(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
What is bitcoin?
Bitcoin, with a capital “B”, is an internet wide distributed ledger, or blockchain, which we discussed last month, that records the ownership of all bitcoin (lowercase "b"). bitcoin, with a lowercase “b”, is a digital currency that is exchanged between two parties with no pre-existing trust
What are the origins of bitcoin?
Unless you have spent the time studying Bitcoin, it may appear as if it has emerged out of thin air. However, in reality, it is the result of several incremental technological innovations built on top of one another over several decades
There have been a number of attempts to create digital money:
The earliest known company to try and solve the problem of online payments is DigiCash. DigiCash was started in 1989 by David Chaum. DigiCash was a payments system that used a virtual currency called Ecash. There were a few banks in the US and at least one in Finland that ultimately implemented the system. The main problem with DigiCash was that it was hard to persuade the banks and the merchants to adopt it. Since there weren’t many merchants that accepted ecash, users didn’t want it either. Without merchants on board, there was no way to bootstrap the network with transaction capacity / cash to generate interest in the system
DigiCash Screen shot
Bit Gold was another noteworthy attempt at creating scarce digital money (circa 1998). Nick Sazbo, a computer scientist set out to create a protocol “whereby unforgeable costly bits could be created online with minimal dependence on trusted third parties.” Sazbos' premise was based on the fact that “precious metals and collectibles have an unforgeable scarcity due to the costliness of their creation.” With Bit Gold a computer (Alice) would have to spend resources solving a proof of work (PoW) puzzle that would generate a PoW chain — the more resources spent, the longer the chain — the longer the chain, the greater the theoretical value of Alice’s newly created property. Ultimately, the Bit Gold consensus mechanism fell short due to the fact that it would be inexpensive for a bad actor to create a large number of nodes (computers) and tamper with the property registry (
B-Money was another precursor to Bitcoin that arose around the same time as Bit Gold. B-Money conceptualized an "anonymous, distributed electronic cash system.” And while it was never developed beyond the whitepaper stage, it included a number of concepts, such as a distributed ledger, the digital signing of transactions, and the creation of money via PoW (like Bit Gold) that eventually made their way into Bitcoin
Hashcash was another project in the late 90s aimed at limiting e-mail spam that greatly influenced Bitcoin. Adam Back set out to increase the cost of sending an email, whereby the cost would be de minimis for honest users, yet prohibitive for abusive users. Hashcash required a sender to generate a Hashcash token by solving a PoW puzzle. This token (akin to a postage stamp) is sent with an email to its intended recipient. If the token is valid, the email will be delivered; if it’s invalid, the email will bounce. For a regular user, the cost to generate a Hashcash token would be negligible, but for a spammer, generating Hashcash tokens in bulk would be prohibitively expensive. Hashcash demonstrated that digital scarcity could be created in the face of abundance
The Bitcoin white paper was published in 2008 and the network launched in January of 2009. Bitcoin successfully created a digital currency that operates in a fully-decentralized, trustless manner that allows users to send monetary value to each other through the Internet without the need for trusted, financial intermediaries. This was made possible by a breakthrough improvement on the consensus mechanism invented via Hashcash. Bitcoin leverages the PoW puzzle of Hashcash and a newly established incentive mechanism that incentivizes transaction validators to play by the rules (i.e. prevents the bad actor acts that Bit Gold suffered from - see here for reminder of key blockchain technical properties)
Why should you care: Bitcoin was not the first attempt to create digital money. Instead, it was built upon the shoulders of the innovators that came before it. It is unlikely that Bitcoin would be where it is today, without the lessons learned and ideas proposed in the earlier attempts outlined above
My hot take: In our clickbait culture, nuance is crowded out by attention grabbing headlines. This approach creates overly simplistic narratives that deprive us of a complete understanding of anything portrayed in the mainstream media. This is significant as it relates to Bitcoin, and crypto more broadly speaking, as the primary medium through which many of us come to learn about the space is via the media, which often portray Bitcoin as some hot, new, potentially flash in the pan, fad. This might be true. However, it is not a fair representation of the evolution of the technology. To me, part of what makes Bitcoin worth understanding is that it’s the culmination of over three decades of technological innovation. It is the product of several innovators that have used trial and error to make thousands of little changes to create a digital money that works at scale. It is this incremental approach that has led to some of the most impactful innovations of our lifetime - the light bulb, turbines and electricity, the automobile, and many others are the products of gradual, incremental, improvements. This does not mean that Bitcoin will be a success; however, it does give it more credibility than the lay person might first give it and provides a context that makes it worth understanding - more on that next month
What is worth reading this month?
There was a lot of chatter about bitcoins' energy consumption - see below for a few well-informed takes on it. TL;DR: Implicit in the bitcoin energy debate is that the energy it uses does not create value; however, if the result of Bitcoin adoption at scale is a decentralized, scarce, store of value, it's energy usage could arguably be justified via the value it helps create and protect - no different than any other use of energy that is deemed "ok" via the value it creates. In addition, the business model of miners incentivizes the use of low cost, renewable energy. The cost of electricity is the largest input in the business model. Therefore, in order to attain the highest levels of profitability, bitcoin miners have been running around the world to find cheap power. That usually results in the miners consuming renewable power, which is historically the lowest cost power available.
Great American Mining, an early stage company that is partnering with oil and gas companies to capture flare gas for use as the power source in bitcoin mining rigs.
China potentially cracking down on bitcoin mining and trading activities Link. Link.
Who did what this month?
Goldman Sachs Leads 15M Investment Round in Crypto Firm Coin Metrics, a bitcoin data provider for institutional investors Link
Mexican Bitcoin Exchange Bitso Raises $250 Million, Becomes Latin America’s First Crypto Unicorn Link
E-Commerce Giant MercadoLibre Discloses $7.8M Bitcoin Buy: Latin American e-commerce giant MercadoLibre disclosed a $7.8 million bitcoin purchase making it the latest publicly traded company to park bitcoin on its balance sheet. Link
Fox announced it was launching an NFT company, Blockchain Creative Labs, and a blockchain-based animated series from Dan Harmon. creator of Rick and Morty, called "Krapopolis". Fox plans to launch NFTs for the series that represent characters, background art, and GIFs, as well as tokens that reward fans. Link.
New York Giants Ink Sponsorship Deal With Grayscale in NFL First: The New York Giants team has locked down the National Football League’s first corporate cryptocurrency partnership, with Grayscale Investments. Grayscale is now the “Official Digital Currency Asset Management Partner of the New York Giants,” the team said Wednesday. Under terms of the deal, Grayscale will provide “educational seminars on cryptocurrencies for Giants personnel each year.” Read more.
