Digital Assets

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What is Bitcoin?

Bitcoin, at its core, is a decentralized digital currency (digital asset) that allows for peer-to-peer transactions without any financial intermediaries like banks. Bitcoin is not just another investment vehicle but the core of a potentially broader digital asset strategy. There is growing acceptance of Bitcoin as a legitimate asset class among traditional investors, focusing on its attributes of being decentralized, non-sovereign, and having a fixed supply, which differentiates it from traditional financial assets.

Decentralization

Unlike traditional currencies, which are controlled by governments and central banks, Bitcoin operates on a decentralized network of computers. This network is based on blockchain technology, which is essentially a consensus-based public ledger of all transactions ever made with Bitcoin.

Creation

Bitcoin was created in 2008 by an unknown person or group using the name Satoshi Nakamoto. The idea was to establish a currency independent of any central authority, transferable electronically, and more secure than traditional banking.

How It Works

01

Transactions

When you send or receive Bitcoin, the transaction is recorded on the blockchain. Each transaction is verified by network nodes (computers on the network) through cryptography and recorded in blocks.

02

Mining

New bitcoins are created or generated through a process called mining. Miners use powerful computers to solve complex mathematical problems that validate the transaction, or block, and add them to the blockchain. As a reward for solving the math problem, the miners get newly minted bitcoins called block rewards. This mining process also maintains the security of the network.

03

Supply

There’s a cap to how many bitcoins can ultimately be created through the mining process which has been set at 21 million. The mining and scarcity features are akin to gold, giving Bitcoin its ‘digital gold’ moniker.

Why It Matters

Financial Freedom
Bitcoin allows for financial transactions without banks, which can be particularly liberating in regions with limited banking infrastructure or where financial censorship occurs.
Investment
Many see Bitcoin as an investment, like stocks, bonds or commodities. Its price volatility, potential for high returns, and its position as the first cryptocurrency or digital asset have made it very popular, particularly among younger investors.
Privacy
While not entirely anonymous, Bitcoin transactions don't require personal information, offering more privacy than traditional digital payment systems.
Global Transactions
Bitcoin can be sent anywhere in the world swiftly and at low cost without currency conversions and related currency translation fees paid to a financial intermediary.

01

Risk Considerations

Volatility: The price of Bitcoin has historically been very volatile, like many technology stocks in their infancy. It’s known for rapid rises and falls, which can be unnerving for some investors.
Regulation: Governments around the world are still figuring out how to regulate Bitcoin. This uncertainty can affect its adoption as an alternative currency to fiat money and its price stability.
Security: While the blockchain itself is secure, the places where you store Bitcoin, like wallets or exchanges, can be hacked. Users must be cautious about where and how they store their Bitcoin.
Environmental Impact: The mining process consumes a significant amount of electricity like computationally heavy artificial intelligence applications, leading to some concerns about its environmental footprint.

02

Considerations for portfolio construction:

Investors increasingly are evaluating bitcoin for potential investment allocations. About 63% of U.S. adults are “crypto curious,” according to the Digital Asset Council of Financial Professionals (“DACFP”).
Individual and institutional investors are increasingly looking to understand the potential benefits and risks of a bitcoin allocation to a traditional 60/40 portfolio:
- Diversification
- Potential for higher portfolio returns
- Potential to lower overall portfolio risk
- And as a hedge on inflation like gold.
We have conducted returns, volatility, and analysis of bitcoin relative to stocks, bonds, and gold to test its potential benefits within the context of a 60/40 stocks/bonds portfolio.
We found that bitcoin is a “unique diversifier” for investment portfolios. It has potential as a non-correlated asset that could provide flight to safety benefits amid global economic uncertainties.
Our research suggests that a modest allocation to Bitcoin could enhance risk-adjusted returns of a traditional portfolio. Larger allocations might increase overall portfolio volatility while providing higher return potential.
Bitcoin’s correlation to inflation has increased over this economic cycle. Similarly, bitcoin’s correlation to gold has increased over time as markets intuit links to monetary devaluations by global central banks.

03

Digital asset qualifications and experience

One of the highest priorities for investors today is finding knowledgeable and experienced investment advisers that can build bitcoin and other digital assets into a diversified investment portfolio.
Our principal holds the Certified Public Accountant (CPA) designation and the DACFP Basic Certificate in Blockchain and Digital Assets credentials, demonstrating our commitment to continuous learning and staying ahead of the curve in the dynamic financial landscape.
Servant has been building digital assets into portfolios for better client outcomes since 2022.
Given its potential for significant capital appreciation, Bitcoin allocations are best suited for tax deferred accounts, such as Individual Retirement Accounts, Health Savings Accounts, and Coverdell Education Savings Accounts.