 

TBC Taproot graphic

Highlight Story:

Inflation

For the second edition of our newsletter, we’re discussing a topic impossible to ignore right now: inflation.

 

Inflation is economic jargon to refer to an increase in the supply of money (monetary inflation), price of financial assets (asset price inflation), or the price of expenses in everyday life (Consumer Price Inflation or CPI). It has been a common topic since the final year-end CPI figures were publicly released a couple of weeks ago, showing average price increases at a staggering 7% in 2021 - the highest in four decades.

 

The Consumer Price Index (CPI) is a commonly shilled and standardized measure of inflation which tracks a basket of goods and services considered common for the average US consumer. Plainly put, the CPI is a highly flawed measure of actual inflation which can be manipulated quite easily by replacing certain items in the basket of goods for lower quality items, giving the artificial appearance of lower inflation… a tactic which has been employed many times.

 

The approach measuring the CPI has changed over time and previous methodologies would have published current inflation at levels above 10%. This means if you didn't receive a raise of more than 10% in 2021, the amount of goods and services you’re able to purchase has decreased significantly.

 

But why? What is causing such a radical increase in prices? A quick google search will likely cite several reasons:

 

Government mandated lockdowns slowed and damaged the production and delivery processes in supply chains causing a relatively lower supply of goods and services compared to demand.

 

People living off of stimulus checks or getting fired during the pandemic resulted in labor shortages causing a relatively lower supply of goods and services compared to demand.

 

Effects of the pandemic in 2020 dramatically reduced prices in several sectors - like airlines and leisure - and recovery of demand in these sectors will result in dramatic price increases when making year over year comparisons.

 

There a little bit of truth to each of these explanations, but trying to attribute price rises to a specific aspect of the economy just seems sorta short sighted. When it comes down to it, your high school economics teacher was right; prices are a measure of supply and demand. If there is more demand than supply for any given good, then its price will go up.

 

Explaining why there is more demand than supply across all goods and services in the US - the largest and most complex economy in the world - is equivalent to explaining why the 330 million people are producing and buying certain goods and services. It is a claim of knowing why humans are making decisions in their daily lives. This line of thinking is why many consider economics to be a social science as the economy is a culmination of each individual’s human action.

 

If you find deciphering the drivers of inflation to be an impossible task, you may have some empathy for the workers at the Federal Reserve who are mandated with solving the ongoing and ever complex puzzle of understanding and controlling price inflation while also maximizing employment.

You may also think it’s unfair to task anyone with this duty and become upset thinking about how poorly those in charge are performing. If those are your thoughts and feelings, you just might be Bitcoin’s inventor Satoshi Nakamoto!... Kidding, but you certainly agree with him.

 

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” – Satoshi Nakamoto, 2009

 

Satoshi found that in conventional government currency systems there is a constant decrease in the value of money in relation to goods and services. He found central banks and governments were failing in their responsibility to orchestrate the economy and act on behalf of their populations to maintain the value of their currency. This feels especially relevant as we see 40-year highs of inflation figures and the expansion to the supply of dollars as a result of the pandemic.

 

Central banks that have control over the supply of government currency - like the Federal Reserve does with the US dollar - will print money for spending in different sectors of the economy when trying to control price inflation or encourage employment. This can be effective or ineffective depending upon the policy decisions, but it is very difficult to truly understand what is driving issues within an economy and it is a completely separate task to properly address those issues. Satoshi asserted that over time more and more governments get this wrong - and in trying to achieve their goals, they devalue their currency, negatively affecting the savings of a country’s citizens.

 

Bitcoin was released in 2009 in the aftermath of a major policy decision that was designed by government officials to enhance the economy. In the process to resurrect several economies after recession, government currencies around the world were printed and spent to encourage growth. Since its inception Bitcoin has been directly tied to these government decisions. Satoshi embedded a newspaper headline in the genesis block saying “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

 

This message remains unchangeable and public in the very first block in Bitcoin’s blockchain serving as a reminder to many Bitcoiners of the most critical characteristic of its monetary system: no central party is able to influence the supply of BTC. It is a simple aspect of Bitcoin that’s commonly understood and repeated in chats about bitcoin, “there will only ever be 21 million.” But it is not just that bitcoin has a limit to its monetary inflation, but also that its supply schedule is completely transparent, works as expected, and cannot be changed.

 

Updates + Security Highlights

  • NYDIG $1 billion funding round values company at over $7 billion
  • Ledn $70 million Series B values company at over $500 million
  • Umbrel new releases adds self-hosted monitoring app Uptime Kuma
  • LN Markets updates derivatives trading application on Umbrel
  • Trezor firmware and application updates enables Taproot support
  • Lightning Labs releases github repository for bitcoin

Lightning Improvement Proposals (bLIPs)

  • Grayscale publishes Bitcoin investor survey study

 

Let us know if there are any projects you’d like us to keep a close eye on.

We’ll add them to our list here.

 

Content Highlights

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Join the Conversation

Tweet thread #1 of the week:

 

@clockwork_prior answers the question: what the hell is a change address?

1:03 PM · Jan 14, 2022

See the thread
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Join the Conversation

Tweet thread #1 of the week:

 

@JohnCantrell97-

I distill what I've learned into threads that explain Bitcoin using simple language...

1:33 PM · Jan 31, 2022

See the threads
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Bitcoin History

On this day (2/7) in 2019 peer-to-peer Bitcoin trading volume reached an all time high in Venezuela.

 

Learn more
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Bitcoin Trivia

Q: What was the dollar value of the financial crisis bailout package in 2008?

Find the answer here
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Bitcoin listen of the week:

Lex Fridman Podcast #231 – Alex Gladstein: Bitcoin, Authoritarianism, and Human Rights

Listen here