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Wednesday, April 20, 2022

Bitcoin- The Immaculate “Coin”ception

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Scarcity is scarce

On Jan. 8, 2009, Satoshi Nakamoto (pseudonym) released version .01 of Bitcoin software. Shortly after that, he went dark – permanently.

But why would a man who had just created a revolutionary technology intentionally disappear? Why would he not hang around to bask in his newfound fame and glory?

A deep study of Bitcoin can lead you to only one conclusion. Satoshi had once written, "Governments are good at cutting off the heads of centrally controlled networks." He understood that a lot of powerful people and most governments hate anything they can't control. We are now 13 years since the release of Bitcoin. Indeed, if Satoshi's real identity were known, he would have already been dragged before Congress to be pilloried by angry, hypocritical politicians. I view his disappearance as sort of a "self-sacrifice" necessary to secure the integrity of Bitcoin.

Before he vanished, Satoshi had done the impossible -– he had discovered the world's first "absolutely scarce commodity" and launched it on a "completely decentralized

network." This network is so widely distributed across the globe that it has no nexus or, for that matter, not even a corpus. The Bitcoin network has no stockholders, directors, employees and headquarters – and, with no Satoshi around, not even a progenitor to attack. It's no wonder that some say Bitcoin had "an immaculate conception."

People often ask, "Why couldn't government simply ban Bitcoin?" My answer is, "because banning Bitcoin would be a thousand times more difficult than the prohibition of alcohol – and we see how well that worked out." It's almost laughable that the Chinese communists are (once again) trying to ban it and replace it with their own digital "spy-coin" -- an action that will prove a costly mistake. Oh, and by the way, be very afraid if our own Federal Reserve ever issues its own version of spy-coin.

Scarcity and decentralization are what sets Bitcoin apart from all the other cryptocurrencies. It's a strictly "rules-based" system.

There will never be more than 21 million coins, ever. And there will never be a central figurehead to chop off.

Some say, "Oh, but the rules could be changed." But, this is highly unlikely. The rules can only be changed by a consensus of hundreds of thousands of self-interested miners who don't know or trust each other and have a vested interest in preserving Bitcoin's integrity.

As with our universe, there is something mathematically elegant about Bitcoin -- it has an almost lifelike quality as it continuously adapts in order to preserve its scarcity.

The software is loaded with algorithms that (1) regulate the amount of time required to mine new coins, (2) regulate the number of coins that are awarded with every block, and (3) repel attempts to counterfeit and double spend.

In the first case, as miners vie to win a computing contest and receive an award of new Bitcoin, the system gracefully adjusts the speed at which they perform their work.

The system specifies that every 10 minutes, a new block of transactions will be mined. If miners begin to complete blocks in less than 10 minutes, the difficulty level increases. If miners start to take more than 10 minutes, the difficulty is decreased.

Secondly, after every 210,000 new blocks are processed, the size of the award is cut in half (called "halving").

In the beginning, miners were awarded 50 new Bitcoin per block. Then, on Nov. 28, 2012, after the first 210,000 blocks had been mined, the reward was reduced to 25 coins per block (called "the first halving").

The halving occurs about every four years. Today we are amid the "third halving," during which miners are paid 6.25 coins per block (currently worth approximately $240,000). Halving is intended to be antiinflationary – it will continue until the final coin is mined in 2040.

Thirdly, Bitcoin cannot be inflated through counterfeiting or doublespending. The fundamental building block of a Bitcoin transaction is called an "unspent transaction output (UTXO)." UTXO is indivisible chunks of Bitcoin locked to a specific owner. The blockchain tracks all available (unspent) UTXO numbering in the billions. Whenever a user receives Bitcoin, that amount is recorded within the blockchain as a UTXO. Thus, a user's Bitcoin might be scattered as UTXO amongst hundreds of transactions and hundreds of blocks.

There is no such thing as a traditional "account balance on the blockchain," as we understand them. Instead, there are only scattered UTXO locked to a specific owner's private address. (Traditional balances are determined outside of the blockchain by software called "wallets.") The time it would take to hack the keys to a private address is estimated to be in the billions of years.

In conclusion, Bitcoin technology is the consummate "rabbit hole." And, just as Alice discovered, falling down it only makes you "curiouser and curiouser."

Lonnie Hardy is a practicing CPA in Shreveport. He has studied Bitcoin since 2016 and provides lectures and consulting on the topic. This information is intended as educational only and never as investment advice. More information on Bitcoin is available on Lonnie’s blog at https://www.lonniehardycpa.com/blog. He can be contacted at lonnie@lonniehardycpa.com.


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