• Bitcoin’s main investment thesis — an emerging digital store of value — is steadily being amended to incorporate additional utility for the world’s most valuable crypto asset. 

• Key protocol upgrades are enabling faster and cheaper payments as sidechains and asset-issuance protocols unlock Bitcoin’s potential to be home for other crypto assets.

• Relative to other crypto assets, the regulatory landscape for Bitcoin is clearer in the US and globally, and accessibility for institutional investors is growing quickly.

• Private and public companies, in addition to sovereign states, are already allocating to BTC as a treasury management strategy. 

• Bitcoin’s current state reinforces our perspective that the flagship digital asset remains a great entry point for institutional investors in crypto. 

 

 

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In recent years, the crypto industry has gone through an unrivaled period of innovation: decentralized finance (DeFi), NFTs and digital culture, sidechains and rollups, alternative smart contract platforms, and — more recently — the success of the much anticipated Ethereum Merge. It’s remarkable how much progress this emerging industry has made in so little time. Some might suggest these recent developments have made Bitcoin, the leading blockchain by market capitalization, obsolete. However, we believe a deeper look at Bitcoin’s core value proposition, fundamentals, and the current applications revolving around its network are making its investment case stronger than ever. 

In this article, we cover the key features that make bitcoin^[1] (BTC) a distinct crypto asset, review developments in the Bitcoin ecosystem that are propelling its utility, and argue why institutional investors should consider exposure to BTC as part of a diverse crypto asset allocation. 

Bitcoin’s value proposition and first-mover advantage

 

Bitcoin is a purely digital form of money, encompassing a series of design features that incentivize the creation and maintenance of a permissionless, decentralized, and censorship-resistant network for transfering value. Bitcoin’s incentive system is powered by a monetary asset, BTC, that has an immutable issuance schedule and supply. These features are outside of any government or other intermediary's control, creating a monetary system separate from the state. 

This design provides a trustless payment network for a monetary asset that cannot be confiscated or diluted by a monetary authority. This has led to BTC becoming a form of property that shares several characteristics with gold — the go-to store of value for millennia —but with additional features that make it a good candidate for a safe haven digital asset in the future. For example: (i) storing and transferring $0.01 worth of BTC has the same costs of storing and transferring $1 billion worth of BTC; (ii) proving the ownership of any amount of BTC is as simple as digitally signing a message with the private key granting access to those funds, which is free; and (iii) BTC used as collateral in a contract can be easily tracked and audited by the counterparties to that contract and the public. 

 

^{Table 1: Comparison of features of BTC, gold, and fiat currencies.}

Fourteen years after Bitcoin’s proposal, a whole industry has been developed atop blockchain technologies. However, bitcoin is the only crypto asset that has reached a market capitalization of US$1 trillion, a mark that took Microsoft, Apple, Amazon, and Google multiple decades to reach. 

While other networks have been created to rival Bitcoin — some faster or cheaper — most lack the level of decentralization of the Bitcoin network. This is likely the reason BTC has maintained its position as the leading crypto asset in market value over time. In particular, the number of addresses holding at least a small fraction of BTC reached more than 40 million in early 2022, and the increasing age of coins^[2] in these holdings underscores an increased understanding of BTC as an emerging digital store of value and the Bitcoin network as a robust settlement layer.

^{Figure 1: Distribution of BTC’s circulating supply with different coin ages[3].}

Bitcoin has what it takes to continue thriving

 

1. It’s the most battle-tested blockchain 

For a network with aspirations of being a borderless payment system — available to anyone, anywhere, at any time — security and uptime are critical. The Bitcoin network has been operating for over thirteen years with an uptime of ~99.98%. The last halt happened in March 2013, when a critical bug was fixed to avoid unexpected bifurcations of the blockchain.

Proof-of-Work^[4] (PoW), Bitcoin’s underlying consensus mechanism, has been the core engine behind the network’s security since inception. Anyone with a computer can verify all transactions since Bitcoin’s block genesis and objectively attest the work performed by the miners that compete to propose new blocks on the ledger. Even though the energy usage of the mining process has led to the opinion that Bitcoin is disproportionately contributing to climate change, recent research found that Bitcoin consumes 56 times less energy than the traditional payment system^[5]. More of our opinion on Bitcoin’s environmental impact can be found here. 

It’s also important to note that PoW has been stress tested in Bitcoin for more than thirteen years and in Ethereum for the seven years preceding its migration to Proof-of-Stake (PoS). PoW’s built-in difficulty adjustment, a key feature of the consensus mechanism, has been able to fine tune the level of security of the network and make it robust to external attacks. The recent mining ban in China, which took place in mid-2021, is one of the major demonstrations of how the operation of a decentralized network can be reallocated in very little time, without disrupting the service it provides to users.

PoS, which has a degree of complexity that far exceeds PoW, has only recently started being tested in a production environment of a high activity network (i.e., Ethereum). Unlike PoW, PoS still doesn’t have the track record of securing hundreds of billions worth of assets over a long span of time. So it’s fair to suggest that, at this point, using PoS as the consensus mechanism of a network with the size and value proposition of Bitcoin would not pay off compared to what might be gained in terms of the sustainability benefits of PoS. This state-of-affairs can naturally change, but it’s unlikely to happen in the near to mid term. As the old saying goes, “if it ain’t broke, don’t fix it!”

 

^{Figure 2: Bitcoin’s hash rate since January 2020[6]. On May 21, 2021, the Chinese government declared a widespread crypto mining ban in the whole of China’s territory. The total hash rate suffered a pretty significant debacle at the time (a ~56% reduction from the announcement to the bottom), but had already been completely reestablished in other countries (particularly the US) by the end of 2021, reaching new all-time-highs throughout 2022, even with the drawdown in BTC’s price.}

2. Bitcoin’s key upgrades do not change its monetary policy

It’s true that other blockchains receive updates at a much faster pace than Bitcoin. This may lead to some concluding that Bitcoin is too conservative, and that the reluctance of its community of users and developers to change the protocol will eventually lead to the death of the Bitcoin experiment. In actuality, this conservatism can be understood as precisely one of the factors giving predictability to Bitcoin and its value proposition, reinforcing the fundamentally unique features of Bitcoin's software since inception. Nonetheless, this conservatism still leaves room for eventual adjustments to be made, with several examples illustrating what has been improved on the Bitcoin technological stack since 2009: (i) hierarchical deterministic wallets, easing the Bitcoin user experience and custody practices; (ii) segregated witnesses, optimizing the registry of data on the ledger and opening the possibility of trustless payment channels; (iii) multi-signatures, allowing multi-party possession of BTC; and (iv) Taproot, creating the necessary infrastructure for greater privacy on the Bitcoin base layer and for upper layers to bring new utility to BTC. 

More importantly: all of these upgrades are not mandatory, meaning any improvements made to the Bitcoin software have to be backwards compatible^[7] with previous versions, giving users the optionality to adopt or dismiss them. This cannot be said of most other blockchains. Ethereum, for example, has been realizing its development roadmap by frequently implementing upgrades which are mandatory and not backwards compatible. Naturally, this is the cost of aiming to encompass far more utility on the base layer than what Bitcoin is capable of, as is the case with DeFi and NFTs. However, Ethereum can loosen the constraints, for instance, in monetary policy for its native asset ether, which has seen its issuance schedule change several times all the way to its latest modification after The Merge.

 

3. Applications built on Bitcoin are gaining momentum

The upgrades mentioned in the previous section are allowing much more utility to be built on top of the Bitcoin network — beyond its base layer. For one, we have the Lightning Network (LN), a second layer which leverages the Bitcoin network to secure monetary value in BTC, while allowing for much cheaper and faster transactions. This is similar to how paper notes used to be issued as certificates of deposits for gold to allow people to more easily transfer large amounts. However, the combination of Bitcoin and Lightning isn’t challenged by having to do final settlement with a monetary asset whose transport and authentication are far more complex and with costs that increase in scale with the amount being transferred^[8]. 

Lightning has seen its BTC capacity rapidly rise since mid-2021, continuing to grow even during the current bear market. As of early October 2022, there are ~5,000 BTC in liquidity on the LN. At current prices^[9], this translates to ~$100 million, with ~15,800 active nodes and ~81,700 payment channels. With the recent launch of the early version of Taro, a protocol that leverages Bitcoin revamped Taproot capabilities to issue new types of assets on the base layer—similar to ERC-20 tokens^[10] built on top of Ethereum — we may begin to see a whole set of new digital assets circulating across payment channels of the LN and on the Bitcoin network itself.

^{Figure 3: BTC capacity and number of channels on the Lightning Network since inception[11].}

 

BTC’s utility is also being aided by other types of scaling solutions, such as the Liquid Network, a Bitcoin sidechain which provides faster, cheaper, and more confidential transactions. Liquid also allows the creation and exchange of several digital assets that can be traded against their own BTC-pegged asset, Liquid-BTC (L-BTC). The network already supports stablecoins such as Tether’s USDT, and currently has a ~$36.5M^[12] market capitalization in USDT. Also, some applications are starting to pop up using sidechain-enhanced smart contract capabilities, such as Fuji Money, a protocol allowing the creation of BTC-backed dollar stablecoins, similar to Dai on Ethereum. As of early October 2022, Liquid has ~3,560 BTC^[13] pegged-in to L-BTC.

It’s also worth mentioning that BTC has a synthetic version of itself on the Ethereum blockchain—WBTC. There are currently ~245,000 WBTC tokens in circulation^[14] that may be readily used as loan collateral or traded for other assets using the Ethereum’s vibrant DeFi ecosystem. As of early October 2022, WBTC accounts for ~1.3%^[15] of the total circulating supply of BTC.

These examples illustrate how second layers, sidechains, or even a full-fledged blockchain such as Ethereum, are becoming different fronts to expand the utility of BTC and incorporate it into a whole new set of financial services. This is particularly true when BTC is able to interact with the rapidly developing DeFi ecosystem.

 

4. There is more regulatory clarity for BTC than other crypto assets

Apart from Bitcoin’s technological developments, which reinforce the long-term value proposition of BTC, investors are closely watching the evolution of the regulatory landscape for crypto assets. While crypto policy in Latin America and Europe is advancing at a fast pace, US regulators in particular have been slower to establish a definite framework for crypto assets. 

This ongoing process includes the review of stablecoins, which have steadily become a topic in reports and recommendations by the US Treasury, as well as governance and utility tokens, which have been under the continued scrutiny of the US Securities and Exchange Commission (SEC). A recent statement from SEC Chair Gary Gensler suggests some of these digital assets may be characterized as securities in the future.   

In contrast, BTC has a much less uncertain road ahead. US regulators currently consider the crypto asset a commodity to be regulated by the US Commodity Futures Trading Commission (CFTC), particularly if BTC is used in derivatives futures contracts. This is mainly due to a relatively clearer picture on BTC not being a security according to the Howey Test: (i) a neutral token allocation since inception; (ii) the lack of any prospection of public funds to develop its technology; and (iii) the absence of any dividend or promise of profits to BTC investors.

 

5. BTC is being adopted by institutions and sovereign states

All the distinct features of Bitcoin covered above have begun to generate demand for the asset by companies and sovereign states worldwide. As Table 2 shows, the number of BTC held by known entities amounts to ~6.9%^[16] of the total of 21 million bitcoins that will ever be created — around $28.9 billion^[17] at current prices. The LN has been used in El Salvador since BTC was made legal tender in that country, and is also being used for payment services such as Block’s Cash App, which is powering the monetary utility of BTC in several other countries.

The upward trend in institutional adoption of BTC has also been propelled by the significant increase in the number of gateways available for institutions to gain access to the crypto asset. In the early days of Bitcoin, institutional investors only had the Grayscale Bitcoin Trust (GBTC) at their disposal, which was launched in September 2013 and remains the largest crypto investment vehicle by assets under management (AUM). However, over the past few years, several new alternatives have started to come up, with the launch of bitcoin ETPs and ETFs in countries like Brazil, Canada, and Switzerland, and bitcoin futures ETFs in the US. More recently, we’ve seen BlackRock launch the first spot Bitcoin private trust for institutional clients, and Fidelity allow retirement plan participants to invest in Bitcoin. This institutional adoption trend has also been followed by sovereign states, which started to acquire or receive donations in BTC in times of political turmoil, as was the case of Ukraine earlier this year.

 

^{Table 2: BTC held by funds, sovereign states and companies worldwide[18].}

Bitcoin’s evolving investment case matters

 

So why should investors care about Bitcoin’s evolution as an investable asset? 

In this article, we provided an update on the Bitcoin investment thesis and the facts that point to a promising future for the network. Key upgrades that bring new capabilities to the base blockchain, second layers and sidechains, and the continued resilience of its network against attacks are important indicators of the strengthening of BTC as an asset, and of Bitcoin as a robust settlement layer. This means that BTC might have at least three core utilities going forward: (i) a pristine store of value—a thesis that surely still needs probation; (ii) the monetary asset powering a global settlement layer; and (iii) an unrivaled collateral for tokenization—such as the issuance of BTC-backed stablecoins—bringing speed and utility to existing assets on the railroads of the oldest and most secure blockchain in the crypto space. 

And complementing these utilities is BTC steadily gaining more regulatory clarity in several jurisdictions. The clear characterization of the crypto asset as a commodity in the US has been a key feature propelling the adoption of BTC by institutions, and will be critical for every institutional investor beginning to allocate to crypto.

In a rapidly changing world, amidst a global scenario of high inflation and rising distrust in central banks, we believe that an asset with the characteristics of BTC—powered by a network with no central authority—should see increasing demand by both retail and institutional investors. These features substantiate why we believe Bitcoin remains the primary protagonist in the investment case for crypto, and why we think the world’s first crypto asset is the ideal entry point for institutional investors wishing to allocate to crypto with the industry’s most battle-tested and valuable asset.  

_{[1]  Bitcoin with an uppercase “B” refers to the network while bitcoin with a lowercase “b” refers to the native token, which is also referenced as BTC.}

_{[2]  The time interval between now and when those coins last moved.}

_{[3] Glassnode, HODL Waves, accessed October 6, 2022.}

_{[4] PoW is an asymmetric computational problem, where the prover has to perform high amounts of computational work to create a proof, which is, nonetheless, easily attested by any number of verifiers with negligible cost.}

_{[5] Michel Khazzaka, Bitcoin: Cryptopayments Energy Efficiency, 2022.}

_{[6] Glassnode, Bitcoin’s hash rate, accessed October 6, 2022. 1 exahash per second (EH/s) is equal to 1018 hashes per second (H/s).}

_{[7] Backwards compatibility is a characteristic of software that means updates to the software do not make old versions of the software unusable. Source: Cryptopedia.}

_{[8] This, together with the built-in digital scarcity in BTC, and the technologies that power the LN, makes the decoupling of paper notes to gold, and the surge of a fiat currency, a very unlikely outcome for the combination Bitcoin and Lightning.}

_{[9] CoinMarketCap, Bitcoin, accessed October 6, 2022.}

_{[10] ERC-20 is the Ethereum standard for fungible tokens, which can be used to create stablecoins, governance and utility tokens.}

_{[11] Bitcoin Visuals, Lightning Network Channels & Lightning Network Capacity, accessed October 6, 2022.}

_{[12] Blockstream, Assets – Tether USD, accessed October 6, 2022.}

_{[13] liquid.network, L-BTC in circulation, accessed October 6, 2022.}

_{[14] WBTC Network, Dashboard – BTC on Ethereum, accessed October 6, 2022.}

_{[15] CoinMarketCap, Bitcoin, for the BTC circulating supply, and WBTC Network, Dashboard – BTC on Ethereum, for the WBTC circulating supply, both accessed October 6, 2022.}

_{[16] Buy Bitcoin Worldwide, Bitcoin Treasuries, accessed October 6, 2022, with data last updated on September 6, 2022.}

_{[17] CoinMarketCap, Bitcoin, accessed October 6, 2022.}

_{[18] Buy Bitcoin Worldwide, Bitcoin Treasuries, accessed October 6, 2022, with data last updated on September 8, 2022.}

 

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