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As U.S. markets brace for the inevitable bitcoin ETF approval, it is important to understand the difference between Bitcoin and bitcoin. The Bitcoin network is a distributed system of computers and nodes which process transactions and maintain the ledger. The asset bitcoin is the native token which lives on and is transferred through the Bitcoin network.
As investors look towards a possible investment in an ETF, they may be inadvertently opting out of important characteristics of the network and asset not accessible through an ETF wrapper.
Bitcoin’s Programmatic Supply
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The asset is programmatically scarce and verifiable through its open-source nature. Time Chain Stats, an open-source Bitcoin network analytics tool, shows the current circulating supply of bitcoin at 19.52 million coins. The max supply of bitcoin will be 20,999,999.97 coins, reaching that limit through a series of programmatic supply issuance reductions.
Roughly every four years the supply of newly issued bitcoin is cut in half automatically. At the beginning, there were 50 bitcoin issued every ten minutes. Currently that number stands at 6.25, with the next halving expected in April 2024.
The supply issuance will continue to be cut in half every four years until the year 2140. These events are widely believed to precede the periods of extraordinary price acceleration in bitcoin the asset.
Bitcoin The Distributed Network
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Price action aside, the Bitcoin network is a conglomeration of miners and nodes that process bitcoin transactions and maintain the ledger in a transparent way. Miners expend electricity in an effort to guess a random number, a consensus mechanism known as proof of work. The miner that guesses first is afforded the privilege of adding the next batch of transactions into a block of data.
That block of data is propagated out through the network, updating all of the nodes around the world. It is added in sequence to the chain of blocks prior, creating a complete history of all bitcoin transactions that have occurred over the Bitcoin network.
As more computers join the network to perform their proof of work, blocks are processed faster. Every two weeks however, the algorithm automatically adjusts the difficulty in order to keep the blocks coming in every ten minutes on average. This prevents the bitcoin supply from inflating too quickly. The difficulty can also adjust downwards if computers leave the network and blocks start coming in too slow.
Since bitcoin’s software is open source, the code can be changed at any time. The network of nodes distributed throughout the world however have to voluntarily opt into these changes to maintain network consensus. If malicious changes are accepted voluntarily by some of the nodes, those changes will not be recognized by the rest of the Bitcoin network, maintaining its integrity.
The system of distributed nodes and miners keeps the Bitcoin network decentralized. The decentralization is important for keeping bitcoin transactions resistant from censorship or attacks. In order to process a fraudulent or censored transaction, an attacker would need to attain an enormous amount of computing power and electricity in order to overpower the existing network participants.
This attack is commonly referred to as a 51% attack, however experts claim that attackers would need to achieve roughly two thirds of the mining power in order to conduct an attack lasting beyond a few minutes.
In doing so, they would need to acquire billions of dollars’ worth of scarce equipment and electricity. Conducting an attack would render this equipment worthless, incentivizing honest participation rather than network manipulation.
Bitcoin and Lightning: A Neutral, Global Payment Rail
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In holding bitcoin, savers are able to leverage the Bitcoin network to make purchases in a permissionless and peer to peer fashion. With the growing strength of the Bitcoin’s Lightning Network, payments are becoming easier than ever.
The Lightning Network is a second layer payment rail built on top of the Bitcoin network. Lighting enables instant and cheap bitcoin payments with similar censorship resistance as the Bitcoin network. Bitcoin and Lightning are becoming increasingly popular in Latin America and Africa due to banking limitations and runaway inflation.
Lightning Labs, a Lightning Network developer recently released a statement announcing the ability to transfer other assets over the Lightning Network, like stablecoins. The announcement posits that the development will help transform the Bitcoin network into a globally accessible financial settlement layer for a multitude of different currencies.
ETF investors can only leverage price action in a traditional portfolio. People who choose to hold bitcoin using its native technology have access to spending and trading twenty-four hours a day, every day of the year. A beginner’s overview of bitcoin only exchanges and self-custody wallets can be found here.
Those who opt into the bitcoin ETF blindly may be making some significant tradeoffs that they do not fully understand. For those seeking a more diversified approach to their investments, it may be beneficial to dig into the intricacies of bitcoin the asset, as well as Bitcoin the network to get a better understanding of these tradeoffs.
