*https://www.matthuang.com/bitcoin_for_the_open_minded_skeptic*
Matt Huang, May 2020
Originally published as a report for institutional investors: PDF
Bitcoin has grown from idea (2008), to working system (2009), to its first real-world use at <$0.01 per coin (2010), to a global currency valued at $8K+ per coin and $150B+ in aggregate (May 2020).
Although Bitcoin is empirically one of the best investments of the past decade, it still remains controversial. Is it a new form of money? A speculative bubble? Or a bit of both?
Investors have well-established frameworks for evaluating assets like equities, credit, and real estate. But a new monetary asset such as Bitcoin appears so infrequently that no clear framework exists.
This paper outlines a simple and intuitive framework for Bitcoin as a new monetary asset.
In the course of our work, we are often in the position of explaining Bitcoin to investors and institutions approaching it for the first time. Never before have we seen more interest in Bitcoin and its potential as a digital companion to gold.
Financial crises stress the limits of existing systems and can highlight the need for new ones. This was true during the financial crisis of 2008 (out of which Bitcoin was born), and it is perhaps more true today with the unprecedented levels of monetary and fiscal stimulus being pursued by governments worldwide.
There has been no shortage of writing about Bitcoin over the past 11 years. This paper does not claim any novel insight. Instead, it is a summary of the conversation we often have with investors seeking to understand Bitcoin for the first time.
“The two greatest inventions of the human mind are Writing and Money — the common language of intelligence and the common language of self-interest.” —Mirabeau
Money is an old and complex idea. Historically, it has taken many forms: from decorative axes and cowry shells to precious metals and representative paper. The last major shift was arguably in the early 1970s with the end of the US gold standard and the beginning of the modern fiat currency system.
We can think of money as a competitive market like any other. Gold dominated for centuries not by accident but by possessing important features such as being scarce and unforgeable. Today, fiat currencies dominate largely through local monopoly power, but all monetary assets still compete globally, with gold, US Dollars, and Euros favored as reserve assets.
Like written language, money is a protocol standard with immense network effects. A new monetary asset can only emerge if it better fulfills the core functions of money, and it can overcome the adoption hurdle of a new money. We believe Bitcoin offers a compelling answer to both.