Impact on industry verticals

According to the Cambridge University Electricity Consumption Index (CBECI), Bitcoin’s power demand is around 148 TW annually (as at Oct 3, 2024), equal to around 0.6% of the world’s total electricity consumption.

4.1.0 Bitcoin’s Energy Debate

The Bitcoin network’s relationship with energy is perhaps its most controversial and misunderstood attribute. In a world where political discourse is increasingly sensitive to mankind’s impact on the environment due to increased industrialisation and trends in consumer behaviour, the emergence of a technology that harnesses a large amount of energy for its operations is bound to attract significant public scrutiny. However, much of that scrutiny is not particularly informative, and in many cases is wildly-inaccurate, as the tweet from the World Economic Forum above demonstrates.

Critics argue that the energy-intensive nature of Bitcoin mining — driven by the Proof-of-Work (PoW) consensus mechanism — contributes to carbon emissions, placing additional stress on global energy grids which, in turn, undermines climate goals. Reports highlighting Bitcoin’s energy usage, at times surpassing entire nations like Argentina, have fueled concerns that the network is exacerbating environmental degradation rather than supporting sustainability efforts. 

However, there is a growing counter-narrative suggesting that Bitcoin mining may actually have a positive role in modernising energy grids and facilitating the transition to renewable energy sources.

So, can Bitcoin be a net positive for the environment? Can it contribute to grid efficiency and stability, and therefore help to drive the transition to renewable energy production? 

4.1.1 Using Energy as Security

The Bitcoin network’s primary function is to maintain a decentralised ledger of transactions. In the absence of a central authority to validate it, the network requires a way to ensure the ledger's integrity and prevent a ‘double-spend’ from taking place. All network participants must agree on the state of the ledger (who owns what) at a particular point. This is where mining comes in.

Miners use specialised computer hardware or ASICs (Application Specific Integrated Circuits) deployed over a vast global network. The ASICs are designed to repetitively guess solutions to a cryptographic puzzle which involves performing quintillions of calculations per second. A successful guess results in a reward for the miner in the form of newly-minted bitcoin and the network cryptographically verifies in real-time that the miner has been successful. Hence the process is termed ‘proof-of-work’.

Collectively, the global network of miners contributes an immense amount of computing power. This happens by design as it secures the network - a bad actor attempting to attack or manipulate the network for their benefit must deploy enough computing power to control the majority of the network. If this were possible, it would require enormous financial resources and still be unlikely to maintain control for a period long enough to significantly disrupt the Bitcoin network. Therefore, the likelihood of this kind of attack being successful has diminished to near zero, thanks to the energy barrier. 

Bitcoin doesn’t waste electricity, it’s used for security.
Kyle Torpey

4.1.2 Hunting for Stranded Energy

Bitcoin miners operate in a very highly-competitive environment against other players in a 24x7 global race to append the next block of transactions to the ledger and claim the ‘block reward’. It is commercially critical for miners to seek the cheapest energy that is both abundant and has little or no competition for demand. This leads miners toward stranded or wasted energy sources.

The principal reason for this is cost-effectiveness. Electricity is the primary operating cost for a miner as it’s highly energy-intensive. By using stranded energy – that is, energy that would otherwise go unused, such as excess energy from renewable sources or natural gas flaring – miners can significantly reduce energy costs. Stranded energy is often cheaper because it is not easily accessible or in high demand. For example, in regions with excess hydroelectric or wind power, prices can drop due to a lack of infrastructure to distribute the energy. This creates opportunities for miners to lock in low-cost electricity agreements, improving their margins.

Electricity agreements can secure access to stranded or waste energy sources, allowing miners to insulate themselves from the volatility of traditional energy markets. Electricity prices fluctuate due to seasonal demand, fossil fuel prices and geopolitical events. Stranded energy offers miners a more stable, predictable energy supply, making long-term planning and profitability more feasible. There is also a reputational benefit around tapping stranded energy, as it mitigates environmental criticism by reducing a miner’s carbon footprint.

As well as benefiting the miner, the energy producer also gains from having a reliable customer for excess energy. Energy producers, especially those in remote or resource-rich areas, may have limited options to sell excess energy. Bitcoin miners provide an attractive ‘buyer of last resort’ for this otherwise wasted energy. Therefore, partnerships between energy producers and mining companies can be mutually beneficial, allowing producers to monetise stranded energy and miners to access cheap power.

Furthermore, renewable energy sources, such as solar and wind, often generate surplus energy during off-peak times or in locations far from major energy consumers. Bitcoin miners can set up operations near these sources, providing a commercial use for energy that would otherwise be curtailed (i.e. wasted). This is particularly important for wind farms or solar fields with intermittent production. This contrasts with fossil fuel-powered electricity networks where unused fuel is easily transportable to locations where there is commercial demand. This makes fossil fuel-powered electricity less attractive as it is rarely cheap enough to support profitable mining.

4.1.3 The Grid Stabilisation Challenge

From an electricity producer’s perspective, grid stabilisation is a significant challenge for renewable energy grids due to the intermittent nature of many renewable sources, such as solar and wind power. Unlike traditional energy sources (e.g., coal, gas, or nuclear), which can produce electricity continuously, renewables are dependent on environmental conditions. This leads to fluctuations in energy generation that make it difficult to balance supply and demand in real-time.

For instance, solar and wind power generation depends on the weather and time of day. Solar energy only works when the sun is shining, and wind turbines only generate power when the wind blows. This leads to variability in power output, making it harder to match electricity supply with demand at all times. A sudden drop in renewable energy production (e.g., when the wind stops blowing or during cloudy weather) can cause sharp decreases in power availability, potentially leading to blackouts or requiring backup power from fossil fuel plants.

In addition, during periods of high renewable energy output (e.g. sunny or windy days) and low demand (such as between 1-4 am each morning), some renewable energy must be curtailed to avoid overloading the grid. This reduces the economic viability of renewable energy projects and creates inefficiency.

It is often asked if batteries or other energy storage technologies can help smooth the variability in power production. While these technologies can help store excess energy generated by renewables, they are often costly and have limited capacity. This limits the ability to smooth out fluctuations in energy production and consumption over long periods.

4.1.4 Bitcoin the Stabiliser

Bitcoin mining, due to its flexible energy demand, can be an effective demand-side management tool for stabilising renewable energy grids. Bitcoin miners can rapidly adjust their energy consumption based on the grid's needs. During periods of excess renewable energy generation, miners can ramp up their operations and absorb surplus energy. Conversely, during periods of high demand or low renewable energy output, miners can quickly shut down or reduce their operations, freeing up energy for essential services. This flexibility helps balance the grid, making it easier to integrate intermittent renewable sources without the need for expensive storage solutions or the deployment of resistive load banks which simulate the demand of a large consumer, converting the excess surplus energy into heat.

In addition, many Bitcoin miners participate in demand response programs, where they voluntarily reduce their power consumption during times of grid stress (e.g. during heat waves or cold snaps). By acting as a controllable load, miners can help prevent blackouts and ensure that the grid remains stable, especially during periods of high demand.

Instead of curtailing surplus renewable energy, Bitcoin mining can consume this excess energy and effectively monetise it. This creates an economic use case for energy that would otherwise be wasted, improving the overall efficiency of renewable energy projects. In areas with a high penetration of renewables, such as Texas or Iceland, Bitcoin miners have set up operations near renewable energy plants, helping absorb excess energy while stabilising the grid.

In Texas, Bitcoin miners have partnered with the Electric Reliability Council of Texas (ERCOT) 2 to participate in grid stabilisation efforts. By adjusting their operations in response to real-time grid conditions, these miners help balance the supply and demand of electricity, ensuring that renewable energy can be effectively integrated without compromising grid reliability. For example, during the 2021 Texas winter storm Bitcoin miners were able to reduce power consumption, freeing up energy for critical infrastructure and residential use​.

4.1.5 Incentivising Clean Energy

In addition to monetising excess renewable energy and acting as the buyer of last resort, Bitcoin miners are helping to encourage investment in new renewable energy infrastructure through long-term partnerships with energy providers. This provides the energy supplier with a steady and reliable revenue stream, encouraging the development of additional wind farms, solar plants, and hydroelectric projects. The presence of Bitcoin miners can make such projects more financially viable by providing a constant customer base. Moreover, miners can pay for energy immediately, that is, before the electricity source is connected to a grid. This significantly reduces the payback period and lowers the cost of capital for a new renewable energy project. With a Bitcoin miner acting as a guaranteed consumer, the energy provider may choose to build a larger project than originally would have been possible without the miner present.

The requirement for a constant buyer of renewable energy was recently laid bare in the UK - it has been widely reported that wind farms are being paid to switch off and gas plants are being used to replace them. Wasted Wind, a website that tracks the amount of unused wind energy in the UK, has estimated that for the first two months of 2025, the cost to consumers of this curtailment was £253m, an increase of £158m on the same period in the previous year.

Business Matters claims the reason for the issue is the “rapid expansion of offshore wind farms, built faster than Britain’s transmission infrastructure can be upgraded.” On windy days when demand is low, the electricity network cannot transmit the excess power and the network operator effectively compensates the wind farms for shutting down. In addition, it pays gas-fired power stations that are closer to the demand centre, to make up the difference.

By contrast, in Iceland, where geothermal and hydroelectric power dominate, Bitcoin miners have been a driver in expanding renewable energy infrastructure. The low-cost renewable energy available in the region has attracted a large number of mining operations, creating a synergistic relationship between the two sectors​.

The Icelandic government has recognized the potential of Bitcoin mining to stimulate the economy, create employment opportunities, and attract foreign investment. As a result, it has been supportive of the industry and has actively encouraged its growth.
Industry Leaders Magazine

The geographical flexibility of Bitcoin mining is also important. Bitcoin mining operations are not constrained by geography in the same way as traditional industries. They can be set up in remote locations that have abundant renewable energy sources, but limited access to population centres or transmission infrastructure. This makes them ideal candidates for consuming energy in places where traditional industries would not be feasible, incentivising the development of clean energy in underutilised areas. In this way, Bitcoin miners are a market that comes to the energy source, rather than requiring the energy to be brought to it, with all the associated infrastructure costs.

Bitcoin mining offers a strong economic incentive for the development of renewable energy by creating a consistent demand for clean power, helping to stabilise grids, and supporting infrastructure development in regions rich in renewable resources. As mining operations increasingly shift towards renewable energy, they are becoming pivotal players in the global transition to a more sustainable energy future.

4.1.6 An evolving positive story

Bitcoin's relationship with energy is multifaceted and evolving. Bitcoin mining has drawn criticism for its high energy consumption, with some commentators and environmentalists citing studies showing the network's energy usage as equivalent to that of entire nations, while others raise concerns that the industry's energy demands could exacerbate climate change. However, this narrative completely overlooks the potential for Bitcoin mining to play a constructive role in the transition to renewable energy and grid efficiency.

Bitcoin mining, with its unique need for cheap and abundant electricity, has increasingly aligned with renewable energy sources. In regions rich in wind, solar, or hydroelectric power, miners can harness excess or stranded energy that would otherwise be wasted. This dynamic helps improve the economic viability of renewable energy projects by providing a consistent demand for surplus electricity, especially during off-peak times. 

Seeking stranded energy is essential for Bitcoin miners from a commercial standpoint because it lowers costs, enhances environmental sustainability, and ensures operational stability in a volatile energy market. This strategy not only makes mining more profitable but also positions the industry as a key player in grid management and renewable energy development.

Bitcoin mining offers solutions to some of the key challenges faced by renewable energy grids. The intermittent nature of solar and wind power creates instability, as energy generation fluctuates based on weather conditions. Bitcoin miners, with their flexible and scalable operations, can help stabilise the grid by consuming excess energy during times of overproduction and scaling back during periods of high demand. This demand-response capability has already been leveraged in markets like Texas, where miners collaborate with grid operators to ensure grid stability.

Bitcoin's potential to eliminate methane flaring at oil fields is another overlooked benefit. By capturing and using stranded natural gas that would otherwise be burned off, Bitcoin miners can help reduce harmful methane emissions, turning an environmentally damaging waste product into a valuable resource.

Environmental scrutiny of Bitcoin mining is expected and welcome. However, the technology is increasingly showing unique opportunities to advance renewable energy adoption and improve grid efficiency.

As the industry matures, greater collaboration with renewable energy providers and grid operators helps Bitcoin mining become a key player in the global shift toward a more sustainable energy future.

Notes

1. Bitcoin Doesn’t Waste Electricity, It’s Used for Security, an article outlining how electricity is the foundation of Bitcoin’s security model, Bitcoin Magazine, November 2015 https://bitcoinmagazine.com/business/bitcoin-doesn-t-waste-electricity-it-s-used-for-security-1446482572
2. Bitcoin miners account for 95% of the Large Flexible Loads in Texas, The Miner Mag, February 2024. https://theminermag.com/news/2024-02-29/bitcoin-mining-map-north-america-texas/
3. Lack of grid capacity pushes ‘wasted wind’ costs to £250m, Business Matters, March 2025 https://bmmagazine.co.uk/news/lack-of-grid-capacity-pushes-wasted-wind-costs-to-250m/
4. Iceland: The Unlikely Bitcoin Mining Hub, Industry Leader Magazine, September 2023 https://www.industryleadersmagazine.com/iceland-the-unlikely-bitcoin-mining-hub/
5. What makes methane a more potent greenhouse gas than carbon dioxide? Climate Portal, December 2023. https://climate.mit.edu/ask-mit/what-makes-methane-more-potent-greenhouse-gas-carbon-dioxide
6. Bitcoin flare firm Crusoe buys rival Great American Mining, Data Center Dynamics, October 2022 https://www.datacenterdynamics.com/en/news/bitcoin-flare-firm-crusoe-buys-rival-great-american-mining/

4.2.0 The Challenge for Investment Managers

Bitcoin is not only a new entrant to the institutional investment sector, it has unique characteristics that pose challenges for traditional finance around how to classify and evaluate it. Bitcoin is only 15 years old and, for most of that time, it was a small and relatively illiquid asset dominated by individual investors. Participation in the bitcoin market by institutional investors has, so far, been limited. For many years, the absence of clear legal and regulatory guidance was an obvious hurdle and perhaps a convenient excuse for staying away.

The launch of futures markets in bitcoin around the end of 2017 was the first step in legitimising the asset for regulated investors. However, it was the regulatory approval of Bitcoin ETFs, in January 2024, that finally demonstrated to the professional investment management sector that bitcoin is now an established asset class that demands attention.

Now bitcoin is becoming a more widely-appreciated asset class, the key challenge for institutional investors is how to evaluate and develop an investment strategy around it. Wealth managers are under increasing pressure from clients to offer, not only an opinion, but a credible framework with products that allow clients to participate in this new asset class. Otherwise, they risk losing significant business to rivals with a broader-minded approach to building wealth.

Until recently, it was challenging for investment managers to justify spending any time to study bitcoin, let alone allocating capital to it. However, with client interest ramping up, we may have reached a point where managers without a bitcoin investment strategy must provide a valid justification.

This module considers some of the ways traditional investment managers might consider bitcoin the asset, its prospects, valuation metrics and impact on portfolios. It is not intended to be prescriptive - the investment management community is very broad in scope and style and each manager will have its own investment framework and process.

4.2.1 Coming around to bitcoin

Institutional investors can be considered in two groups. The first group consists of wealthy investors that may be participating via an investment vehicle or a family office. The group also contains specialist investors or hedge funds that are, by their nature, able to deploy capital relatively quickly. They may have few stakeholders, making them less constrained and more nimble with regard to investment decisions and strategy. They may be less constrained by regulation and have a higher risk tolerance. This group is already more likely to have some exposure to bitcoin.

The second group can be thought of as the more traditional investment sector. It consists of regulated investment advisors, larger asset managers, banks, mutual fund operators, pensions, endowments and sovereign wealth funds. It tends to move much more cautiously and has a lower risk tolerance.

This group is also much more conservative. Its members will have long-established and detailed investment frameworks and processes. Managers may be constrained by detailed mandates that restrict the assets or markets available. Allocation decisions are often made by committees made up of portfolio managers, analysts and compliance staff where ideas are deeply-researched and documented according to strict criteria, all under the watchful eye of a financial regulator. 

It is easy to have sympathy for this group and the challenges it faces with bitcoin. By nature this group is conservative, resistant to change and, generally, this approach has served it well. In that environment, when a highly-innovative or disruptive technology comes along, the natural reaction is to be cautious, skeptical or to completely dismiss it, especially if much of the wider industry is doing the same. Therefore, in this highly-disciplined environment, it should be no surprise that this second group has moved much slower when allocating to a new asset like bitcoin. 

Readers of much of the traditional financial media’s coverage of the Bitcoin network and protocol have noted that many commentators struggle to see where it fits within the legacy financial system. This is understandable. Bitcoin emerged from outside the existing financial system. And, as a technology that reimagines the concept of money itself, its adoption has the potential to render much of traditional finance obsolete. Of course, this resembles the disruptive technology playbook within other industries.

Nevertheless, increased demand for exposure from clients is forcing managers to consider bitcoin exposure in portfolios or risk losing clients. This demand was a key driver in the launch of Bitcoin ETFs by large asset managers BlackRock, Fidelity and others. This gave investment managers a regulator-approved vehicle, allowing them to satisfy investor demand for bitcoin exposure in a way that is compatible with existing investment mandates.

After 15 years of negative coverage from mainstream and business media, Bitcoin is still defying many naysayer predictions. The network continues to grow and metrics such as the number of public addresses, the network hash rate and the dollar value transacted, all point to technology that continues to grow exponentially.

Therefore, it is becoming harder for investment managers to justify not having an allocation to bitcoin.

4.2.2 Bitcoin: An Acceptable Alternative Asset?

Depending on their mandate (e.g. single asset, single strategy or risk-weighted multi-asset funds etc), large traditional investment managers will have their own well-established criteria and framework for evaluating potential investments. These processes are disciplined and rigorous, as they should be. Therefore, it may be challenging for an investment manager to see whether holding bitcoin in a portfolio can fit an existing investment process because it cannot be valued using traditional metrics used for other asset classes. Therefore, part of the evaluation of bitcoin as an investment should run alongside a review of existing investment processes. 

From an academic perspective, the goal of effective investment management is to develop optimal portfolios at the ‘efficient frontier’. That is, the portfolios that offer the highest expected return for a defined level of risk, or the lowest measure of risk for a defined expected return. The key question for investment managers is whether an allocation to bitcoin can help achieve this goal.

Studies show that successful evaluation of risk versus return should place a portfolio at or near the efficient frontier. A common metric used to measure this is the Sharpe Ratio. It divides a portfolio’s excess return by a measure of a portfolio’s volatility, such as the standard deviation of excess return. A higher Sharpe is better when comparing portfolios.

It’s worth noting that portfolios at the efficient frontier usually exhibit a higher degree of diversification. That is, they contain a broad range of assets whose returns are not closely correlated in terms of price performance. Alternative assets tend not to be closely correlated with the major asset classes (stocks and bonds) and therefore can be an attractive prospect for investment managers seeking additional diversification in a portfolio. ‘Alternatives’, such as private equity, real estate, farmland, or even art and collectibles are increasingly on the watch-list of institutional portfolio managers as a diversification tool, especially given the significant underperformance of the bond market in recent years. Managers of the typical ‘60/40’ portfolio (60% stocks, 40% bonds) are under pressure to improve overall investment performance.

However, alternatives often come with a significant impediment. They may reside in markets that lack the depth of liquidity seen in larger stock or bond markets. It is challenging to find buyers or sellers in sufficient size. Even pricing an asset for portfolio purposes can be challenging as simply ‘marking to market’ can be unreliable in an illiquid market.

Bitcoin is an alternative asset that doesn’t have this drawback. It is a market valued in excess of $1 trillion and trades 24x7 globally. Volume traded is counted in tens of billions of dollars daily. Also, unlike other alternative investments, bitcoin is homogeneous, independently verifiable, easily divisible and has no counterparty risk, if held directly. 

4.2.3 Analysing and Valuing Bitcoin

Professional Investment managers will already have an established rigorous process for evaluating potential investments. In 2017, business systems analyst Brian Leemoon developed a framework for appraising Bitcoin technology using three well-established business analysis methods: SWOT, PESTLE and Porter's Five Forces. From an investment manager’s perspective, a summary example SWOT analysis for Bitcoin might look something like this:

Strengths

• Most recognised digital asset, open payment network/protocol with longest history
• Highly stable protocol with no major changes to monetary policy
• Highly stable network with 99.99% uptime since inception
• Most secure and decentralized digital asset network
• Most valuable and liquid digital asset market with the largest user base
• Fastest growing digital asset network - no. of addresses, hash rate, value transacted
• Enabling economic participation in developing world
• Positive symbiotic relationship with renewable energy and other ESG benefits
• Establishing as a treasury asset for corporations, strengthening balance sheets
• Regulatory landscape is improving. i.e. approval of ETFs in the US

Weaknesses

• Highly-volatile asset price with significant price drawdowns
• On-chain transaction costs are highly variable
• Lack of market education around functionality and properties
• Challenging to value by investors
• Lack of clear regulatory guidelines in major markets 
• Negative market perceptions and sensitivity to illicit or criminal use
• Career/reputation risk associated with supporting Bitcoin within traditional finance sector
• Could become illiquid if investor sentiments turns against the asset
• 3rd-party custodians are vulnerable to cyberattack or theft

Opportunities

• Becomes established as a store of value and global treasury reserve asset
• Becomes more accepted as a medium of exchange for goods and services
• Success of application layer protocols will drive significant user adoption 
• User growth at a similar rate to the internet in the mid-1990s
• Opportunity for improved investment returns through diversification (non-correlation)
• Market dynamics ripe for demand - fiat monetary debasement likely to continue
• Early-mover advantage potential for investment managers over competitors

Threats

• Significant price rally leading to risks of a large price drawdown
• Regulatory landscape in major markets turns against the technology
• The network experiences a technical outage, impacting valuation perceptions
• An ‘upgrade’ to the network results in unexpected technical problems
• It is surpassed by another digital asset that has more user or regulatory support

This is not an exhaustive list and we should expect investors to hold varying views on the strengths and weaknesses etc. However, the exercise encourages analysts to gain a deeper understanding of the Bitcoin network, protocol and asset and consider what makes it investible. It is also important to revisit the analysis regularly since key elements of the ecosystem continue to develop.

The SWOT analysis also encourages analysts to make a comparison with the fiat monetary system. A general lack of acceptance of the problems associated with fiat money can be a roadblock to understanding Bitcoin. For decades, there has been very little discussion of fiat money’s drawbacks within investment or academic communities, largely because it is generally accepted that there is no credible alternative since the gold standard ended, giving way to a system of free-floating fiat currencies. That is, until Bitcoin came along.

Bitcoin has new and unique properties. Because of this there has been much debate around how to value it as an investment. A common critique is that it has no cash flows like stocks, bonds or real estate and it is, therefore, ‘uninvestable’. However, this may speak to the inflexibility of an investment process that requires rework to adapt to new ideas. It helps some investors to think of bitcoin (the asset) as a ‘digital gold’ with superior properties to physical gold. Gold also has no cash flows and has a long history of being used as money. Drawing a comparison of the monetary properties of gold, fiat and bitcoin can be instructive, similar to that contained in the 2018 article ‘The Bullish Case for Bitcoin’ by Vijay Boyapati.

In the absence of traditional measures of valuation, how should we consider the potential future value of bitcoin? 

Analyst Jesse Myers4 at OnRamp suggests that because bitcoin can be thought of as new base money that can reprice all other asset classes, then the Total Addressable Market (TAM) for bitcoin is the entire world’s wealth (around $900T), that is, all value held in equities, bonds, real estate, money markets etc.

 Of course, the capture of a majority or even a large portion of the world’s wealth is not expected to happen anytime soon. This is a multi-decade story. So, in the meantime, how can we track that the Bitcoin network is trending in the right direction, so that this investment thesis for bitcoin (lower case b for the asset) remains intact?

For the Bitcoin network there are many metrics5 we can track to monitor activity on the network. Below are some examples. This is not an exhaustive list and a full description of each is beyond the scope of this module.

• Hashrate of the network (the total combined computational power being used to mine and process transactions on the Proof-of-Work Bitcoin ledger)
• Dollar value transacted on the network
• Number of bitcoin on exchanges (a measure of scarcity of the available bitcoin for trading)
• Number of users, active wallets on the network (base layer & layer 2 such as Lightning). It is worth noting that estimates of these can vary significantly, so it is important to choose a consistent methodology in order to monitor trends reliably. 
• Number of active nodes on the network
• HODL waves (the distribution of bitcoin holders based on how long they have held coins)
• The trend of Bitcoin-related media publications, such as films, books or mainstream media articles.
• The trend in the number of merchants accepting bitcoin payments in major economies. This can be tracked on btcmap.org 

Tracking a basket of metrics for the network helps a manager monitor if the investment thesis remains intact. In addition, tracking the progress of publicly traded related stocks (such as miners or companies offering bitcoin exposure) can provide additional supporting data. These stocks can also be valued using traditional metrics that professional managers will already be comfortable with, such as discounted cash flow models or ratios such as price/earnings, price/sales, price/earnings growth, price/free cash flow, or price/book value. 

4.2.4 Bitcoin’s impact on Portfolios

Despite being only 15 years old, by August 2025 bitcoin had established itself as the world’s 7th most valuable asset. While it’s important for investment managers to understand the nature of Bitcoin and its potential impact on the economy and society, the key question from a professional perspective is the potential impact on portfolios.

If we believe that Bitcoin can capture a significant portion of global wealth over the long-term, then it seems reasonable to have an allocation to it as a high-powered return enhancer. However, it is important to consider whether the return is worth the risk. This is captured by the Sharpe Ratio mentioned earlier. A manager should also consider diversification. That is, how correlated an asset’s investment returns are when compared with other assets in the portfolio, while also considering the risks around price volatility and drawdowns.

There is publicly available information on the impact of bitcoin on portfolios at Fidelity Investments or the Nakamoto Portfolio from Swan Research. In a study updated in June 20248, Fidelity conducted returns, volatility and correlation analysis of bitcoin relative to stocks, bonds and gold within a 60/40 stocks/bonds portfolio. It found that bitcoin did offer some diversification benefit, although correlations vary.

The chart below shows rolling 3-year correlations of bitcoin relative to stocks and bonds, from July 2013 to March 2024. It shows that, while correlations between stocks and bonds are increasing. A rolling 3-year correlation to stocks of 0.53 and to bonds of 0.26 through to March 2024 shows significant potential for diversification in a multi-asset portfolio.

The total market capitalization of bitcoin didn’t exceed $100B until mid-2016. Therefore measuring early correlations may be less meaningful since the bitcoin market lacked depth, liquidity and pricing efficiency in early years, especially prior to January 2018 when the first bitcoin futures contracts began trading.

From a returns perspective, Fidelity observed that since August 1, 2010 to March 31, 2024, bitcoin achieved annual returns of 178%, while noting that since the establishment of futures trading, annualized returns are around 29.6%. Of course, the past is no guarantee of the future. However, it is clear that bitcoin has potential to significantly enhance portfolio returns.

Bitcoin’s price volatility is often cited as a reason that investment managers steer clear of bitcoin as a portfolio constituent. It is a slightly odd criticism, since managing price volatility of individual assets within a portfolio is a well-understood attribute of a competent portfolio manager. Furthermore, Fidelity found that bitcoin’s annual price volatility is not dramatically different to the ‘magnificent seven’ group of high-performing technology stocks.10 At the end of 2023, there were 92 S&P stocks more volatile than bitcoin.

Fidelity also observed that bitcoin’s volatility is declining over time. This is to be expected as the market matures. A deeper and more liquid market allows for greater capital inflows with less impact on the market price.

High price volatility, measured by the standard deviation of returns, is also well-understood by investors as a by-product of high performing assets. As shown in the table below, for the period from 2020 to early 2024, bitcoin investors have been well-compensated for its volatility, showing a Sharpe ratio of 0.96 versus 0.65 for the S&P 500. The Sortino ratio is perhaps more instructive, since it only considers downside standard deviation of returns or “bad” volatility. Its value of 1.86 shows that the majority of volatility over the four years was to the upside. This is despite some significant price drawdowns over the period.

The bottom line is that bitcoin is a volatile asset. This is to be expected because it is new and on a long voyage of price discovery and user adoption. Professional investors are well-equipped to embrace this volatility and, given the potential for supernormal returns, manage it accordingly. They can determine the appropriate allocation, in line with their own investment framework and appetite for risk. And, to smooth out short-term volatility, holding bitcoin for at least one, 4-year, halving cycle could be an appropriate minimum holding period.

4.2.5 The Shifting Narrative 

Since the start of 2024, there has been a significant shift in the narrative around bitcoin within traditional finance. The market entered 2023 with the overhang of the FTX collapse still present. As a result, large swathes of the industry were not considering bitcoin as a seriously investable asset.

Moving forward one year the narrative has shifted considerably. The US SEC approval of Bitcoin ETF products represents a transformative shift in the regulatory landscape. This development effectively opens the door to professional investors, allowing them to enter this asset class via a regulated product, issued by highly-regarded and long-established asset managers.

After just nine months of trading, Bitcoin ETFs were ranked the most successful ETFs ever launched. After just two full quarters of trading, they had already broken records for the most money attracted in the first year and the highest number of institutional holders.12 In the wake of the ETF approvals and their trading success, leading investment firms (such as Blackrock, Fidelity and Cantor Fitzgerald) are making considerably more positive market comments on the prospects for bitcoin. This piles on the pressure for investment managers that have yet to develop a coherent bitcoin strategy.

It is becoming increasingly difficult for professional investors to justify not having some exposure to bitcoin, if only in an intellectual sense. Moveover, the shifting narrative has helped to pull back the curtain on the fiat monetary system, further exposing its inherent flaw - it declines in purchasing power over time.

Ultimately, the role of Investment professionals is to manage risk. With that in mind, it is worth considering what ‘zero exposure’ to bitcoin is suggesting from a risk management perspective. 

Is it akin to a bet, with 100% certainty, that the Bitcoin network and protocol will fail? If so, is that sound risk management?

In the world of traditional finance, bitcoin sceptics remain in the majority. This should be no surprise. The sector is by nature conservative, operating as it does in a highly-regulated environment. Within this setting and moving in circles of where conformity is encouraged, there is little advantage to be gained in being an early-adopter of new and disruptive technology. Indeed, there may only be increased career-risk for trying to get ahead of the herd.

However, like other disciplines such as insurance or engineering where sound risk management is essential, the need to be effective should supersede the desire to be correct. Therefore, bitcoin-skeptical investment managers should seriously consider some exposure, due to the risk of significant overall underperformance if bitcoin continues to perform well over the long-term. The performance risk associated with zero exposure should not be ignored.

4.2.6 Bitcoin’s Future Impact on Investment Management

It is also worth considering what long-term impact the rise of bitcoin in portfolios may have on the investment management industry. 

Fiat money’s ‘store of value’ problem has been a key driver behind the growth of the professional investment management sector since the 1970s. The inability of fiat money to store purchasing power while residing in a simple savings account, has led to an explosion in investment products, directed at consumers seeking to grow or to simply maintain their purchasing power.

A side effect of this phenomenon is that the major asset classes - stocks, bonds and real estate, have all attracted significant valuation premiums thanks to their superior ability to store value over the long-term. Furthermore, as fiat money’s debasement has accelerated, capital flows toward these assets has ramped up further, leading to malinvestment and distorted valuations, which potentially lead to asset bubbles and poorer outcomes for investors. It is argued that this effect can also be observed in the valuations of alternative assets such as art, vintage cars and other collectibles.

In a future world where bitcoin is more recognised as a superior store of value versus other asset classes and establishes itself as a treasury reserve asset, what impact would this have on valuations in other asset classes?

The long-term impact could be dramatic: bitcoin could draw the ‘monetary premium’ from other asset classes, slowly at first, and then more quickly as its properties become more widely understood. In this scenario, a large swath of investment products become obsolete, with the result that the investment management sector declines in size. In time, the sector’s slice of the wider economy may shrink to resemble the proportion it held 50+ years ago.

Of course, not many commentators expect this scenario to play out soon - bitcoin’s global adoption is a multi-decade story. However, those investment management firms that are prepared already have a huge advantage over those that are not. Therefore, it is essential for all investment management firms to have ‘The Rise of Bitcoin’ on their Risk Registers. And, even the most skeptical managers should ask:

What if, like the rise of the internet, we can’t simply choose to opt-out?

Notes

1. Boom or Bust, Bitcoin a valuation framework, Brian Leemoon, Wilkes University, December 2017.
2. The Bullish Case for Bitcoin, March 2, 2018 by Vijay Boyapati contains a comparison of the monetary properties of Bitcoin, Gold and Fiat.
3. Bitcoin’s potential full valuation, Jesse Myers, February 2003.
4. There are many resources providing data and charts on the Bitcoin network. Bitbo is one example: https://charts.bitbo.io/index/
5. The world’s top assets by market capitalisation are tracked here: https://companiesmarketcap.com/assets-by-market-cap/
6. The Nakamoto Portfolio is a list of tools, research and open-source code that can help analysts assess the impact of bitcoin on portfolios.
7. Considerations for including bitcoin in investment portfolios, Fidelity Institutional
8. Correlation reveals the strength of return relationships between investments. A perfect linear relationship is represented by a correlation of 1, while a perfect negative relationship has a correlation of -1. A correlation of 0 indicates no relationship between the investments. Correlation is a critical component to asset allocation and can be a useful way to measure the diversity of a portfolio. 
9. A Closer Look at Bitcoin’s Volatility, Fidelity Digital Assets
10. United States Inflation Rate from TradingEconomics.com; source: U.S. Bureau of Labor Statistics https://tradingeconomics.com/united-states/inflation-cpi
11. Bitcoin ETFs Are Making History: Wall Street Rushes In, But Opportunities Remain for Smart Investors, Yahoo Finance, Aug 28, 2024.

Broad money represents the big set of money that people and businesses directly use to transact with each other, store our savings in, and define as our ‘money’
Lyn Alden

4.3.0 Introduction

Once a new technology rolls over you, if you're not part of the steamroller, you're part of the road.
Stewart Brand

Banking and payments have been strongly related ever since banks emerged. Many institutions are engaged to some degree in both activities. In the 2020s the largest banks rank alongside the largest payments services companies and often have significant cross-shareholdings. For example as at December 2023, Bank of America, which founded Visa in 1958 as BankAmericard, owned 1.53% of Visa Inc. Morgan Stanley owned 3.26% (source: Wikipedia).

Until the 19th century the involvement of banks in payments, other than as issuers of paper money backed by gold, was much lower as most transactions were made in cash. By the middle of the century paper cheques, supported by banks, had emerged and become the primary means of exchange in the United States for larger transactions as a replacement for cash. The advent of the telegraph created the opportunity for Western Union to pioneer the first money transfer service in 1871. Historically, the main roles of banks were as custodians of money through the provision of bank accounts, and as providers of credit to individuals and businesses.

The rise of digital communications and the internet have generated huge innovation in payments both inside the banking system and outside, PayPal is an example of these new payment providers. However, until the advent of stable coins on blockchain ledgers, the banking system still lay underneath all payments solutions. USDt, also known as Tether, now allows the banking system to be disintermediated from payments denominated in and valued by the market as US Dollars. Payment disintermediation is one element of technology that may change banking and payments. Another more consequential change for the role of banks could be driven by the emergence and growth of value transfer denominated in an entirely different unit of money - bitcoin.

The purpose of this chapter is to consider what the rise of Bitcoin may mean for the banking and payments industries. It also aims to provide a basis for banks and payments services companies to identify threats and opportunities that this neutral, permissionless and global value transfer technology may present. 

4.3.1 Risk

The most important causes of change are not to be found in political manifestos or in the pronouncements of dead economists, but in the hidden factors that alter the boundaries where power is exercised. Often, subtle changes in climate, topography, microbes, and technology alter the logic of violence.
James Dale Davidson

We are not concerned here with the usual financial or operational business risks that banking, payment services and other companies may need to monitor and manage. In this section we consider strategic business risks that could emerge and how the rise of Bitcoin may drive a once in a century transformation of the industry. If we were to rank industries by likelihood and impact with respect to being affected by the rise of this technology, then banking and payments would sit right at the top of the list.

History is replete with examples of technology innovation changing how human societies evolved and were governed. The Sovereign Individual, a 1997 book by James Dale Davidson and William Rees-Mogg, explores how technology changes drove the change in the West from a world governed by the Church to one of the nation states we inhabit today. They identify the key technology innovations as the emergence of the printing press and the use of gunpowder as a fuel for violence which changed the returns to violence at scale.

An important observation is that there is no evidence that either the Church or the people at large wanted or instigated the change that occurred. In retrospect it appears inevitable that the power that emerged from the Church’s control of information would ebb as the new economics removed its monopoly on producing written materials.

The printing press lowered the cost of reproducing information, and thus increased the decentralisation of the production of written material. 

History suggests that technology that drove large change was not instigated by the governmental framework, the institutions, the leadership or by the people via democratic processes. More often we saw that people and institutions tended to vainly resist, obstruct and delay the adoption. In the 20th century we can observe this in the early responses to the use of automobiles, electricity, cryptography, email and the internet.

The embracing of new technologies by markets drove the reshaping of where people lived, how they worked and sometimes the very structure of what they regarded as their culture, country or leadership entity. In many cases it changed the scale and construction of that very entity itself. Other examples of technology driving wide scale societal change include the rise of farming, electricity, automobiles and the internet.

This evidence is cited to support the conclusion that technology must therefore be superordinate to law. Law can catch up afterwards, but the flow of causation shows legal means can’t reasonably or durably stop change, and nor can legal means cause it. Laws changing are an effect of technology change, not the cause, and new technology innovation can’t be voted in, decreed by a ruler or indeed prevented without self-harm.

Law has been unable to prevent the advance of many technologies which at the time of their inception the society seemed to wish to prevent. Where this has been achieved it has usually reduced the wealth of that nation in the medium to long term.

4.3.2 Credit and Money Creation

It is well enough that people of the nation do not understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.
Henry Ford

Most banks are involved in credit creation and this along with related consumer and global banking activities underpin a large source of earnings.

Friedrich Hayek, Nobel prize-winning economist, argued that the centralisation of money that occurred during the 20th century was an underlying driver of the centralisation of nation states. The rise of Bitcoin may push this into reverse, something which many people support and indeed to which politicians pay lip service, but have been seemingly unable to deliver.

Prior to the 20th century emperors, kings, queens and governments were always constrained by access to money. They often resorted to tactics such as debasement or coin clipping to fight these constraints. However, because these workarounds required effort and took time the constraint still worked to some extent. The wealth that money measures does not emerge centrally from above but from a decentralised economy. Until the 20th century the nature of money reflected this flow upwards from the market and thus was itself ‘real’. The form of this money, its specific technology, varied in time and place as part of the evolution of human societies.

Since the early part of the 20th century experiments were undertaken to remove the ‘realness’ of money, culminating in its full dissociation from reality in 1971 when the dollar’s convertibility to gold was “temporarily” suspended.

I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Richard Nixon

Money is a technology and Bitcoin, as a digital money, may be one of the biggest technology innovations in human history.

...money is, at root, technology as much as any other basic machine like the wedge, lever or wheel.
Business Insider

Comparable in scale to the invention of farming, the printing press or gunpowder. Excluding altruism, money motivates all voluntary human action and therefore it is possible that a new solution in this technology for 8 billion people may turn out to be the most impactful technology innovation in human history.

Money is power, it is a technology, and as such it is superordinate to law, and therefore by deduction it is also superordinate to lawmaking institutions. The decentralisation of money will drive the decentralisation of power.

One of the penalties paid for the blessings of stability of the currency is that the law finds itself unprepared for unexpected and revolutionary changes in the monetary system.
Phanor J. Eder

Today nations specify one or more moneys as legal tender. If the market were to determine something else as a preferred money either locally or internationally then governments may face a situation where the demand for the local tender currency is outpaced by the demand for the global, neutral ‘real’ money. We will again observe that real money is a market determined good which may cause legislative change, and is not itself created by law. Nations could always choose to keep tender laws that specify the less demanded money, but would be well-advised to consider the self-harming consequences of making such choices :

History shows it is not​ possible to insulate yourself from the consequences of others holding money that is harder than yours.
Saifedean Ammous

The argument presented above shows how a decentralised, global and neutral money can drive decentralisation of power. Now we turn to how Bitcoin, a decentralised monetary communications technology, may also be a precursor of the decentralisation of non monetary communications and media. 

4.3.3 Disintermediation of Payments

If you try to unwind the credit bubble but [the banks] are completely essential for payments and hence for commerce... there's no a priori... reason why that should [be]
Allen Farrington

Bitcoin’s design both on its base layer blockchain, some open second layers, and apps on higher layers enables individuals to transact digital value with one another without relying on third parties. It has not previously been possible to have disintermediated digital payments. However, designing the capability for peer to peer payments does not imply that all or even most payments will end up as such. The extent to which payments become peer to peer as Bitcoin’s footprint grows will emerge from the market. The market is, in part, shaped by those that offer services, which could include existing banking and payments institutions. If these institutions do not participate then the market will simply emerge with new players growing to supply the services demanded.

The ability to transact a decentralised currency digitally in a peer to peer fashion will act as a control against the future use of monopoly or oligopoly power to centralise money and payments. This means the engagement of existing banks and payment institutions to provide services does not threaten Bitcoin’s overall thesis. 

From the time that the first Bitcoin exchanges came online they have acted as custodians for many holders of bitcoin. Hence any payments of bitcoin made from these exchanges either to an individual’s self custody wallet or directly to a merchant have been intermediated by the exchanges. However, once in self custody payments can be made peer to peer and many bitcoiners also transact this way.

The evolution of the Lightning Network as a low cost, instant and final settlement layer 2 payments solution has led to a new and diverse group of payments intermediaries. They offer the convenience of custodied funds on lightning that can be accessed via phone apps for quick and easy face to face or online payments in bitcoin. It is possible for individuals to run their own self custodial lightning node, but it is a more demanding technical implementation than just holding bitcoin in self custody on chain. Lightning wallets are more suitable than on chain funds for day to day spending, and they rather resemble a current/checking account with a bank than a savings or investment account. As with current accounts, and for the same reasons, these wallets tend to hold only smaller amounts needed for short term spending. Many bitcoiners have shown themselves to be comfortable to trade off self custody for convenience when using Lightning on the grounds that they are only taking on counterparty risk with small funds.

Reduction of systemic risk

The settlement of most digital payments today, however the payment appears on the surface, requires banks to transact either internally or with other banks. This is due to the way that the financial system needs to be structured as a pyramid with the central bank at the top below which the banks manage digital payments in the currency for which the central bank is responsible. This means that when a bank crisis occurs, the consequences of allowing a bank to fail presents systemic risk to the payments network.

Credit card processing, at time of sale:

1. Customer presents card for payments
2. Payment request sent to payment processor
3. Payment processor sends on request to card association (Visa, Mastercard)
4. Card association send on request to customer's card issuing bank
5. Issuing bank approves or declines the payment
6. Card association passes on response to payment processor
7. Payment processor sends on response to merchant terminal which approves or declines the payment

Payment finalisation, at some later time:

1. Payment processor instruct their bank to make (net) payment to merchant’s bank
2. Customer instructs their bank to make (net) payment to card issuing bank

The conflation of the banking system with payments creates an unnecessary risk which manifests itself in a political requirement to rescue banks when there is a credit crisis or else the entire economy would collapse as payment processes fail. This creates a moral hazard in the credit creation process itself.

Lightning Network processing

1. Merchant terminal presents Lightning invoice QR code
2. Customer scans invoice QR code from their Lightning wallet on their smartphone and send funds
3. The transaction is finalised in real time by nodes in the Lightning Network passing bitcoin through a chain of liquidity

Note: this process only transmits information and money

Payment finalisation happens at time of sale

• Merchant receives funds immediately as compared with days or weeks using existing rails
• Banks not required
• No credit risk
• No systemic risk

By enabling a real separation between responsibility for the currency and the digital payments process, Bitcoin offers the opportunity to significantly reduce, if not remove, the dependency between digital payments and banking, making the overall financial system more resilient. This may mean that societies no longer have to face the conundrum of needing to socialise losses made in the banking sector or face the breakdown of the economy’s payments systems. No one party is responsible for Bitcoin, although many individuals, companies and non-profits contribute to its growth and development. Bitcoin’s value emerges not from institutional structures, but from the market.

4.3.4 Threats

Payments

There is a clear societal and economic stability benefit from being able to disentangle payments systems from the wider banking system. If banks were no longer central to the global payments system then the requirement to bail out those that become insolvent due to poor debt creation would be significantly reduced. For their own success, banks are likely to become more responsible for their lending practices as the backstop that currently exists may be significantly reduced or even removed.

Not only is this a threat to some earnings banks make from payments, but it has a wider knock on implications for their business in savings and loans.

There is likely to be a more diverse set of payments providers, including some consumers becoming their own providers by running personal or community bitcoin lightning services. With many new entrants banks and existing payment service providers will need to develop attractive services to maintain their earnings. 

International remittances and foreign exchange

Bitcoin and stable coin solutions offer a significant reduction in the frictions and costs linked with foreign payments and international remittances. This may represent a significant threat to earnings for banks and payment service providers.

The size of foreign exchange markets has risen from essentially zero since the outbreak of World War II to $7.5trn per day at the end of 2022, with almost all that growth occurring since the end of the Bretton Woods exchange system in 1971. Banks and payment service providers derive significant earnings from providing services in these markets.

https://www.cls-group.com/media/psfny5au/cls_fx_policy_02_fall_of_bretton_woods_fx_50years_afloat_shapingfx_series_oct2023.pdf

Savings and Loans

Consumers are no longer compelled to store value in banks in order for it to be usable in payments. This is not just a threat to the ‘too big to fail’ position that banks inhabit today as mentioned above in 3.4.1, but also may impact their ability to create debt in the form of loans.

A reduction in the quantity of credit that banks could create may significantly reduce earnings in both consumer and global banking.

4.3.5 Opportunities

Whilst BItcoin makes disintermediated savings and payments possible, some people are likely to see value in trading some counterparty risk for convenience either in part or in whole. There is a huge opportunity for banks and payment services providers to leverage their existing market presence to produce successful products that attract such customers. 

Payments

The Bitcoin payment space is developing rapidly both from a merchant and customer perspective. There are large opportunities for banks and payment services providers to innovate on their existing platforms to seamlessly introduce native bitcoin payment solutions. It is inevitable that this will happen eventually, however, the threat of being late to this opens opportunities for future market share to accrue to new players who are already providing and developing such solutions. Some of the solutions are open source, others are proprietary, and some are in between where the code is open sourced, but operators can choose to implement the open source code as a backbone for their proprietary solution. 

Such solutions may be geographically limited or available globally. They also typically come with reduced payment fees and faster time to final settlement - often under a second. They cut out middlemen and sidestep correspondence and central banks to offer better and more efficient payment services to customers and merchants.

Micropayments and streaming micropayments are not economically deliverable using today’s systems and money technology. Layers on top of Bitcoin such as the Lightning Network can deliver these functionalities with economically sensible cost. There are a number of areas where the development of such payment solutions could have a dramatic positive impact on growth. One such area is in micropayments for reading individual news articles or streaming payments for watching video media. This may improve the customer experience by reducing advertising intrusion as well as drive growth in direct revenue to media organisations. There will likely be many more areas where the evolution of micropayments will be able to add value to existing products and markets for consumers and profits for the underlying providers. They may also enable the development of entirely new products and markets.

Artificial Intelligence agents cannot make or receive payments in the existing system as they have no human or legal identity. There is an opportunity to lead and shape products that help AI agents to send and receive payments. Existing banks and payment service providers could develop technology that helps to advance this. Since this market does not exist, it’s not a threat, but it could be a missed opportunity. Bitcoin does not require human identity to function and therefore it is likely that AI agents will use technology built on Bitcoin to acquire send and receive payments functionality at some point.

International remittances and foreign exchange

There is an opportunity for banks and payment service providers to leverage Bitcoin and stable coin solutions to streamline their services for consumers and businesses, lowering costs, improving reliability and reducing payment delays. The sooner that they engage the better able they may be to reduce the ‘democratisation’ offered by these new technologies and preserve a good share of their existing markets. Failure to do so in a timely manner is likely to increase the erosion of their earnings in these markets.

Savings

Banks have an opportunity to develop and provide new accounts that could range from simple to sophisticated with varying custody benefits to customers. There will be trade-offs that customers face between self-custody and convenience and banks could develop a matrix of products to satisfy different customers. Many customers may be happy both to self-custody some bitcoin whilst also having accounts with banks for some of their money.

Different accounts may carry varying benefits to provider and customer, here are some possible examples:

• Shared custody for a fee, but provider has no rights to use customer assets for lending
• Free custody accounts where the provider has the right to use for full reserve lending
• Custody accounts with interest in bitcoin if the provider is authorised to lend against fractional reserves and/or provide liquidity into trading markets or payments channels.

Credit

There may be opportunities to extend new forms of credit based on bitcoin collateral. Some examples are suggested below:

• Fiat (eg US$) credit based on bitcoin collateral in shared custody or proof of control
• Bitcoin credit similar to above
• Unsecured bitcoin credit.

4.3.6 Activity

Critically analyse the threats and opportunities identified.

Bitcoin is an ideal antidote to fiat currency depreciation. Bitcoin’s fixed supply, open-source software, and distributed network resist inflation. Moreover, as an energy currency, it necessitates energy consumption for acquisition, underscoring its unique value preservation.
Jack Mallers

4.4.0 Introduction

The technology industry is at the forefront of Bitcoin adoption. As is often said, and described in the above quote - it combines everything people don’t understand about computers with everything they don’t understand about money. The quote also describes some of the key aspects of Bitcoin that need to be understood to perceive its true value. This puts the technology industry in a good position to benefit from its adoption, but also at the forefront of the changes that will occur across the business lifecycle.

 If we look at any typical business this may take the form of:

• Business Strategy – how does any business need to adapt 
• Business Plan – How will this be achieved
• What to sell – What products or services and associated capabilities are required to achieve this
• How to win – Go to market strategy and sales 
• Security – Any implications to Governance, regulatory and Compliance
• Talent management – what skills will be needed
• Customer Success – Engagement, onboarding, management and retention
• Continuous innovation – how to keep up with the rapidly changing ecosystem

4.4.1 Business Strategy – how does the business need to adapt?

Bitcoin represents a new technology that is in the process of global adoption. Although at first glance it may not appear so, it can potentially affect all aspects of any business including those that are technology focused. 

It is the first truly scarce digital asset and has created a new market of ‘crypto-coins’ or ‘alt-coins’ which are all trying to emulate it or build something new using the underlying technologies. One of the more obvious of these is the blockchain, which provides a key capability for managing digital money, but is otherwise mostly a solution looking for a problem to solve.

An entire ecosystem is being created around Bitcoin to enable not just sound money for a digital age, but smart contracts, payment systems and other solutions based on the protocol.

To understand how Bitcoin may affect their business, technology providers need to therefore have an understanding of:

• Encryption
• Bitcoin as the pioneer and leader in the space
• The Blockchain trilemma and the required trade-offs
• Security considerations 
• Open source software management
• Networking aspects 
• Cryptography
• Usage and impact on customers – payments etc.

Source: https://www.solulab.com/cryptocurrency-tech-industry-impact/

Security and privacy - Encryption and cryptography

The bitcoin network security is multi-layered. When you send bitcoin, the transaction is encrypted using SHA-256 hashing. The mining function also uses hashing to create a valid block approximately every ten minutes. 

Bitcoin transactions can be kept private, but this requires an understanding and application of capabilities such as:

• Not reusing addresses
• Avoiding the use of KYC and not using personal email addresses
• Using a wallet connected to your own node
• Broadcasting on-chain connections over Tor
• Use of Lightning
• Using Coinjoin features
• Use of secure software such as wallets

Security focused technology companies are well-placed to understand and apply these capabilities to keep customers and their own bitcoin safe. 

Bitcoin as the pioneer and leader

Bitcoin is the pioneer technology and stood alone in the first years of its existence. The crypto industry grew up around it with competitors either trying to replace it or to use the underlying technologies to create new solutions. This has occurred in waves of adoption and has occurred twice in Bitcoins’ history as shown in the chart above. Both times the dominance of Bitcoin has recovered as these ‘alt-coins’ have failed to deliver on their promises. Gaining an understanding of why this occurs as a repeated pattern will help to guide internal investments as well as providing consulting opportunities for customers.

Blockchain trilemma and trade-offs

The blockchain trilemma refers to the challenge of achieving three critical aspects of blockchain technology: security, scalability, and decentralisation.

The trilemma suggests that optimising one aspect often compromises the others, making it difficult to achieve all three simultaneously. Bitcoin optimises for security, with the hash rate protecting the network only growing higher, and decentralisation, allowing for a truly global network that has no central authority overseeing it. This is at the expense of scalability, the number of transactions supported per second is relatively low. This problem is left to be solved at the higher layers such as Lightning, in a similar way to the TCP/IP multi-layered approach.

Open source software management

Bitcoin is an open source project and the source code is available under an open (MIT) license, free to download and use for any purpose. Open source means more than simply free to use. It also means that bitcoin is developed by an open community of volunteers.
Andreas Antonopulos

That “open community of volunteers” collaborates through developer platforms like GitHub. Through public repositories, they organise the software’s development transparently. The code and its history are always available. The whole setup has similar characteristics to the blockchain, the open ledger at the heart of the Bitcoin network.

The open source ethos is present all over the Bitcoin ecosystem; from clients like Bitcoin Core and Bitcoin Knots, to DIY miners like the BitAxe, to wallets like Wasabi, Green Wallet, or Blink.

Any technically capable company or individual can get involved with these projects, add value and build solutions on top of it. 

A good source of reference for Bitcoin related development is Jameson Lopp, who has been involved in Bitcoin since the early days.

Networking aspects

The Bitcoin network comprises nodes that interconnect in a mesh network with a "flat" topology. There is no server, no centralised service, and no hierarchy within the network. A node is a computer connected to other computers which follows rules and shares information. A 'full node' is a computer in Bitcoin's peer-to-peer network, which hosts and synchronises a copy of the entire Bitcoin blockchain. Nodes are essential for keeping a cryptocurrency network running, the code for which is contained in the Bitcoin Core software. Miners are a specialised subset of the nodes that carry out the hashing function and create blocks. As the Lightning diagram above shows, there is an ecosystem of companies supplying the hardware and/or software to provide these function, that any technology company could choose to get involved with.

Usage and impact on customers

As the diagram also shows a part of the ecosystem comprises companies that provide payments infrastructure, wallets, mining pools and applications that provide value to the consumer such as Podcasts and Exchanges. Any of these areas are potential avenues to explore for a technology company, whether it’s to understand the opportunities it may present or threats to the existing business.

How does the business need to change?

With an understanding of these key aspects, a business will be in the position to consider how the existing strategy may need to change, for example answering the key questions outlined in ‘Playing to Win’:

• Winning aspiration – what is the purpose of our business and guiding aspirations and how does Bitcoin fit into this?
• Where will we play? – what geographies, product categories, and segments can we succeed in based on an understanding of the Bitcoin ecosystem.
• How will we win? – value proposition and competitive advantage based on current capabilities.
• What capabilities must be in place? – what specific capex and investment is required.
• What management systems are required? - how will changing the form of money/treasury asset impact the business and internal systems.

An example approach would be to carry out a SWOT analysis, which may include: 

Strengths

• What skills and technologies are available in-house to apply to the Bitcoin industry?

Weaknesses

• What skill or additional investment might need to be made to address these changes?

Opportunities

• What new businesses are forming around Bitcoin?
• How does AI and Bitcoin/Lightning work together?

Threats

• What is our competition doing to address this space?
• What new competition might arise as Bitcoin matures?
• What risks does this create for the current business?

Completing a similar analysis using this or other frameworks will help to understand how Bitcoin might affect the business, and what changes need to be made.

4.4.2 Business Plan – how will this be achieved?

As shown in the example ecosystem for Lightning, the IT industry is key to the Bitcoin economy, and there are many different opportunities to add value depending on the answer to the questions of where will you play and how you will win, such as: 

• Layer 2s/3s network infrastructure development
• Involvement in Open source software development
• Development of new hardware solutions
• Application and software development
• Implementation of AI and Bitcoin solutions
• Enhancing IT security and privacy for the Bitcoin network
• Bitcoin mining and energy analysis

4.4.3 What to sell- What products or services could be created or adapted to this new business model?

Some examples of companies that are innovating in this space are:

Fountain is a Podcast App that offers several innovations to Podcasting.

The App is linked to a Lightning wallet powered by CashApp or Strike, which allows users of the app to send and receive ‘sats’- small amounts of bitcoin.

Listeners can choose to stream sats to the producer by the minute while they are listening. They can also ‘boost’ podcasts that they like by sending sats to the podcaster along with a message. Boosts get displayed as comments so that other listeners can read and respond to them. When you send a Boost it will appear on the show and episode page under activity. The more you Boost, the higher it appears on the episode page. It will also be seen by other users who follow you on Fountain in their Discover feed.

The Podcasters can therefore earn sats over lightning for listener engagement, and can select to split this automatically with any contributors to the show. 

For the user, every minute that is spent consuming content, creating content, or watching ads, increases the value of the platform being used.. Think about the ones used every day. Youtube, Twitter, Facebook, Instagram, TikTok - all of these platforms would lose their value without the time and attention given to them, but none of them reward the user for staying. On the Fountain app, users can be rewarded for liking, listening to promoted content or simply listening to a podcast.

Companies can consider diverting marketing funds – famously traditionally 50% of which is wasted but difficult to know which 50% - to adopt a similar model.

MicroStrategy Incorporated is an American company that provides business intelligence, mobile software and cloud based services. The firm develops software to analyse internal and external data in order to make business decisions and to develop mobile applications. 

In August 2020, MicroStrategy invested $250 million in bitcoin as a treasury reserve asset, citing declining returns from cash, and is now using bitcoin to provide incentives to employees. MicroStrategy is one of the foremost organisations developing and deploying solutions in this direction, and in 2023, Microstrategy announced a number of initiatives in this area:

• Rewarding employees for attendance on conference calls. By integrating lightning with Zoom , as meetings and conferences are scheduled, such as the company day, employees who attend and stay for the entire duration of the webinar get SATs.
• Reward sharing knowledge with Salesforce integration. Employees are also rewarded for providing useful knowledge in the form of articles that customers can read to answer the questions they have about the products of MicroStrategy. Employees are also paid for answering questions in real time with sats.
•  Reward for consuming content with Wistia integration. Video content created by the marketing team, which explain the vision and mission of MicroStrategy, as well as the feedback of customers on how the company’s products are useful, are hosted on Wistia while employees are paid to consume these contents. The aim is to help its employees “understand its vision, understand the new capabilities of the product, and understand our customers’ use cases” while they are rewarded with Sats.
• The reward for learning with Adobe LMS integration. The Microstrategy staff said that due to the importance of the personal development of its staff to the company, a learning system was created and integrated with the Adobe Learning Management System, which also works with the Lightning reward. 

Microstrategy noted that these capabilities will be made available to customers of the Microstrategy platform.

Since the initial investment in bitcoin, Microstrategy has invested heavily to become one of the largest holders of bitcoin, and has seen its shares outperform against industry peers. The subsequent increased value of stock options held by the staff was described in an interview as having had a positive impact on employee retention. 

Source: https://cryptotvplus.com/2023/05/how-microstrategys-sats-rewards-spark-employee-motivation/

As these two examples show, using Bitcoin and Lightning offers opportunities not only for offering internal rewards for employees but also for external services. Technology companies are in a good position to be able to adopt these for themselves, as well as helping customers deploy solutions itself. 

The potential products or services to offer would be highly dependent on the part of the technology industry that the company is involved in, but some examples are:

• Software companies - SaaS subscription payments using SATS streaming
• Security vendors – targeted services to detect cryptojacking
• MSPs – Blockchain/Bitcoin education programs for customers
• Social media platforms - charge for usage instead of relying on advertising revenue
• Stream sats to users (e.g. for filling out surveys or for spending time on the platform or website) instead of spending on marketing and advertising
• FinOps companies adopting Bitcoin rails for payments
• Data Center providers delivering heat/mining solutions for AI/BTC
• Heating companies incorporating mining
• Renewable energy companies incorporating mining

It is also important to realise that major investments have been made in the ‘alt-coins’ that have claimed to be designed to provide new and innovative solutions, but have failed to gain any real traction to date. The best of these ideas will most likely find their way onto the Bitcoin network.

4.4.4 How to win – go to market strategy and sales

A digital marketing strategy should include a plan for using online channels to establish an internet presence and achieve specific marketing objectives. Ultimately, the goal is to boost the visibility of any business and attract new customers using a variety of channels. As shown in the examples above, disruptive micropayments can also make new marketing models viable. 

The marketing strategy and plan should be adapted to include the Bitcoin related initiatives agreed to, with clear goals and objectives defined. 

Goals may be:

• Establish thought leadership on Bitcoin in related technology area to the business
• Attract new customers with Bitcoin focused products and services
• Increase brand awareness in the Bitcoin space 

The marketing plan may include initiatives such as:

• Build a new website landing page focused on Bitcoin and/or Lightning
• Embed Bitcoin messaging into existing marketing campaigns
• Product or service launches related to Bitcoin
• Grow social media following on targeted platforms related to Bitcoin content
• Contributing to open source software 
• Utilise the opportunity for sats streaming to encourage consumption of marketing or educational content

4.4.5 Security – any impact on Governance, regulations and compliance requirements

Does the use of Bitcoin and related open source protocols impact the way we think about IT risk and compliance?

Security and compliance are critical to the success of Bitcoin, which relies on hashing, cryptography and encryption. As an open source protocol, the code is available for anyone to scrutinise and make contributions to. Technology companies can be well-positioned to contribute to this ecosystem. 

Depending on the selected solutions the company is focused on, there may well be other aspects of security and compliance to consider, such as financial transaction regulations or customer privacy. 

4.4.6 Talent management – what new skills will be required

Many early Bitcoiners came from the IT industry, possibly because early adopters needed to have a high level of technical knowledge to appreciate how Bitcoin provides security and scarcity.

As described in the introduction, a cliché is that Bitcoin combines everything you don’t understand about computers with everything you don’t understand about money. The latter may be something that needs further internal education, but the technology industry is obviously well placed compared to other verticals to identify and provide the appropriate skills required. Depending upon the specific area of focus, new technical skills may need to be identified around networking, encryption or cryptography within the company. 

Understanding of the technical aspects of Bitcoin is also lacking generally, and technology companies are well placed to help educate the market. 

To be able to deliver effective education and training for both internal development and support as well as to the market, the financial aspects of Bitcoin also need to be understood. This may not fall into the comfort zone of a typical technology focused company, but will be needed to deliver effective education and training to potential customers on why it is important and why the new products and services the company is offering are of value. 

4.4.7 Customer management – engagement, onboarding and retention

The entire purpose of any company is to deliver positive outcomes to their target customer base and to translate that into profits. Technology companies have often put in place a ‘Customer success team’ to focus on managing each customer through the entire lifecycle, from building awareness through to preference, onboarding and customer management, and ultimately loyalty.

However this function is managed, it will now need to incorporate Bitcoin. This may include:

• Customer Education workshops on Bitcoin 
• Input to service development from the customer base
• Upselling new Bitcoin related services to the existing customer base
• Managing customer satisfaction related to the new services
• Gathering case studies and testimonials related to Bitcoin solutions

This will require new skills and possibly new processes to be put in place.

4.4.8 Innovation

Bitcoin is early on in its adoption and development, and is therefore on a steep curve with constant innovation in many parts of the industry. It is therefore important for any technology company to stay on top of this innovation to remain relevant in the industry. As the technology industry already evolves at a fast rate, a culture of continuous innovation should already be in place, and Bitcoin needs to be incorporated into this process.

4.4.9 Summary

The Internet elevated the 'IT Department' to the C-Suite through the role of CTO as it became clear that IT was not 'just a tool' but was transforming (or obsoleting) operating models. Bitcoin is building on this further as it transforms the financial side of a business. Every large/medium-sized company is now a software business and, within 10-15 years, every company may well be a Bitcoin business too.

Technology companies are well placed to both understand and benefit from this adoption of Bitcoin. This can take many forms based on the company profile and target market, but will require a level of understanding and investment in many parts of the company to succeed.

4.5.0 Introduction

I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill, hand it over to you, and then there’s no record of where it came from. You may get that without knowing who I am.
Milton Friedman

Many companies and people missed the importance of the internet when it first started and continued to do so as it evolved to deliver the wide range of capabilities we take for granted today, that have revolutionised many aspects of our lives. Early users - around the time of this quote - struggling to send emails over a slow dial-up modem would have found it hard to imagine walking around with a mobile device providing on-demand access to the broad range of applications available today. 

Cloud technologies had a similar disruptive effect, starting with the launch of basic storage services a few years before Bitcoin was launched, initially being perceived as simply a variation of offsite hosting, but becoming the predominant platform for delivering IT services and continuing to develop new capabilities and features at an accelerated rate that is hard to keep up with.

The missing link for unlocking the next stage of value from the internet, as Friedman pointed out early on, is a reliable digital equivalent to cash that can be used to pay for value delivered over the internet, which Bitcoin delivers. It has grown organically, with no marketing budget or large companies behind it, on a faster adoption curve than the internet to become the ‘e-cash’ Friedman saw as this missing link. It allows people and companies to transact with each other globally without requiring permission or systems from the Government. It will unlock a new wave of innovation and collaboration globally, and companies that understand this and adopt it earlier will be the biggest beneficiaries.

4.5.1 Bitcoin for Professional services providers

Professional services generally describe businesses that offer services and expertise instead of a manufactured good. If you are one of them, then this chapter describes the potential impact on this industry, how having a trust-less form of digital cash available globally may affect the way you do business, and the types of services that can be offered to capitalise on this development. 

Why consider Bitcoin? 

Bitcoin can offer up new avenues for existing services, have an impact on how current services may need to adapt, and offer the possibility to build new adjacent services based on your current skills and industry knowledge.

Adding bitcoin to the discussion with existing customers

In the current environment, bitcoin is still more of a B2C play. A Professional services company with customers such as hotels or restaurant chains can consult with those clients to incorporate bitcoin payments for their end customers. 

As the market matures, adding Bitcoin as a payment option for their own services could also advertise capabilities in this space. Bitcoin holders tend to be keen to search out and use services from companies for which they can pay in Bitcoin.

How Bitcoin might affect existing services

For professional services organizations, the rise of a Bitcoin economy could demand a more collaborative approach where vendors, suppliers, consumers and even competitors will have a more transparent exchange of data and insight to the shared ecosystem. Bitcoin is all about the ecosystem it serves, levelling the playing field and re-distributing power and accountability to those who interact within it. As an example, Nostr (Notes and other stuff transmitted by relay) is a new social media platform that provides a direct link between the user community for the exchange of information and value using Bitcoin. 

In the same way the Cloud has enabled global collaboration and provided greater access to IT resources to a broader consumer base, Bitcoin can enable access to a transparent and open form of money to a global audience. Professional services organisations will need to look at the solutions they offer to consider how this change may affect the way they deliver existing services and products to their customers.  

New services based on the Bitcoin ecosystem

In addition to affecting existing services, Bitcoin and the ecosystem that is being built upon it offers the opportunity to create new services as alternate or entirely new revenue streams for professional services companies. Some examples of these are provided below:.

Accounting

Background

While bitcoin may not be a conventional holding among corporate treasurers, a greater understanding of bitcoin may help to explain why corporate treasurers of large, publicly traded companies have started to embrace it in recent years. Many of bitcoin’s properties, such as a maximum supply of 21 million tokens and verifiable scarcity on a public blockchain, may make it an attractive aspirational store of value. This critical segment of a portfolio could potentially be a valuable hedge against growing fiscal deficits, currency debasement, and geopolitical risks. As corporate treasurers grapple with new economic headwinds, bitcoin’s unique properties have acted as tailwinds.

Traditionally, corporate treasuries have managed cash conservatively by allocating most of the capital to what are often perceived as low-risk assets (e.g., bank deposits, money market funds, treasury bills, commercial paper, and repurchase agreements). However, uncertain economic factors including inflation, interest rates, and heightened geopolitical risks may be causing corporations to reconsider the viability of such strategies. 

Investment analyst and writer Lyn Alden describes three types of inflation: monetary inflation, asset inflation, and consumer price inflation (CPI). Monetary inflation (an increase in the broad money supply as measured by M2) does not guarantee but is a precursor to asset inflation (an increase in the price and valuation of investable assets) and consumer price inflation (an increase in the price level of non-financial goods and services).

Depending on the type of business, corporations could be impacted by both asset price inflation and consumer price inflation. For example, asset price inflation could lead to an increase in the value of assets a company may want to invest in or acquire, and consumer price inflation could lead to greater inventory costs relative to the purchasing power of cash.

Why Corporate Treasurers May Look to Invest in Bitcoin 

Professional services firms should be aware of the growing number of corporates that are adding bitcoin to their balance sheets, and why, for example MicroStrategy, and Metaplanet.Understanding the advantages of being able to use your balance sheet as a driver of shareholder value adds value to the advice that a professional services firm can provide to its clients.

Regulations

Numerous regulatory developments around the world regarding digital assets have given investors more confidence in bitcoin as an investment. With ever increasing market data and price history, digital asset-friendly regulations such as the European Union's (E.U.) Markets in Crypto Assets (MiCA) legal framework, and the U.S. SEC’s approval of a spot bitcoin exchange-traded product in January 2024 have offered investors and companies some assurance and clarity for which they have been looking.

FASB Accounting Rule Change

In December 2023, the Financial Accounting Standards Board (FASB) updated its guidelines for how companies should account for and report bitcoin and other digital assets on their corporate balance sheets. These new rules benefit companies that hold bitcoin by allowing them to use fair value accounting, finally allowing companies to also mark assets up to market. Previously, companies were only allowed to mark digital asset positions down. The new guidelines could give a better view of the company's financial statements and financial health by showing a more accurate representation of the true value of bitcoin held.

Bitcoin Price Performance Over Time

As a thought experiment, consider what the average S&P 500 company’s balance sheet would look like if they had invested just 1% of their corporate treasury balance in bitcoin over the last five years. Assuming an average treasury size of $10 billion, consider if a 1% ($100 million) allocation to bitcoin was made in June 2019 at $10,000. Despite an initial drawdown and periods of volatility, the bitcoin position would have eventually recovered and grown to approximately $700 million by June 2024. While the company could face short-term earnings volatility, the company’s long-term financial performance would be significantly enhanced, especially during high inflationary periods that have followed the onset of the COVID-19 pandemic.

Opportunities

The current uncertain and high-inflation economic environment has been pushing forward-thinking corporate treasurers to consider adding bitcoin to their balance sheets. The series of balance sheet allocations to bitcoin from Block Inc., MicroStrategy, Stone Ridge Holdings Group, and others represent a trend that could continue to grow as businesses weigh the risks of diminished liquidity due to elevated interest rates and the potential loss of purchasing power of cash due to central bank monetary and fiscal stimulus.

Companies that choose to allocate to bitcoin can benefit from outperformance due to bitcoin’s value rising over time, and accountants that understand the potential benefits and implications of this approach stand to benefit.

Financial services

Background

The convergence of the financial services and technology industries has created a level of uncertainty, with innovations such as peer-to-peer payment technology disrupting infrastructure, operations and business models.

While these innovations drive more customer-focused solutions at lower costs, they are also putting unprecedented pressure on financial institutions to become more responsive and agile.

The Financial technology (Fintech) industry includes a broad array of companies that utilise technology to deliver innovative services such as online payments, mobile applications, often working with traditional currencies and payment systems. 

Crypto currencies use blockchains and cryptography to deliver alternative digital currencies, which are designed to provide transparency, security and borderless transactions. This market has evolved over several years to include different solutions and is the basis for Central Bank Digital Currencies (CBDCs) being developed by Governments around the world. This has led to some confusion in the market with different solutions vying for attention from businesses and Government. None of these solutions provide the desired benefits of a decentralised, open-source and permissionless form of money except Bitcoin. 

Opportunities

• Global FX transfers: The existing financial rails used to transfer money around the world are expensive, cumbersome and slow, as well as not being available to all potential participants. This opens up the opportunity to offer cheaper, more transparent and efficient financial transfers between any two parties globally. This could be based on the US Dollar using solutions such as USDT (Tether), or using bitcoin directly via the Lightning Network. 
• Advisory services: Adoption of Bitcoin as the best solution to meet customer needs – an understanding of the superior properties of Bitcoin as a store of value and the ecosystem being built around it - offers the opportunity to provide advisor services to clients on how they can benefit from bitcoin adoption, as well as positioning it against the alternatives. 

Audit and assurance service

Background

Blockchain technology has the potential to impact all record keeping processes, including the way that transactions are initiated, processed, authorised, recorded and reported. This may have an impact on activities such as financial reporting and tax reporting. Chartered accountants will need an understanding of the technology used to create and confirm Bitcoin transactions and how these are stored on the blockchain ledger in comparison to traditional ledgers. 

Although outside the scope of this module, other alternative solutions based on the idea of blockchains do exist, such as CBDCs, ‘stablecoins’ and other smart contract focused solutions. An understanding of these solutions and the potential impact if a client has chosen to deploy them will also necessitate an understanding of how these work. This expertise will be critical to answering questions such as whether they are decentralised and public or ‘permissioned’ and managed by a consortium of protocol owners, as an example for supply chain management This will have an impact on what validation techniques may be required for an effective audit trail. 

• Smart contracts: Smart contracts are a method to automate the contracting process and enable monitoring and enforcement of contractual promises with minimal human intervention. Automation can improve efficiency, reduce settlement times and operational errors. Because using smart contract technology requires the translation of all contractual terms into logic, it may also improve contract compliance by reducing ambiguity in certain situations. However it may require a level of technical knowledge to implement and monitor which the team does not currently possess. A CPA auditor may be required to verify the interface between smart contracts and external data sources that trigger business events. Without an independent evaluation, users face the risk of unidentified errors or vulnerabilities. 
• ESG reporting: Engaging with bitcoin could allow corporations to gain positive advantage in their ESG reporting, which is now a compulsory and large part of their required regulatory reporting. The KPMG paper which was written in 2022 describes how Bitcoin mining can encourage the adoption of renewable energy, balance energy grids utilising intermittent renewable energy sources, reduce methane emissions and help to recycle the heat generated by data centres.

Opportunities

To take on the new role, an auditor may need a new skill set:

• Understanding of technical programming languages
• Effective methods of data collection from the Bitcoin blockchain for audit usage
• Implementation differences between solutions and the impact this has on trust and ownership of the protocol
• Auditing a smart contract for compliance to regulations and third-party controls
• Dispute arbitration for smart contracts according to any applicable legal framework
• Understanding of the ESG implications of bitcoin adoption

Financial Advisors

Background

As well as holding digital assets directly, many wealthy individuals and family offices are allocating a portion of their new investments to funds that invest in specific digital assets or digital asset projects. While the new bitcoin spot ETFs enable the ability to hold investments which track the performance of bitcoin without taking on the custody risks attached to holding the asset itself, the most secure way to protect long term value is to learn how to hold the asset directly.

Encouragingly, it seems regulators have generally accepted that digital assets like bitcoin are here to stay and so, rather than considering whether they should be outlawed or not, they are focusing now on striking a balance between developing the industry and protecting investors. It is essential to obtain comprehensive local and holistic advice on the multijurisdictional regulatory treatment of a digital asset investment strategy and the interplay of one regime with another.

Different jurisdictions also have varying ways of treating digital assets and the gains derived from them for tax purposes. A similar approach to the regulatory analysis outlined above will need to be adopted for tax, with specialist local tax advice being obtained as well as a more holistic international perspective.

Concerns around data security necessitate the implementation of strong cyber security measures to ensure that both financial assets and personal information are adequately protected.

Most family offices retain a third-party specialist crypto custodian to hold their cryptocurrency and the relevant private keys. A service provider should have in place the most robust security systems currently available, require multiple layers of authentication from various internal stakeholders to execute any trade, and have insurance which covers the loss of the asset in the event of fraud or a cyber attack.

Opportunities

Advisors to family offices and wealthy individuals can offer a variety of services based on this market dynamic:

• Digital asset security management
• Cyber security advisory
• Bitcoin secure storage advisory
• Tax implications 
• Bitcoin as part of an overall portfolio management
• The development of new legal and compliance protocols, such askey signing ceremonies for transfers

Marketing consultancy

Background

There are many professional services companies focused on providing marketing services, from helping customers in defining a strategy and creating content, to building websites and driving traffic to them. 

Any digital marketing strategy should include a plan for using online channels to establish an internet presence and achieve specific marketing objectives. Ultimately, the goal is to boost the visibility of any business and attract new customers using a variety of channels. 

One example of a new channel which is closely aligned with Bitcoin is Nostr.. Like Bitcoin, this is a decentralised open-source platform where the user retains ownership of data by using a private key. Nostr's censorship-resistant architecture ensures that business communications, marketing messages, and customer interactions are free from external interference. This is particularly valuable for businesses operating in industries where regulations are strict or where freedom of speech is a concern. Moreover, Nostr's use of a single private key to access multiple interfaces simplifies account management, providing peace of mind by being able to switch between different applications seamlessly. Integration with Bitcoin and Lightning also enables global transaction and micro-payments – a feature of Lightning that opens up new methods of marketing.

Opportunities

Assisting customers with their marketing may include initiatives to:

• Establish thought leadership on Bitcoin in related technology area to the business
• Attract new customers with Bitcoin focused products and services
• Increase brand awareness in the Bitcoin space 

The marketing plan may include initiatives such as:

• Build a new website landing page focused on Bitcoin and/or Lightning
• Embed Bitcoin messaging into existing marketing campaigns
• Manage Product or service launches related to Bitcoin
• Grow social media following on targeted platforms related to Bitcoin content and evaluate the use of newer platforms such as Nostr
• Contribute to open-source software 

Building a depth of knowledge in these areas will open up new types of marketing services that can be developed and sold to the existing or new client base.

Services targeted at the Small Business Sector

Benefits for SMB:

• Inflation hedge
• Access to global markets
• Lower transaction fees
• Near instant settlement
• Enhanced security
• Financial independence
• Censorship resistance

For a professional services business, there are several potential benefits to Bitcoin adoption that the SMB sector should be interested in, and services can be designed to meet each of these:

• Market reach: the online Bitcoin community will travel further and research online to buy from companies that adopt Bitcoin. This can open up a new potential customer base for a smaller company.
• Taking Bitcoin as payment can settle faster with lower fees than conventional methods of payment. 
• Bitcoin can also enhance security for online transactions due to the inherent features of the underlying technology, as well as not being reliant on the traditional banking system, making it resistant to censorship
• Keeping some or all of the received Bitcoin in a secure wallet can help to preserve wealth, especially in countries with fast depreciating fiat currencies, making it a good long term investment opportunity

Opportunities

As smaller companies will tend to rely on fewer service companies compared to an enterprise, if a professional services organisation is targeting this market then it would be beneficial to be able to advise them on all aspects of Bitcoin adoption.

Healthcare

Being ahead of where an industry is heading will enable Professional Services companies in that sector to continue to deliver value to their clients. A couple of examples in healthcare can illustrate how innovation based on Bitcoin can disrupt an industry sector by solving real problems in the market.

Secure Data management – example Nostr 

The ownership and secure sharing of patient data is a key concern with standards such as HIPAA in the United States being put in place to ensure that the data is adequately protected. 

The healthcare industry can potentially benefit significantly from Nostr's decentralized and secure nature. As highlighted in a recent pilot project in El Salvador, the Nostr-based SALUD protocol aims to revolutionize how patient data is managed and shared. By decentralizing health data, Nostr ensures that patients retain ownership of their medical records while allowing healthcare providers to access accurate and tamper-proof data when needed.

This approach addresses significant concerns with current healthcare data management systems, where patient information is often controlled by centralised entities that may monetize or misuse the data. With Nostr, the risk of data breaches or unauthorised access is minimised, and patients can opt out of data sharing if they wish without losing control over their information.

A second example of how Bitcoin can be incorporated into new approaches to Healthcare is CrowdHealth.It has created a platform that leverages Bitcoin’s costs and settlement advantages through an integration to a Lightning wallet to make and receive payments. These payments are owned by the contributors, who can then call on the community if they face a large medical bill. 

These are examples of how the rapidly developing Bitcoin ecosystem is disrupting one specific industry, and many more examples can be found in other industries. Professional services organisations that are focused on a specific industry may be able to either benefit from helping that industry adopt such solutions, or be the innovator that brings these types of solutions to new industry verticals as the market evolves.

4.5.3 Building out the Bitcoin ecosystem

Bitcoin is and has always been the lead blockchain, but the required focus at layer one on security and decentralisation initially left a gap for other capabilities in the market, which other blockchain based solutions emerged to try and fill. For various reasons these have not seen a great deal of commercial success over the years, and the Bitcoin ecosystem has now grown to a stage where these new types of capabilities can be built on it without adversely impacting the underlying core layer one technology. 

In addition, many Bitcoin users are long-term holders, viewing it as a store of value or a form of digital gold. Bitcoin maximalists are a large subset of this community who believe that it is the only cryptocurrency that will stand the test of time. They argue that Bitcoin’s decentralised nature, security, and first-mover advantage make it superior to all other digital currencies, differentiating them from alternative blockchains.

There is also a huge and growing amount of value secured within the Bitcoin network by these holders, so growing Bitcoin’s native ecosystem will not be a matter of attracting new users. Instead, projects will need to capitalise on the vast reservoir of users, developers, and capital already on the network. This gives rise to several opportunities to expand the Bitcoin ecosystem upon which professional services can be built:

1. Enhance Scalability: There are already several scaling solutions operating on the Bitcoin network, such as the Lightning Network. However, others are also being built to target different problems. For example to deliver comprehensive scaling solutions offering secure, decentralised and efficient platforms for smart contracts.
2. Facilitate Smart Contracts: Imagine a contract that runs itself automatically, with no need for lawyers or middlemen. That’s what Bitcoin smart contracts do. Bitcoin smart contracts are self-executing contracts with the terms of the agreement directly written into digital code. They automatically execute and enforce the contract when predetermined conditions are met, without the need for intermediaries.
3. Foster Interoperability: Building bridges and connectors that allow seamless interaction between Bitcoin and other blockchains. This would enable users to move assets across chains effortlessly and tap into the best features of each network. An example would be USDT – a stablecoin that can be transferred across many different blockchains where users will typically choose the lowest price. Enabling USDT held on one of these alternate blockchains to be transferred to Lightning and Bitcoin can enable interoperability and migration of value to the more secure Bitcoin network.
4. Integrate User Friendly Experiences: As the ecosystem grows, there is a need for tools that simplify the development and deployment process for developers. This includes better wallets, development frameworks, and debugging tools. Beyond this, user friendliness is essential for those users who may be less technologically literate to interact and participate in the ecosystem.
5. Education and Community Building: A strong community is the backbone of any successful blockchain project. Investing in education, workshops, and community-driven initiatives can help users discover, developers build, and investors connect.

Opportunity

This opens up a number of potential services that can be created for the market to advise consumers and other businesses around the Bitcoin ecosystem, which is already happening around the world:

• Advisory
• Education
• Buy, hold and sell Bitcoin

4.5.4 The Future

What might happen in the future?

The previous section has provided several examples of the types of services that are being offered in the market today, but what kind of solutions may become available in the future that companies could build professional services around to consult, analyse, design and implement to meet evolving customer requirements?

E-Voting

One example of the potential applications that can be built on Bitcoin is securing Government elections. 

• Current situation and challenge: Democratic elections are designed to ensure that power is transferred in accordance with the outcomes, and that the elected government reflects the will of the people.This requires that eligible voters can participate in the process free from intimidation, that all votes are counted properly, no counterfeiting of votes is possible and that the outcome is transparent. Around the globe, elections are often perceived as not meeting this goal, with 
• Existing proposals: Governments have tried various means to ensure fairness of the election process, requiring Voter ID, or independent counting of votes using a paper based approach, but challenges still remain. Governments like the EU are ‘investigating’ ways to use alternative blockchains and protocols to achieve the end-goal of a transparent and tamper-proof electronic voting system. However, this still requires trust in whoever is creating and running the system and will be developed according to the Government timescale. 
• Bitcoin based alternatives have already been developed that use its open-source capabilities to deliver the desired outcome of a transparent, tamper-proof method of running elections.

Guatemala

• Thanks to OpenTimestamps, a tool created by bitcoin developer Peter Todd a few years ago, Guatemalan tech startup Simple Proof is able to safeguard key documents about the country’s presidential elections from fraud and tampering. Todd’s tool, which leverages hash functions and the bitcoin blockchain, is able to timestamp pieces of information and make it easier to spot attempts at fraud and manipulation’

Open source decentralised electronic voting protocol: HodlParman – an active proponent for Bitcoin – recently announced:

• ‘I've been working on a decentralised electronic voting protocol that's fully peer to peer, eliminates the possibility of electoral fraud or double voting, keeps votes private, and is verifiable by anyone. It benefits from Nostr relays, and Bitcoin’s clock, and DOES NOT require a blockchain or token’ 

As we can see, there is the ‘conventional’ approach to solving a known problem, in this case electoral trustworthiness, which is still being developed and will not necessarily resolve all of the issues, and a new approach based on the Bitcoin ecosystem that has already been developed and is available that has the potential to resolve them. Gaining an understanding of these types of solutions and how they can be used to deliver services to the market, including in this case Government, will provide potential new revenue streams.

Sats rewards

The ability to deliver small amounts of bitcoin for payment at virtually no cost opens up different avenues for companies to explore, around which a Bitcoin focused services company could provide advisory services for such as:

• Using platforms such as Microstrategy for employee rewards
• Bitcoin-friendly podcast platforms such as Fountain, rewards for attending live streaming using NOSTR and zap streaming
• Paying people to complete surveys to encourage participation

Summary

The Professional services industry is broad in scope, covering businesses of all sizes, focus and reach. Whatever the focus, these examples have hopefully shown that Bitcoin and the associated ecosystem has the potential to drastically affect this industry, changing the way services are delivered and opening up new opportunities. Professional service organisations that take the time to understand these dynamics early can get ahead of the curve.

References

1. https://kpmg.com/us/en/articles/2023/bitcoin-role-esg-imperative.html
2. https://medium.com/@primalcapital/growing-the-bitcoin-ecosystem-afb424e0ff0f
3. https://www.fidelitydigitalassets.com/research-and-insights/adding-bitcoin-corporate-treasury
4. https://www.pathcheck.org/en/blog/notes-and-other-stuff-over-relays-nostr-for-health

Some example companies offering Bitcoin services: 

• River
• Swan
• CoinCorner
• Strike
• Relai
• Musqet

Excluding altruism, money is the motivation driving all voluntary human action. Bitcoin is a neutral, global money with rules, but no rulers. If it can’t be coerced, and doesn’t fail, the geopolitical implications are unparalleled.
James Dewar

4.6.0 Introduction

Once a new technology rolls over you, if you're not part of the steamroller, you're part of the road.
Stewart Brand

The purpose of this chapter is to point out to governments, government agencies, and government employees that ignoring Bitcoin is burying your head in the sand and hoping that either it is coercible or it will fail. If neither of these outcomes eventuate then it will hugely transform the incentive structures for all future human action. The people who inhabit the geography of existing nation states whose governments act first to understand and enact appropriate policy could gain a substantial advantage.

It could be that Bitcoin is coercible and/or it fails, but unless a government learns about the technology and reaches that conclusion through knowledge without prejudice they are taking a huge risk, the consequences of which will be borne by the citizens on behalf of whom they are currently expected to act. After receiving notification by reading this chapter, that would be gross negligence and a dereliction of duty by today’s governments, their agencies and employees. If you don’t want that responsibility stop reading now, and resign.

Governments can be defined as the entities which exert, or seek to exert, a monopoly of violence over their geographical territory. This arrangement has been arrived at for protection against external physical threat, and to preserve order internally. As societies and economies have developed, governments have tended to expand their roles internally. One of the roles that emerged, fitfully at first, from the late 19th century on was control over money via central banking. The purpose of this chapter is not to make a case for or against central banking and government control of money, but rather to highlight that it may not be possible to exert this power in the future. Anyone who understands the centrality of control of money to the exertion of other powers will recognise the loss of such central control as a substantial tailwind towards decentralising power within nation states. 

History teaches us that short of war or pestilence, significant societal change has more often been driven by technology than law because such change was seldom sought in advance by the people or their leaders. Indeed even had such change been sought, law has no capacity to discover or invent technology.

A lot of the power that nation states have acquired over the last century from taking (historically unprecedented) control of money may have to be ceded. This is not a threat to the people, but it may be for the structure of government and institutions. The leaders of our institutions need to learn about Bitcoin and its implications so that they can understand how the interests of the geography and people who currently constitute their nation state may be affected. 

Only in this way will they be able to choose policy actions that optimise the future for their geography and people. Education and humility will be required by all to optimise decision making. There is no hiding from this, changes will be forced upon us at some point anyway, and a better outcome can be achieved by anticipating them. The game theory at play may mean embrace early or lose out. 

This is a litmus test for our current politicians and institutional leaders. Are they mainly driven by the desire to improve the future for the geography and people that currently constitute their nation state? Or, are their priorities shaped by other motivations, be it personal, business or ideological?

By learning about Bitcoin governments can plot a chart for the benefit of their current and future citizens. This chapter aims to provide some areas for consideration to help get the planning process underway.

4.6.1 Technology vs Law

The most important causes of change are not to be found in political manifestos or in the pronouncements of dead economists, but in the hidden factors that alter the boundaries where power is exercised. Often, subtle changes in climate, topography, microbes, and technology alter the logic of violence.
James Dale Davidson

History is replete with examples of technology innovation changing how human societies evolved and were governed. The Sovereign Individual, a 1997 book by James Dale Davidson and William Rees-Mogg, explores how technology changes drove the change in the West from a world governed by the Church to one of the nation states we inhabit today. They identify the key technology innovations as the emergence of the printing press and the use of gunpowder as a fuel for violence which changed the returns to violence at scale.

An important observation is that there is no evidence that either the Church or the people at large wanted or instigated the change that occurred. In retrospect it appears inevitable that the power that emerged from the Church’s control of information would ebb as the new economics removed its monopoly on producing written materials.

The printing press lowered the cost of reproducing information, and thus increased the decentralisation of the production of written material. 

History suggests that technology that drove large change was not instigated by the governmental framework, the institutions, the leadership or by the people via democratic processes. More often we see that people and institutions tended to vainly resist, obstruct and delay its adoption. In the 20th century we can observe this in the early responses to the use of automobiles, electricity, cryptography, email and the internet.

The embracing of new technologies by markets drove the reshaping of where people lived, how they worked and sometimes the very structure of what they regarded as their culture, country or leadership entity. In many cases it changed the scale and construction of that very entity itself. Other examples of technology driving wide scale societal change include the rise of electricity, automobiles and the internet.

Taxation and debt are also structured by law and therefore respond to technology. This can be observed through the past. Historically taxation was limited to things like stamp duties and excise / import duties as the necessary technology to support income taxes and others did not yet exist.

This evidence is cited to support the conclusion that technology must therefore be superordinate to law. Law can catch up afterwards, but the flow of causation shows legal means can’t reasonably or durably stop change, and nor can legal means cause it. Laws changing are an effect of technology change, not the cause, and new technology innovation can’t be voted in, decreed by a ruler or indeed prevented without self-harm.

The truth is incontrovertible. Malice may attack it and ignorance may deride it, but, in the end, there it is.
Winston Churchill

Successful technologies are a kind of “truth”. As such, law has been unable to prevent the advance of many technologies which at the time of their inception the society seemed to wish to prevent. Where this has been achieved it has usually reduced the wealth of that nation in the medium to long term.

4.6.2 Decentralisation

There can be little doubt also that the ability of central governments to resort to this kind of finance is one of the contributory causes in the advance of the most undesirable centralisation of government.
Friedrich A. Hayek

Hayek argued that the centralisation of money that occurred during the 20th century was an underlying driver of the centralisation of nation states. The rise of Bitcoin may push this into reverse, something which many people support and indeed to which politicians pay lip service, but have been seemingly unable to deliver.

Prior to the 20th century emperors, kings, queens and governments were always constrained by access to money. The wealth that money measures emerges not from above, but from a decentralised below. Until the 20th century the nature of money reflected this reality and thus was itself ‘real’. The form of this money, its specific technology, varied in time and place as part of the evolution of human societies.

Since the early part of the 20th century experiments were undertaken to remove the ‘realness’ of money, culminating in its full dissociation from reality in 1961 when the dollar’s convertibility to gold was “temporarily” suspended.

I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Richard Nixon

Money is a technology and Bitcoin, as a digital money, may be one of the biggest technology innovations in human history.

...money is, at root, technology as much as any other basic machine like the wedge, lever or wheel.
Business Insider

Perhaps money is comparable in scale to the invention of farming, the printing press or gunpowder. Excluding altruism, money motivates all voluntary human action and therefore it is possible that a new solution in this technology for 8 billion people may turn out to be the most impactful technology innovation in human history.

Money is power, it is a technology, and as such it is superordinate to law, and therefore by deduction it is also superordinate to lawmaking institutions. The decentralisation of money will drive the decentralisation of power.

One of the penalties paid for the blessings of stability of the currency is that the law finds itself unprepared for unexpected and revolutionary changes in the monetary system.
Phanor J. Eder

Today nations specify one or more moneys as legal tender. If the market were to determine something else as a preferred money either locally or internationally then governments may face a situation where the demand for the local tender currency is outpaced by the demand for the global, neutral ‘real’ money. We will again observe that real money is a market determined good which may cause legislative change, and is not itself created by law. Nations could always choose to keep tender laws that specify the less demanded money, but would be well-advised to consider the self-harming consequences of making such choices :

History shows it is not​ possible to insulate yourself from the consequences of others holding money that is harder than yours.
Saifedean Ammous

The argument presented above shows how a decentralised, global and neutral money can drive decentralisation of power. Now we turn to how Bitcoin, a decentralised monetary communications technology, may also be a precursor of the decentralisation of non monetary communications and media. 

Decentralisation of communications

Bitcoin is a decentralised, open and neutral network communications protocol which the market appears to value increasingly as money.

There are features of this protocol which may also produce a new paradigm in human communications beyond money. We are beginning to see communication and social media solutions emerge and gain traction which deploy some of these features, for example Nostr and Keet. This may be the beginning of a major decentralisation of services as compared with how the internet is used today. These media services are also likely to have Bitcoin transactability natively embedded.

In light of the recent debates, particularly in the developed world, regarding freedom of speech and censorship, the decentralisation of communications should not be ignored by governments, and it should inform policy today irrespective of Bitcoin itself.

It may be that it is counter-productive for governments to be too coercive seeking to ban, shut down, censor or otherwise interfere with the current centralised solutions. The harder that government acts, the faster alternative solutions are likely to grow. In anything resembling the existing developed world free societies, these alternative solutions will be far more costly to surveil, and hence practically unsurveillable for the mass population.

Therefore the optimum approach may be to seek to work with existing centralised solutions voluntarily with a focus only on commonly accepted major harms and not on issues regarding widely held alternative narratives or on individual citizens. A global commitment to complete freedom of speech on existing platforms will reduce the push to the emerging decentralised ones.

4.6.3 Internationalisation

Internationalisation through properties

Bitcoin is digital property and therefore occupies no physical space and has no geographic footprint. Further, Bitcoin is not a legal construct. Therefore Bitcoin is a unique innovation that has become valuable property but which has no domicile either physically or legally.

The world has experienced a period in the near past when it was on one monetary standard - the gold standard. Although countries maintained their own currencies, the exchange rates rarely changed as they were valued based on the weight of gold that each represented. However, gold's costly and slow physical portability eventually brought this period to an end. It also limited the internationalisation that gold could deliver beyond simply a common measure of value. Gold’s survival as a global monetary standard was limited and ultimately undermined by its occupance of physical space.

Internationalisation through social network

The Bitcoin community has developed as a global social network. Domicile may vary the freedoms that people have by geography, for instance ability to access the open internet, or the list of apps approved on the Apple App Store, or Google Play Store. Domicile may also affect the legal status and regulation of Bitcoin as an asset and medium of exchange. However, the common culture and knowledge that has developed and is growing in the Bitcoin community is a shared global experience. 

Consequences of internationalisation

It would seem unconscionable for any of the free world to implement policies that restricted people’s freedom of movement to the level of making moving to other countries illegal. Such an authoritarian move would signal the demise of the developed world and history would suggest that it would not be sustainable long before revolution.

Given the above, the combination of the non-geographic nature of Bitcoin and the global social network will unleash an unprecedented competitive force onto nation state governments to deliver value for money services to their citizens or face a falling customer base. This need not be a ‘race to the bottom’ as some may cast it, but rather an explosion of diversity, and with a strong emphasis on high quality and productive delivery in return for taxes raised at whatever level the market will bear.

The more competitive environment in which nation state governments will find themselves combined with the growth of a new money that is coordinating human action globally will act as a pull outwards. Combined with the decentralisation of money and communications acting as a draw inwards, nation state governments may find themselves becoming stretched from both sides. Areas of competence may separate into regions or communities internally, and disintegrate outwards. The size and scope of nation state governments is likely, on average, to reduce. Whatever the resulting size in a given jurisdiction, the tax paying citizens will be less supplicants and more customers and will thus demand that services are value for money.

The decentralisation inward, and the stretch outward may pull some nation states apart much like spaghettification in a black hole. Bitcoin is at once both localising and globalising.

We already see within the bitcoin economy the seemingly contradictory effects of being at once both a localising and a globalising force. There is more globalism, less intermediation and more decentralisation with both more localised and international economies and social networks, with much less in between.

Here is a, non-exhaustive, list of specific issues upon which governments might want to consider the effects of this internationalisation: 

• Taxation / budgets
• Money supply / banking system
• Defence / prosecution of war
• International governmental structures
• Regional / local governmental structures
• Economic structures
• Charities, non profits, religious and community organisations
• Education / academia

4.6.4 Ethics 

The most important ethical issues vary based on geopolitics. We consider two perspectives: The developed world perspective and the Global South perspective. That the existing financial system poses different problems for citizens simply based on where they live may itself be considered an ethical issue related to human equality.

Developed world perspective - wealth inequality and the environment

The Cantillon Effect is named after Richard Cantillon, an 18th century Irish-French economist who first wrote down his observation. The effect describes the uneven effect monetary inflation has on goods and assets in an economy. When new fiat money is injected into an economy its effects are felt by different people and industries at different times. Typically assets grow in value, benefiting the wealthy, whilst the asset poor experience general price inflation.

The existing monetary system is a significant underlying cause of the growth of the wealth gap between the rich and the poor. The ability for the wealthy and politically connected to exploit the existing system for their benefit, at the cost of the less well-off, is a feature of how the existing system of money works. This mechanism is also driving a decline in the middle class, with the few becoming rich, and the many becoming poorer. A return to a neutral money which can only be gained through work, irrespective of the wealth of the person concerned, will stop the increase in these wealth gaps and start to redress them leading to less unequal societies.

Bitcoin appears to provide a number of benefits across an ESG framework. Throughout its short history, new and innovative ways of leveraging the network and its native asset continue to emerge, such as helping to stabilize energy grids, reduce greenhouse gas emissions, and even assist with providing sustainable heat to commercial and residential properties.
KPMG

Bitcoin may be a critical contributor to helping to mitigate climate change due to its economically viable interaction with energy production and use. The paper also notes significant Social and Governance benefits associated with Bitcoin,

In a world where money cannot be created to drive consumption of resources, the resources available will be consumed in a more efficient and less wasteful way. We are likely to see a change in the balance of economic incentives between new production and “repair and reuse” with the latter rising relatively. This would drive a reduction in consumerism without economic calamity as the money is no longer based on debt. We would see more sustainable use of resources and growth in wealth for those that work, consume less than they earn and save that excess in hard money.

Global South / developing world - financial exclusion and poorly run national currencies

Some of us are born into monetary regimes with good policies and wise rulers…But many of us suffer under poor or poorly run monetary regimes…we have as little control of which monetary institutions we’re born into as we have over the biological mothers who bear us.
Resistance Money, Andrew Bailey, Bradley Rettler, Craig Warmke

In the Global South we observe from the perspective of poorly run currencies with high inflation, low international convertibility and low levels of financial inclusion. In many sizable countries half or more of the population are unbanked. A neutral, permissionless and fixed supply global currency has much to offer to such populations.

High inflation makes it hard for citizens to save. Saving is an important factor in being able to build capital in an economy and the absence of it seriously impairs real growth and sustainability. Instead, economies become dependent on external capital or more usually debt to drive production. Such debt usually comes with conditions which drive the type of economic development that the lender considers beneficial and which may not be what the local market would have developed organically. That the debt is centrally organised also provides an opportunity for unethical leaders to siphon some off for personal gain.

High inflation drives a raising of time preference as people discount the future at a higher rate. Lowering time preference is key to the growth of civilisation and economies. Low inflation, and lower time preference make it easier for people to plan and invest for the future.

Excluding substantial numbers of the global population from having access to global money exchange also tends to exclude them from participation in global markets. This harms their ability to provide for themselves by supplying goods and services to willing buyers. Their exclusion also harms customers who could benefit from competitive advantages that those currently excluded could offer; we all lose, some more than others.

4.6.5 Evaluating policy options

Change is the law of life. And those who look only to the past or present are certain to miss the future
John F. Kennedy

Whatever response governments take to this issue, the depth and breadth of its implications mean that the rise of Bitcoin should be added to national risk registers. 

4.6.5.1 Resist - Fighter

Some elements of government policy, but more especially those of financial regulators, appear to have taken this position over much of the time since Bitcoin has had a value that gained attention. Where regulations have appeared they have tended to be reactive, slow and to have the effect of stymying growth. However, this may not be intended and may simply be the consequence of an insufficiently strategic approach from governments, and hence regulators below.

If Bitcoin does continue to rise, the history books will see that driving opportunities to others will have been a huge disservice to the populations living in the countries that took this approach. The rise of the internet was fought a little, very early on, in the developed world, but wisdom quickly prevailed and much of the commercial and technological benefits have been developed, built and gained by those countries that embraced it when it was young. 

4.6.5.2 Ignore - Gambler

This option appears to have been the one taken by most governments from 2009-2024 with some notable exceptions such as El Salvador and Bhutan. Despite the work policy institutes such as the Bitcoin Policy Institute in the US and Bitcoin Policy UK, most governments have remained largely ignorant of the issues and are thus missing both mitigating actions and opportunities from the Rise of Bitcoin. Where regulation has been forthcoming it has tended to be reactive rather than strategically thought through.

Deliberate ignorance cannot be an acceptable stance as it is gambling with the futures of the people that inhabit the geographies for which the government is currently responsible. Being supportive of misinformation and using political oratory to belittle a substantial technology cannot be an ethical or professional way of conducting the politics of government. Laughing at Bitcoin as ‘magic internet money’ may have been reasonable in the first few years when it was merely a geeky collectible or had a very low value, but that is no longer an acceptable position to take.

4.6.5.3 Delay - Laggard

Attempting to delay the rise of Bitcoin is a realistic option. However, it will come at the price of a worse outcome for the people who today and in future inhabit the geographies that such a government is responsible for. Given this risk, it should only be pursued from a position of knowledge and informed expertise.

There may be areas where injecting some topic-specific and internationally coordinated delay could be beneficial in smoothing the inevitable transition. One example would be that by reducing the attempts to censor or place undue burdens on centralised social media companies, the move to uncensorable solutions could be delayed. This may reduce the costs of managing international financial and other large scale crimes for an extended period.

4.6.5.4 Embrace - Innovator

If it’s going to win, back it. History is kind to leaders that back winners.
James Dewar

If Bitcoin does continue to rise as a global money the early winners will be :

• Individuals who embraced Bitcoin early
• Business and their shareholders who embraced Bitcoin early
• Citizens of countries whose governments embraced Bitcoin early

In the long term everyone will benefit, but the initial outsized benefits will flow into countries whose governments adopt this option.

By embracing Bitcoin now governments can : 

• Support education of their citizens
• Develop Bitcoin law and regulation from a strategic angle
• Encourage, or at least remain neutral, the growth of new industries 
• Anticipate the reshaping of the economy - size of financial sector, reduction in importance and power of mega corporations
• Manage the impact on government funding 

Will Bitcoin render obsolete the politician that believes their role is to rule rather than to serve?
Darren Freemantle

It is more socially injurious for the millionaire to spend his surplus wealth in charity than in luxury. For by spending it on luxury, he chiefly injures himself and his immediate circle, but by spending it in charity he inflicts a graver injury upon society.
John A. Hobson

4.7.0 Introduction

Governments will not only lose their power to tax many forms of income and capital; they are also destined to lose their power of compulsion over money.
James Dale Davidson

As discussed in the chapter aimed at governments, the rise of Bitcoin is likely to place significant pressure on state funding of welfare services. This added pressure is likely to develop at the same time as many western economies face aging populations. 

The displacement of the state as a funder and/or deliverer combined with greater needs from their populations will lead to much greater needs for charitable activities and the philanthropy to support them. In a world where financial assets can be held self-custodially and in a dematerialised form, high levels of coercive taxation are only sustainable, even in democracies with electoral consent, by the imposition of currently unacceptable levels of restriction on freedom of movement. See the quote above from The Sovereign Individual, or read it in full.

However, there are also opportunities for charitable and not for profit organisations. It is not that their services will no longer be in demand, quite the reverse. And many of those who through learning and foresight become wealthy through this transition will follow the path of those who came before (for example Rockefeller and Carnegie) and become philanthropists as they see the need and acquire the means.

4.7.1 Risks

I’m obliged to pay so much to the poor by law, that I am not of ability to bestow in voluntary contributions….this checks and weakens the charitable principle within; and this principle, by not being exercised … grows weaker and weaker, and, in time, perhaps, is quite extinguished
Thomas Alcock

The risks that charities face emanate from the following observations:

• An increase in societal demand for health and welfare services due to demographic change (in the developed world)
• A decrease in the capability of the state to continue providing existing services
• A decrease in the power of the state to provide financial support to charities to support existing services

The above lead to risks that charities and not for profit organisations may face increased demand for services at the same time as a key source of funding is falling.

During the 20th century the state came to be the dominant provider of health and welfare services in most developed countries, areas which had previously been largely the domain of charities, community groups and religious establishments. The emergence of the welfare state since the second world war has been predicated on the rise in power of nation state governments. If this were to reverse then gaps in social provision will open up and people will seek to organise to cover these gaps.

It is repugnant to a civilised community for hospitals to have to rely upon private charity.
Aneurin Bevan

Whilst many people, including politicians, have made ethical claims about reliance on charities as “repugnant” or similar, it may turn out that holding such views was a temporary privilege. In any case, such ideas have been intellectually contested. A return to the expectation that those with the broadest shoulders will bear the greatest burden through philanthropic engagement rather than coercion may turn out to be both ethically and socially beneficial. 

The current and future advancement in global technology and productivity means that such a change will not be a turn backwards to the world as it was before the 20th century. The resources to provide the generally desired safety nets today far exceed those available previously. Indeed Bitcoin, by driving better resource allocation decisions, capital growth and a lower time preference, will itself provide a new basis for increasing the resources that the global economy can produce.

4.7.2 Threats 

Change is the law of life. And those who look only to the past or present are certain to miss the future
John F. Kennedy

Funding

Charities or not for profit organisations that receive funding from central or local government may face reductions in these flows due to the decentralisation of financial power away from these political entities.

The same risk applies to those organisations who derive significant funding from corporations that may themselves face challenges from the rise of Bitcoin, In particular, we would highlight those corporations that today operate in the financial services environment. If these funding organisations are not themselves actively planning and responding to this emergent technology then their ability to continue to support charitable activities may fall.

Charities that source some of their funding from investments, legacies or endowments may find that real returns from these fall as Bitcoin reduces some of the monetary premium they currently hold. In particular this may affect real estate, gold and stocks. Bonds may also lose real value not just as a consequence of over-indebted states, but also as they face competition from the rise of a new monetary asset.

The demographics of funding have always changed over time and this is not new. However, what may happen due to the rise of Bitcoin is that the difference in values and perspectives of the replacement generations may be radically different from what has been seen in the past.

Demand growth

As governments become less able to provide some health and welfare services there will be an increasing amount of unsatisfied demand in society. People will increasingly look to smaller, local community organisations to help meet this demand. New organisations will emerge, supported by newly engaged donors.

The developed world faces a demographic time bomb caused by aging populations and reducing fertility rates. These trends are driving governments further into debt and in many cases increasing the burden of unfunded future liabilities. Many current demands are not being met, and promises that almost certainly will not be met are being made. This is driven by short term political expediency, but it has the unfortunate repercussions of raising expectations way beyond what can actually be delivered. Such expectations are a source of future demand since when they are not met, people are likely to have made inadequate private provision, even where they may have been able to had they not received the promises in the first place. 

4.7.3 Opportunities

In this section we highlight some possible opportunities for charities and not for profit organisations that Bitcoin may offer. They are not comprehensive, but they are opportunities for most organisations and they are intended to stimulate thought.

One key insight is that should Bitcoin continue on its path of becoming an increasingly valuable worldwide asset and currency then there is a demographic cohort already involved today from whose ranks will emerge many of the philanthropists of tomorrow. They are a motivated and committed group many of whom already understand that with great wealth comes great responsibility. They are likely to be increasingly willing to engage with and support charities that position themselves ethically to help those in need, whether that need is current, or emergent as governments become increasingly unable to meet promises made in the past. 

With the new demand and the new funding cohort, it may be worth considering starting a subsidiary charity or not for profit organisation. A new arms length subsidiary may achieve better focus and be able to innovate faster in both delivery and fundraising. You may even be able to find Bitcoiner staff who are willing to volunteer their time to help you, as well as providing the means to support philanthropy financially, because having wealth also makes people the owners of their time. 

Accept and target bitcoin donations

Accepting bitcoin is an easy, low cost way to engage with the Bitcoin demographic. There are many businesses across the world now doing this to generate additional revenue, using various social media and online services to promote themselves, often for free. By accepting bitcoin, organisations are opening themselves up to a growing global market of people who are getting wealthier over time. This market is relatively easy to target at present as it is fairly cohesive across social media and online platforms.

In some tax jurisdictions, capital gains tax is due when spending bitcoin in businesses. However, donations to charities may not be taxable thus reducing friction more than for businesses.

Building a reputation within this global community at present will be a lot easier than in a few years time when it is much bigger and your charity is one of hundreds accepting bitcoin. Further, the people you engage with today are likely to make up a larger share of those becoming philanthropists in the future than those who adopt Bitcoin later. Engaging with this demographic opens up a global opportunity to be considered for Bitcoin legacies as well as other non-financial support such as volunteering.

Treasury Management

For charities and non profit organisations that service some income from investments or/ endowments, the inclusion of an allocation to bitcoin within the investment mix can deliver superior returns for a given risk by increasing the Sharpe ratio. See Chapter 7.3 ‘Treasury Management’ for more information on this.

Delivery Innovation

Many businesses engaging with Bitcoin introduce products and services specifically aimed at this market to further drive revenue and loyalty. There is an opportunity for charities to look at how Bitcoin technology may provide a platform for improving their service delivery.

We provide just one example here to help illuminate the idea and help your innovation process.

‘Bank’ the unbanked: Bitcoin payment cards, provided and recharged by a charity, could help people without bank accounts, either due to identity issues or unprofitability, to access services such as food banks whilst retaining privacy and dignity. Such a solution may also promote skills related to independent living like making budget-based decisions in store. This can provide a basis for recipients to experience financial management even though they currently have no access to banking. It could also help tp ensure payments get to localised areas of need quickly and cost-efficiently.

Delivery Structure

Consider decentralising structures to engage local communities more. A more decentralised structure is likely to promote ground up engagement and may better reflect the move to a more decentralised world.

Demand Growth

Identify the crossover between your organisation’s charitable objectives and the areas where there are currently unmet needs, or where the government currently meets some needs but may withdraw or reduce provision should they face financial challenges in the future.

Prioritise and make plans for expanding your services into these areas.

4.7.4 Activity

Design a fundraising campaign aimed at the Bitcoin demographic.

Some things you might consider:

• Why will the philanthropists who emerge from this technology change want to engage with you?
• What values does the demographic hold?
• How does your charity / campaign intersect with these values?
• What commitment to Bitcoin is most likely to attract donations? 
• What is the geographic distribution of this demographic?
• What are the wealth cohorts within the demographic today, and in future?
• How can you communicate with and reach them?
• How can you develop a long term relationship and trust with the cohorts?