Welcome to the future of digital equity
Yes, bitcoin is equity, albeit a very futuristic version of it. Owning a piece of bitcoin is owning a piece of the network. The fact Bitcoin is equity means ownership of the coin is ownership of the underlying Bitcoin blockchain. It’s a change in paradigm from the traditional company structures we are used too, and the stocks they issue.
Bitcoin as a network is a decentralised entity that issues the bitcoin cryptocurrency to those helping to secure the Bitcoin blockchain. These coins are accessed by private keys, the coins themselves never leave the protocol itself. It’s the private keys in essence which are the equity, and not the coins, as the latter is useless without the private key to spend them.
What bitcoin represents is a shift towards distributed and Decentralised Autonomous Organisations. These organisations provide the ability for systems to behave like a meritocracy, making decisions based on merit and ensuring those decisions are transparent and immutable. These systems themselves are sustained by incentivised miners and honest nodes in a trustless way.
So what is equity?
The proper definition of equity in our context is the value of ownership you own of an asset. For example, if you own some shares or stocks, you own equity in that business. Private equity is the same, with the only difference being the stock is not publicly traded yet.
Equity in a home means the difference between the debt you own and the homes market value. If you own the house outright, you own 100% equity of that house.
Equity based companies
Traditional companies are structured in a way where they issue shares to employees, executives and the public. These shares represent equity in the company. Depending on how much shares you own, is how much of the company you own.
In addition, your ownership and class of share is also linked to the weight of your vote in company matters. This vote can be made for company governance decisions, such as mergers, acquisitions, etc. Majority shareholders in a company can also hold the majority voting power. One example in Elon Musk with Space X and Tesla and the founders of Google.
As the companies grow and expands, stock can be issued or withdrawn. A company may choose to issue more stock as they are in need of capital. This dilutes existing shareholders investments due to an increase in supply. It’s also a centralised form of essentially changing ownership and value of a company.
Blockchain networks are the future organisations
A blockchain is an organisation, but it’s also not. The definition of an organisation is;
“an organized group of people with a particular purpose, such as a business or government department.”
Bitcoins blockchain is not a group of people, it is a protocol. As we covered in our recent Bitcoin value blog, it has stakeholders that interact with the protocol, but do not govern it. Its rules are defined in the source code, allowing any miner, node or user to connect to the protocol. It is, in essence, a meritocracy that rewards only for effort and is impartial to any individual factors that may influence it.
A protocol based meritocracy allows a decentralised form of governance called a DAO, which is a ‘Decentralised Autonomous Organisation‘. These organisations assume the protocol to be the entity itself. No people behind it, no executives, no CEO. The code itself is the entity, self governing, decentralised and autonomous.
Bitcoins ‘organisation’ was purpose designed by Satoshi Nakamoto to operate in a trustless way. This was achieved by designing it around the incentivisations of human-self interest. Through the use of economically incentivised mining and use of honest nodes, it is in the networks participants self-interest to keep playing by the rules.
Why bitcoin is equity – Private keys and network ownership
By owning bitcoin, or any cryptocurrency for that matter, you own a piece of the underlying network protocol. Private keys give you access to a portion of bitcoin on the underlying chain. Thus your private key and the amount of BTC you own is equity from the Bitcoin blockchain.
As abstract as it may sound, recall that the bitcoin coins and the Bitcoin network are seperate. The Bitcoin ‘network’ is a decentralised ledger of transactions that is supported by miners and nodes. The bitcoin ‘coin’ is the economic incentive Satoshi Nakamoto designed into the system to reward miners. This was done to compensate miners for computational resources and electricity, which in turn was done to ensure proof-of-work was maintained on the longest chain. Nodes are there to validate authentic proofs of work.
Bitcoins network is actually expanding its use-case beyond just being a coin with developments such as liquid and elements.
Unspent Transaction Outputs (UTXO)
When you hold bitcoin in a wallet, you are actually holding a ledger of unspent transactions. You not actually ‘holding’ bitcoin perse.
For example, if I send you say 0.0105 bitcoin, a transaction is created from the UTXO‘s currently assigned to my private key. These UTXO’s are all summed to give me a total balance of bitcoin as shown in my wallet. For this example, let’s say I had 0.0681 bitcoin to start with.
So after I send the transaction, two transactions are created by the wallets software. One sends you the 0.0105 BTC I specified, and the other returns the 0.0575 BTC change. Each transaction totals the original 0.0681 bitcoin that was in my wallet prior to the send.
The 0.0575 bitcoin change comes back to my wallet, minus transaction fees, and is called the change output. This comes back via a new wallet address created by the software, which is done to ensure privacy is maintained. As this figure indicates, the change output is marked as unspent. The sent transaction is marked as spent. The system does this to prevent double spending.
This example is given to show how the movement of bitcoin occurs at the protocol level. It is an ever changing list of UTXO‘s to wallet addresses accessed by private keys. Again, ownership of the private key is the most important factor. Without it, a wallet filled with UTXO’s is useless.
Speculating on network equity
From an investors perspective, buying bitcoin means speculating on future price appreciation. Analogous to stocks, the bet is being put on the ability of the entity or company to perform better, and thus increase the valuation of the issued equity.
For a traditional company, this means things like product sales, partnerships, expansions, acquisitions, etc. They are things that increase profits, cash flow, encourage growth, and ultimately contribute to an increase in the stock price. Remembering that the intrinsic value and market value should be analysed separately.
Conversely with bitcoin, investors are speculating on the entity to perform better. However, the context is very different. Performance is measured with things like network transaction volume, merchant adoption, wallet creations, hashpower, financialisation, developments, and so on as covered in our recent bitcoin value blog.
You can start to see just how analogous traditional equity is when compared with network equity. By interchanging a few concepts and key words, it all starts to make sense.
Is Bitcoin the ultimate equity?
I continue to ask myself, if bitcoin is equity, is it the worlds ultimate equity?
Bitcoin is limited to just 21 million coins that will ever be released. Ever. The protocol’s equity is thus limited in supply and is enforced by code. The opportunity to own a significant portion of bitcoin is largely finished, as the price movement has made it financially infeasible for most people now. However, we are still in the earliest days of bitcoin adoption. The dollar value of bitcoin is less important than the participation and ownership of a fully self-sovereign asset.
We know inflation halves every four years, again programmed and enforced by code. Bitcoin’s operation is not dictated by any one person, entity or government. Bitcoin is open source and decentralised so anyone can work on it. Major development firms contribute to the future of Bitcoin more than others, but it is still open source project and we all reap the benefits.
Credit goes to JP Thor for his help reviewing and contributing to this blog. Credit also goes to Trace Mayer and his podcast for once again teaching me about new concepts around bitcoin and blockchains.
If you like this blog, you can read the 3 others that form part of this series.
- Is a Bitcoin world reserve currency really possible?
- How the value of bitcoin is determined
- The future of Bitcoin is Satellites, Sidechains and Smart Contracts
Beau is the Founder & Chief Editor at Cryptocurrency Australia Media, an educational platform designed to help anyone learn about cryptocurrency investment and blockchain technology. Beau is also the Founder & Principal Consultant of Blockchain Management Solutions, a specialist technical and project management consultancy, is an advisor with Masternode Ventures, a blockchain incubator, and is an advisor with THORChain, a new decentralized exchange protocol.