A Bitcoin Primer

Susan Jung |

I'm sure you've heard of bitcoin; it's mentioned often in the press, but little understood. Essentially bitcoin is a technology-based form of currency designed to provide anonymous transactions with no central governing authority. The price has varied widely and is often based on rumor and speculation. In our view, it is not an investable asset as it is still unknown what its real fundamental value might be.
Still, it's important to understand this currency as others (i.e. platforms such as Facebook Libra) attempt to capture market share in the crypto currency market. Our research team assesses a wide variety of topics beyond equity research and portfolio management. It's important we stay abreast of new financial and market developments.
I thought it might be helpful to share with you a few insights provided by our research team to our advisor group. These excerpts give you a basic understanding of what bitcoin is.

What are Cryptocurrencies?

  • Purely digital units of value
  • No physical form, such as cash or checks
  • Rely on cryptography/mathematics instead of a central authorities
  • No need for central banks to issue and control supply
  • No need for trusted parties, such as banks or credit card networks, to facilitate transactions
  • Typically run on globally distributed, peer-to-peer networks
  • "Trust in math, not in people"
  • Began in 2008-2009 with Bitcoin
  • Bitcoin was the first implementation of the increasingly popular "Blockchain"
  • Technology

How was Bitcoin Started?

  • Invented by person or people using the pseudonym "Satoshi Nakamoto"
  • In November 2008, Nakamoto posted a nine-page paper explaining Bitcoin to a cryptography mailing list on metzdowd.com
  • In January 2009, Nakamoto released open source software for Bitcoin and mined the first block on the chain (Block 0 or the "Genesis Block").
    • The Genesis Block included the following text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"
  • After Bitcoin's popularity grew and Nakamoto had mined "'l million bitcoins, Nakamoto handed-off the lead development role on Bitcoin to Gavin Andresen in 2011
  • Nakamoto all but disappeared after the hand-off

Inventor of Bitcoin: "Satoshi Nakamoto"?

  • Claimed to be a 37-year-old male living in Japan
  • Wrote in impeccable English, sometimes using distinctly British phrases
  • Most of his posts occurred during waking hours of U.S. Eastern or Central time zones
  • Demonstrated a broad knowledge of many different disciplines - computer science, cryptography, psychology, economics
  • Many different people have been thought to be Nakamoto, but most have denied it
  • Some think Nakamoto is actually a group of experts, or perhaps even a government agency
  • Maybe Nakamoto is just someone who wanted to stay anonymous to avoid having too much influence and exemplify the decentralized vision of Bitcoin

How Bitcoin Works?

  • At its core, Bitcoin is just a digital ledger that contains account numbers and the amount of bitcoin owned by each account
  • Unlike most ledgers that are kept in one place, the Bitcoin ledger is decentralized with identical copies kept by ~12K different globally distributed "nodes" (anyone can act as a node)
  • The nodes form a peer-to-peer network, with each node talking to all the other nodes
  • When a transaction occurs, it is broadcast to the whole network and all the nodes update their ledger to reflect the new balances

I believe bitcoin, and its related concept called block chain technology, is an important evolution in currency. The real question for us is how to value these types of assets. Until we have a framework to value assets on a cash flow focused, fundamental basis, we will be observers rather than investors. Still, we will continue to monitor this topic closely. We believe at Destination Wealth Management that understanding today's investment landscape as well as future trends is an important in developing an appropriate investment strategy.
If you have any questions about this information, please let us know.

The opinions expressed herein are provided for informational purposes only and are not intended as investment advice. All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. Although the information provided to you on this site is obtained or compiled from sources we believe to be reliable, Destination Wealth Management cannot and does not guarantee the accuracy, validity, timeliness or completeness of any information or data made available to you for any particular purpose. Any links to other websites are used at your own risk.