By Jan van Eck, Chief Executive Officer, VanEck
In order to explain bitcoin to investors, we are offering a series of blogs and podcasts. A previous blog tried to explain the developments driving bitcoin’s rally. This blog is the first in a series that covers topics that are important to investors. For more on this topic, please listen to the related podcast.
The question “what is bitcoin?” can be answered in many ways. I don’t think investors need to know how bitcoin works technically, but they need to be able to assess the opportunities and risks of investing in bitcoin. So let us examine the two biggest questions that investors care about. First, how sure are we that bitcoin’s supply won’t increase beyond what is planned. And second, will the technology continue to work?
I think the best way to answer these questions is to understand that bitcoin is software.
But let’s stay away from the technical jargon. Most people already know that bitcoin is a thing of value, a type of electronic money, and that anyone can create a wallet, buy, send or receive bitcoin. They know that a password (or “key”) is needed to access their wallet and shouldn’t be lost. This blog will not explain how these things happen—encryption, hashing, mining, double spend, etc.
And let’s dispose with one bitcoin critique. Some investors, like Warren Buffet, don’t care about store of value assets like gold and disregard assets that don’t generate income streams. But some investors do care about stores of value. They will tell you that all paper currencies, backed by nothing, like the current U.S. dollar, eventually become worthless. This blog is meant for this latter group of investors.
Who’s in Control of Bitcoin Software?
If bitcoin is software, the starting point is to understand who controls the bitcoin software, or Bitcoin Core. Actually, no one is in charge of bitcoin per se. Bitcoin is open-source software that is free and run by the community on personal computers and servers.
Can software be developed by connected, non-controlling groups? Clearly, yes, there are precedents for this. Linux is shareware that runs smartphones, cars, most of the internet, all of the world’s top 500 supercomputers and the world’s stock exchanges. In fact, open-source software is a trend. Conceptually, open-source makes sense when there are many potential users and the number of developers who can review and refine the software is greater than what any single company can reasonably afford. The more developers, the more reliable the software.
Developing and Upgrading Bitcoin Software
So, who develops bitcoin software? In the first stage of bitcoin, Satoshi Nakamoto was the lead developer. There have been subsequent lead developers and some important changes. For example, there was a decision to implement a voluntary upgrade in late 2011 and early 2012. Developers wanted to address the issue that bitcoin was being stolen—not hacked—due to security vulnerabilities. In order to do this, they needed confirmation that the upgraded code didn’t have bugs that would crash the network, and the community, a majority of developers and miners, needed to agree to do it.
The argument was not about the desirability of the solution, but rather about what the best technical approach was. The solution ended up being a “soft fork,” an upgrade such that the network would continue to operate whether nodes/processors upgraded to the new software or not.
This story highlights various vulnerabilities, including bugs and getting agreement around upgrades.
Another aspect of bitcoin upgrades is that bitcoin is run on thousands of computers. Users need to accept the software upgrade for it to take effect, which creates an interesting dynamic. Developers don’t want to work on upgrades that users don’t want. In a way, the users are the ones who accept the upgrades by downloading and using the new versions of the software.
The SegWit decision, an…