Bitcoin is a form of digital money, but what if bitcoin is not just about money? It’s also an innovation that challenges the foundations of traditional finance.
Bitcoin as a Treasury Asset Is on the Rise
Recently, there has been a rise in business and public sector interest in allocating to bitcoin as a treasury asset. Early in 2024, the SEC approved a spot bitcoin exchange-traded fund (ETF), clearing the way for more institutional adoption. For example, publicly traded company, MicroStrategy (MSTR), recently announced their plan to acquire $42 billion worth of bitcoin over the next three years, in addition to the $16 billion they already own.1 Another publicly traded company, Semler Scientific (SMLR), announced their bitcoin treasury strategy by adding $40 million worth of bitcoin to its balance sheet.2 Wisconsin and Michigan’s state pension funds have each made an investment in bitcoin at $160 million and $6.6 million, respectively.3,4 The CFO of the State of Florida has also recently suggested that Florida should add bitcoin to its pension fund.5
Why Bitcoin Matters
Our world continues to become more digital by the day. Without regard to cryptocurrency payments, total digital payment transaction volume grew almost 15% in 2023 to over $2 trillion.6 Meanwhile, 89% of Americans are now using digital payments.7 The growing digital transformation and speed at which payments can be made are catching the attention of traditional banks because banks stand to benefit from digital payment processing fees. Why, then, would J.P. Morgan, the largest bank in the world, launch JPM Coin that leverages blockchain technology and now handles $1 billion in transactions per day?8 Citigroup recently announced a similar initiative.9
Five Characteristics That Make Bitcoin Unique
Decentralized
- Traditional Finance: The Federal Reserve is the central bank of the U.S. and was created in 1913 to help stabilize the U.S. banking system. The Fed controls the monetary policy for the entire country and is governed by 12 individuals who comprise the Federal Open Market Committee (FOMC).
- Bitcoin: Satoshi Nakamoto created bitcoin in 2008 by developing an open-source software program. Anyone in the world can run or contribute to the software. The bitcoin blockchain—a database of all historical transactions—can be downloaded and run by anyone worldwide (also called “running a node”). Nakamoto remains anonymous and is not in control of the software. Software upgrades are suggested and voted on by participants in the network.
- Dive Into the Numbers: Over 1,550 active bitcoin nodes in the U.S. exist. This accounts for about 9.25% of total active bitcoin nodes.10
Self-Custody
- Traditional Finance: You can self-custody U.S. dollars today but typically have to do this by owning physical cash. You can quickly see the problem with self-custodying physical cash when you have more than a handful of bills. Carrying around a large amount of physical cash also comes with security risk, which is why companies like Brink exist. Trusting a third party to custody your assets can come with counterparty risk, g., bankruptcy or receivership. Traditional finance may come with counterparty risk, but traditional finance is historically relied on to reduce security risk, e.g., stolen assets.
- Bitcoin: Perhaps one of the most revolutionary aspects of bitcoin is the ability to self-custody. Trusting a third party to safeguard your money comes with counterparty risk, as shown by Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023. Were it not for the Bank Term Funding Program, a special program to secure the U.S. banking system in a time of volatility, customers were at risk of losing their deposits in excess of FDIC limits. While self-custody may reduce counterparty risk, it creates a heightened security-risk environment. You may have heard of individuals losing their private key (similar to a password) and being unable to recover their bitcoin. Self-custodying bitcoin usually lacks a “forgot password” recovery option.
- Dive Into the Numbers: Only about 1.8 million bitcoin out of the total supply of about 19.5 million are stored on custodial exchanges.11
Programmable Inflation
- Traditional Finance: Since the Fed was created in 1913, the U.S. dollar has inflated by more than 3,000%.12 In other words, one dollar of purchasing power in 1913 equals roughly three cents at the end of 2023. The U.S. national debt now exceeds $36 trillion dollars, and current fiscal policy is not showing signs of reversing this number.
- Bitcoin: An inflationary rate is programmed and predefined into bitcoin’s open-source software code. Contrary to how the Fed has the power to expand and contract the money supply through borrowing or “printing” new dollars, bitcoin is capped at a supply of 21 million. No more bitcoin will ever exist.13 Currently, about 19.5 million have already been minted. 6.25 new bitcoin are minted about every 10 minutes and rewarded to the miner of the associated block in the blockchain. The creation of new bitcoin will reduce to 3.125 about every 10 minutes in the first half of 2024. About every four years, the newly minted bitcoin is halved, so that the reward will reduce to 1.5625 in about four years after the halving in 2024. The cycle repeats until 21 million bitcoin are in existence.
- Dive Into the Numbers: In 2024, bitcoin’s inflation rate is expected to be about 1.1%, decreasing to less than 0.5% by 2028.14
Censorship-Resistant
- Traditional Finance: Certain elected officials in the U.S. are on the record lobbying for the U.S. to investigate issuing its own Central Bank Digital Currency (CBDC).15,16 This could effectively give the government insight and control over all financial transactions that occur with the CBDC. They could, for example, censor and deny your transactions. Currently, private sector financial institutions act as intermediaries between consumers/businesses and the U.S. government. This adds a layer of privacy and prevents the U.S. government from obtaining unobstructed access to consumers’ and businesses’ transactions.
- Bitcoin: Bitcoin is censorship-resistant. The idea of “closing your account” or censoring your transactions on the bitcoin blockchain is reduced because of the option to self-custody. In addition, transacting on the bitcoin blockchain is generally permissionless, and anyone with an internet connection can perform a transaction without concern over the transaction being blocked.
- Dive Into the Numbers: North America leads the world in cryptocurrency usage, with an estimated $1.2 trillion in value received on-chain between July 2022 and June 2023. That total represents 24.4% of global transaction activity during the time period studied.17
Borderless & Peer to Peer
- Traditional Finance: If you want to securely send money from the U.S. to another country across the globe, you’ll typically initiate an international ACH or a wire transfer through your bank, which can cost $5 to $50 and take one to five business days to reach its destination. In addition, there may be a limit on the amount of money you can transfer in one day.
- Bitcoin: Bitcoin can be sent almost instantaneously to anyone, anywhere, for as little as a dollar (depending on block space demand). No third-party intermediary, such as a bank, is needed to facilitate a transaction.
- Dive Into the Numbers: In September 2023, the average transaction fee for a single bitcoin transaction was less than $2.18
What’s Next
Now that traditional banks are adopting blockchain technology, the looming question is: Will bitcoin still be attractive if a U.S. CBDC were offered or if traditional banks adopt blockchain technology? Bitcoin still offers unique characteristics that traditional financial markets haven’t solved, such as decentralization, self-custody, programmable inflation, censorship resistance, and borderless peer-to-peer payments. If you have questions or need assistance, please contact a professional at Forvis Mazars.
- 1“MicroStrategy Announces $42 Billion Bitcoin Investment Plan,” forbes.com, November 1, 2024.
- 2“Semler Scientific® Announces Bitcoin Treasury Strategy,” ir.semlerscientific.com, May 28, 2024.
- 3“Michigan state pension fund makes $6.6 million bitcoin ETF investment,” reuters.com, July 26, 2024.
- 4“Wisconsin pension fund now includes bitcoin,” wpr.org, May 16, 2024.
- 5“CFO Jimmy Patronis to SBA: Florida Needs to Lean Forward on Cryptocurrency,” myfloridacfo.com, October 29, 2024.
- 6“Digital Payments Statistics in 2024 (Latest U.S. & Global Data),” ecommercetips.org, January 15, 2024.
- 7“Digital Payments Statistics in 2024 (Latest U.S. & Global Data),” ecommercetips.org, January 15, 2024.
- 8“JPMorgan Says JPM Coin Now Handles $1 Billion Transactions Daily,” bloomberg.com, October 26, 2023.
- 9“Citi Develops New Digital Asset Capabilities for Institutional Clients,” citigroup.com, September 18, 2023.
- 10“Bitcoin Node Distribution Live Map,” newhedge.io.
- 11“Bitcoin Exchange Tracker,” coinglass.com.
- 12“CPI Inflation Calculator,” bls.gov.
- 13Unless a future software upgrade is agreed upon by the network.
- 14“As Bitcoin’s Yearly Inflation Rate Dips to 1.77%, BEA Data From May Shows US Inflation Fears Are Legitimate,” news.bitcoin.com, June 28, 2021.
- 15“Rep. Himes Argues Congress Should Begin New Legislation To Authorize CBDC, forbes.com, June 27, 2022.
- 16“Elizabeth Warren Calls for US to Create a CBDC,” coindesk.com, May 11, 2023.
- 17“The 2023 Geography of Cryptocurrency Report, chainalysis.com.
- 18“Fees Per Transaction (USD),” blockchain.com.