Reflections on Bitcoin’s 15-year journey

May 28, 2024
Temple Melville

I ALWAYS think that the peripheral offshoots from a central story are frequently much more interesting than the main event itself. Bitcoin is no exception and has probably engendered more words than any other financial instrument in history. This is not any kind of inducement to buy, just some informative facts that may be of interest.

But where does it stand just now? Forget the ‘going to the moon’ story and the current slight impasse in Bitcoin’s price. Longer term, are we talking replacing gold, for example, or remaining a niche plaything?

The first thing to recognise is exactly what SHA256 is and means. This is the protocol that governs Bitcoin’s blockchain and algorithm, and is what keeps the miners churning out some more Bitcoin every 10 minutes – as well as confirming transactions within the block.

It is, of course, a mathematical construct, but one of such magnitude that mere humans can hardly conceive of it. Even older computers have a problem with it. The essence of it is that it produces solutions to complex formulae, but – surely, says the non-tech person – that is a very finite number. I hate to tell you this but SHA256 has more solutions than there are atoms in the universe.

I’ll just repeat that: more solutions than there are atoms in the universe. So, we are not going to be faced anytime soon – even with quantum computers, when they finally work properly – with any issues.

The second part of the algorithm has to do with the hashrate. Mining hashrate is a key security metric. The more hashing (computing) power in the network, the greater its security and its overall resistance to attack.

If you want to mine one Bitcoin, you will need more than 5,000 Bitmain Pro-miners. That would cost you around $12.5 million. The important thing about this is that these computers perform more calculations per second than there are grains of sand in the world.

Grains of sand

Both of these points are reassurance that the system and Bitcoin Blockchain are massively secure. In fact, when I give talks about blockchain, one of the things I ask the participants is what they regard as secure. Most go for grains of sand in the world – and that’s only the secondary security level.

Moving on, how much Bitcoin can all the world’s millionaires own, if evenly spread? Working on the final outcome of 21 million (there are well over 100 years to go to get there), the answer is 0.375 Bitcoin. Think about that. There are massively more millionaires than there are Bitcoin.

Next out of the box, how has Bitcoin fared as an investment since inception? Ignoring the first few years when it could not really have been described as an ‘investment’, in eight out of the eleven most recent periods Bitcoin has been the best performing asset. Having just 1% of your portfolio allocated to Bitcoin would massively improve your returns and, in fact, that is about what you should have relative to assets worldwide.

Finally, what does inflation have to do with Bitcoin? The first point, of course, is that no one can interfere with its creation rate. It’s hard-wired into the protocol. But everything inflates.

Even gold, which is just about at an all-time high adjusted for inflation, and certainly in absolute terms, has an inflation rate. It is pretty steady over many years at between 1.4% and 1.5%. This is the addition to gold stocks each year.

Until April, Bitcoin was about the same – maybe a touch more – but definitely below the rate of inflation in both America and the UK. Now, some days later with the halving behind us, that inflation rate has dropped to about 0.8%. Perhaps not yet, but in the not-too-distant future, that may have profound effects.

And, by the way, how do you fancy carrying $1 million-worth of gold across a border? It’s only about 30 lbs in weight, but how much easier is it to click a button and it’s there?

As for the wastefulness of Bitcoin mining, going back a few years there was little incentive to be efficient. However, miners are now very much incentivised by that wonderful thing, the price mechanism, to find the cheapest and best value input costs.

Mining gold and running banks and their branches are both much worse in terms of carbon footprint and electricity usage than Bitcoin. Nor does it crowd out other users.

The whole point is that mining rigs can be turned off or on in minutes and the nature of mining means it smooths out usage and demand on electricity networks. Plus, renewable sources of energy for miners are up from below 40% to well over 70% now, with more happening all the time.

Finally, Bitcoin and crypto generally is famous for volatility. A 10-15% drop is very normal and, in general terms, usually gets made up reasonably easily. It sometimes rises not far short from these sorts of numbers.

Bitcoin has come a long way – and it has further to go on a number of fronts. There have been a number of alarming headlines over the years and, if you are of a nervous disposition, it is probably not for you. But, more than 15 years after it was invented, Bitcoin looks to have a bright future ahead of it.