BTCO: Invesco Galaxy Bitcoin ETF

Bitcoin is a cryptocurrency that is built using its own blockchain. Bitcoin is decentralized, meaning there is no singular authority that controls it. Instead, it uses encryption based on blockchain technology, calculated by multiple parties on the network, to verify transactions and maintain the protocol.

Bitcoin (with a capital “B”) often refers to the network, the system, or the concept, while bitcoin (with a lower-case “b”) typically refers to the asset BTC.

Transactions are ordered and added to the blockchain through Bitcoin’s Proof-of-Work (PoW) consensus mechanism, which rewards cryptocurrency miners for validating transactions.

In other words, by extending the blockchain with new transactions, miners are compensated in two ways:

1. newly minted issuance (i.e., supply inflation) and
2. transaction fees included by spenders seeking to have their transactions added more quickly.

Bitcoin is governed by three groups of stakeholders: miners, nodes, and developers. Together, these groups reach a balance that we call the governance triumvirate, with each group possessing checks and balances against the other two.

Developers are essential for deploying code, whether to fix bugs or add features, but developers cannot force nodes and miners to run the code.

Nodes can choose which code to run and validate blocks and transactions, but nodes do not write code and cannot append new transactions to the ledger.

Miners can pick and choose which transactions to add to the ledger in which order, but they don’t write code and their blocks can be rejected by nodes. There are drawbacks to this type of system design, but this dynamic results in a decentralized balance of power that keeps Bitcoin credibly neutral in a way that no other system can achieve.

Mining is the process by which new blocks are created and new transactions are added to the blockchain ledger. In Proof of Work (PoW) mining, the process Bitcoin utilizes, miners compete to solve a simple but difficult mathematical puzzle that requires significant amounts of computational work. Upon identifying a valid solution to the puzzle, Bitcoin miners submit their proof (a new block) to the rest of the network and, upon acceptance of that block, the network issues a reward to the miner, resulting in the creation of newly minted bitcoin.

Miners also receive the transaction fees appended by spenders to all the transactions in the block they create and publish. Together, the newly minted issuance (reward, or “block subsidy”) and the transaction fees comprise a miner’s revenue. Each block, miners submit proof of their computational work to the network, and that proof is validated by network nodes, hence the name “Proof of Work.”

To maintain the hard cap supply of 21 millions coins, as well as keep Bitcoin’s network block time (the average interval between blocks added to the blockchain) at 10 minutes, the Bitcoin network periodically (every 2016 blocks, ~2 weeks) adjusts the difficulty of the puzzle. If the average time between blocks is greater than 10 minutes during one of these 2016-block periods (known as “difficulty epochs”), which would mean that the cumulative mining hashrate reduced during the period, the Bitcoin network will reduce the puzzle’s difficulty. If the cumulative mining hashrate increases during the difficulty epoch, resulting in an average block time that is less than 10 minutes, the Bitcoin network will increase the puzzle’s difficulty.

While the term “miner” typically refers to an entity that participates in block production on a Proof-of-Work network, the term “validator” typically refers to an entity that participates in block production on a Proof-of-Stake network, which we will explain more in our Ethereum lecture.

Does Bitcoin have any intrinsic value?

While Bitcoin might not be backed by a physical asset like gold, neither is the US dollar or virtually any other modern fiat currency. As mentioned before, most fiat currencies derive their value from a centralized authority and its supply and demand. Unlike the USD or other fiat currencies, bitcoin is fully decentralized, scarce, and mathematically verifiable. Due to its limited supply, functionality, and network effect, it has established a robust belief system around the world. The more people that use bitcoin, the more people it attracts. And because its supply is completely inelastic, this self-reinforcing virtuous network effect should make it more and more valuable over time.

“A better cryptocurrency come along, which would decrease the value of Bitcoin?”

Through a combination of first-mover advantage and smart design, Bitcoin’s network effect of security and user adoption is very hard for other cryptocurrencies to catch up with at this point. Bitcoin's dominance is currently around 48%, and much higher if you remove stablecoins and low-liquidity coins from the calculation, despite a full decade of alternative coin launches. That being said, Bitcoin is a young technology and other digital assets, like infrastructure tokens could gain more market share in the future.

“Bitcoin Mining (Proof-of-Work) consumes too much energy?”

Bitcoin mining’s competitive nature makes it an energy-intensive process at scale. But determining the environmental impact is hard. For one, all aspects of the digital economy require energy. Galaxy research has shown that Bitcoin is more efficient than the traditional banking system and gold mining on a global scale. Already about 25-50% of Bitcoin mining is powered by renewable energy sources or energy surplus. Bitcoin mining will gravitate towards the cheapest form of energy, which is increasingly renewable energy.  Lastly, Bitcoin’s energy consumption is undeniable, but critical in preserving the security of the network. As of 2022, electricity generation powering bitcoin mining is estimated to be responsible for 0.14% of world greenhouse gas emissions. We will go into more detail, in our “ESG” lecture during this academy.

“Bitcoin is too volatile”

The inelasticity of Bitcoin’s supply, one of the network’s most prominent features, also contributes to the volatility of bitcoin’s exchange rate. However, as more and more people have used Bitcoin over the years, its exchange rate volatility has consistently declined. That being said, it is important to state that bitcoin remains a risky growth asset, but that doesn’t mean it shouldn’t be included in your portfolio.

“Bitcoin isn’t secure”

Despite some early hiccups, since BTC had any exchange value the Bitcoin network has never been hacked. Bitcoin’s core protocol has functioned securely with 99.9% uptime since its creation in 2009.  A vast amount of computing power secures the network. The miners that power the network are distributed throughout the world and while some mining pools control between 20-30% of the hash rate, Bitcoin is unlikely to suffer from a so-called 51% attack due to the prohibitive cost of acquiring that much hashing power. Even in the case of a successful 51% attack, a malicious actor can only disrupt the chain or attempt double-spend attacks, but they cannot seize bitcoin from existing wallets.

Bitcoin is the first decentralized and censorship-resistant, verifiable, scarce digital money. It introduced the concept of digital private property on the Internet.

Bitcoin’s protocol limits it to 21 million coins. It’s scarcity and fundamental transactional properties combine with its network effect to give it value.

Bitcoin combines the scarcity of gold with the portability and fungibility of fiat currencies. This makes it ideal for the digital age.

Bitcoin uses a proof-of-work consensus mechanism. Mining is the process by which new blocks are created new transactions are added to the blockchain.

Bitcoin mining requires computational work, which consumes electricity, contributing about 0.1% to the world’s greenhouse gas emissions.