Since the 2008 financial crisis, central banks have turned to unconventional monetary policy in an attempt to spur global economic growth. Featuring ultra-low interest rates and unprecedented quantitative easing, trillions of dollars have been released into the financial system and near-zero interest rates have become the new normal. Today, total debt held by global central banks exceeds $18 trillion and multiple countries such as Switzerland and Japan have implemented a negative interest rate policy, charging depositors for holding funds in the central banks.
For over five years, the US Federal Reserve has maintained a target Federal Funds rate between 0.00-0.50%, exerting significant downward pressure on global interest rates and forcing investment capital into exceedingly risky markets in pursuit of yield. The Fed has quadrupled the US monetary base via debt purchases yet the velocity of money has dropped sharply. This means additional dollars flooding into the financial system are not being lent to consumers, but utilized by institutional banks to double down on risky bets in various equity, debt and derivative markets.
Markets have responded well to this influx of capital aided by the global accumulation of debt by central banks. The current bull market has lasted for over seven years, with all three major US stock indices topping all-time highs in 2016. The question is how will central banks normalize monetary policy and begin to raise interest rates? As noted by prominent economists, extended periods of zero (or negative) interest rates could have adverse consequences for the global economy.
In 2009, as central banks took these unprecedented steps to spur economic growth, Bitcoin was anonymously released with the aim of revolutionizing digital value transfer and restructuring the global financial system. The Bitcoin protocol introduced the idea of distributed ledgers, i.e blockchains, an innovative technology that is now being applied in various industries such as record management and distributed computing. Neha Narula's TED Talk, 'The Future of Money' does a exemplary job explaining this disruptive concept.
Over the last few years, other peer-to-peer platforms have been created, building upon and tweaking the attributes of Bitcoin's underlying technology. The Ethereum Virtual Machine (EVM) was released into production, allowing for the formation of decentralized autonomous organizations (DAOs) and the development of decentralized applications (dapps). The ethereum platform aims to become the backbone of the Internet of Things (IoT) economy, which will allow inanimate objects to conduct autonomous transactions via micro-payments.
Per coinmarketcap.com, less than $15 billion is currently invested in peer-to-peer platforms and supporting projects. Within this diverse industry, multiple disruptive technologies have come to market offering innovative services at significantly reduced costs. With close to $70 trillion invested on global stock exchanges, even the slightest reallocation of capital into this space will materially increase market values.
Please take a moment to explore the information provided throughout this site and utilize the links as a jumping off point in your research. Feel free to contact us to discuss the purchase of distributed digital property or ask any questions you may have.
In November 2008, the unknown 'Satoshi Nakamoto' mysteriously released a paper titled 'Bitcoin: A Peer-to-Peer Electronic Cash System' via a cryptology mailing list. Also known as the Bitcoin White Paper, this nine and a half page document provided detailed analysis of a peer-to-peer electronic cash system created to combat the Internet's reliance on "financial institutions serving as trusted third parties to process electronic payments."
We do not believe the timing of events to be coincidental. This well-thought "purely peer-to-peer" network cut out the middle man for a reason. As major Wall St. banks began to collapse, Satoshi Nakamoto identified the "inherent weaknesses of the trust based model" and created a currency free from world government manipulations. Nakamoto aimed to put currency back in the hands of the people and restore faith in global commerce.
Bitcoin is unlike any other currency ever invented in that, the future supply can be determined with certainty. As you can see from the chart below, the logarithmic algorithm regulating the mining of bitcoin has a mathematical limit of 21 million. There will never be 21,000,001 bitcoins in existence. This means that once all bitcoins have been mined, there will be no inflation of the currency EVER AGAIN FOR ALL OF HISTORY. A truly amazing characteristic.
If bitcoins can't be "printed" like fiat government-backed currency, how are they released into circulation? To put it simply, they are "mined" by ultra-powerful server networks as they solve complicated computing problems. As of this writing, 15,075,575 bitcoins have been mined, which is roughly 75% of the eventual outstanding circulation.
Bitcoins have a built-in, predetermined rate of inflation. Currently, the currency is inflating at a rate of 25 BTC for every block added to the Bitcoin 'blockchain', as that is the current reward to miners for attaching a new block. As you can see from the chart below, we've been at a 25 BTC / Block inflation rate since November 2012, the last time the rate halved.
After bitcoin 15,750,000 is mined something interesting happens. The inflation rate drops from 25 to 12 BTC / Block and continues to halve after smaller and smaller increases in bitcoin circulation. Essentially, we are beginning to reach the plateau of the supply curve, a fact that will become more apparent after 15.75 million BTC mined.
With a truly finite supply, the question is, how strong will demand be in the future? Is speculative investment driving bitcoin exchange activity or are citizens of the world putting their trust in the currency? Can society make the transition from fiat cash and plastic cards to personal, encrypted wallets? We believe there will be significant insight gained from analyzing the price reaction to the 12 BTC / Block reward. Stay tuned for further discussion.
Tyler Logsdon is a CPA and Registered Securities Representative located in Newport Beach, California. He is actively employed in the blockchain industry.
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