Bitcoin's Dual Role: A Treasury Asset and Technological Innovator

As the world’s foremost asset and groundbreaking technology, Bitcoin continually sparks weekly innovations. This article delves into some of these aspects and what they mean for your business, drawing on industry perspectives shared by Alex Leishman during his talk at Microstrategy World 2024.

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Corporate Adoption and Stability

Bitcoin's journey from a fringe experiment to a mainstream financial instrument has been nothing short of extraordinary. MicroStrategy exemplifies this evolution, demonstrating the transformative power of integrating Bitcoin into corporate treasuries.

As Natalie Brunell noted, “MicroStrategy has really proven over the last four years that adopting a Bitcoin corporate strategy can make a successful company even more valuable, even more successful, more stable.” This highlights Bitcoin's impact on corporate stability, giving MicroStrategy a buffer against currency debasement and falling yields, and setting a precedent for other corporations to follow.

Looking at the performance of Bitcoin and their stock, it’s not hard to see why people are paying attention.

This incredible value accretion is not an isolated phenomenon. Recently, Metaplanet Inc, a Japanese investment firm, adopted Bitcoin for their treasury reserve asset. Consider their stock performance since then. Is this an isolated phenomenon, or simply the consequence of an already successful company adopting the world’s best asset?

Enhanced Value Preservation

One of Bitcoin's most compelling attributes is its ability to preserve value over the long term. Unlike fiat currencies, which are being inflated away, Bitcoin's fixed supply makes it a robust hedge against currency debasement, arguably the biggest issue in the world right now. As Natalie Brunell mentions, "It's really owning a form of property that has the ability to preserve value over the long term more than any other asset in history." This unique characteristic of Bitcoin has made it an ideal asset for companies looking to secure their financial future.

Between May of last year and this May, there has been a 43% increase in the amount of Bitcoin held by public companies.

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Practical Benefits for All Businesses

The practical benefits of holding Bitcoin are becoming apparent to businesses of all sizes. At River, a Bitcoin-focused company, over 1,000 business clients range from small enterprises like hot dog stands to large family offices. The diverse clientele at River reflects the widespread appeal and practical advantages of Bitcoin. Businesses of all sizes are realizing the benefits of holding Bitcoin. In the past year alone, the average Bitcoin balance held by businesses at River has surged by 60%.

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Diversification and Risk Management

Bitcoin's role in corporate treasuries extends beyond value preservation; it also plays a crucial part in diversification and risk management. Over half of River Financial's own corporate treasury is in Bitcoin. This strategic allocation has substantially increased the company's treasury value, providing it with more resources and financial flexibility. By diversifying their treasuries away from cash, companies can insulate themselves from the risks inherent in the traditional banking system. The biggest risk is the relentless debasement of currency, creating a hurdle rate upwards of 10%.

While Bitcoin has revolutionized corporate treasury strategies, its impact goes further. At the forefront of technological innovation, Bitcoin, through the Lightning Network, is pushing the limits of financial technology.

The next section will explore how the Lightning Network and other advancements position Bitcoin as a key player in digital payments and autonomous transactions.

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Bitcoin's Technological Innovations

‍Lightning Network and Payment Technology

"The mental model I think you should have is that the Bitcoin blockchain is the base layer. It's the orange boxes at the bottom. And the Lightning Network is the second layer on top of the base layer." – Alex Leishman

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Analogy of the Lightning Network

To understand the Lightning Network, consider this analogy from Alex Leishman: imagine walking into a bar and placing multiple orders throughout the night. Instead of paying for each drink individually, the bartender keeps a tab and settles the total at the end of the night. It allows for numerous transactions to be conducted off-chain and then settled as a single transaction on the Bitcoin blockchain.

This method significantly reduces transaction fees and times, allowing Bitcoin to scale to become a medium of exchange (MoE). Grasping the concept that Bitcoin scales in layers is crucial. While some advocates argue that all functionalities like privacy, transaction output, security, and decentralization should be incorporated into the base layer, this approach is impractical. Like many systems in our world, Bitcoin scales in layers, with each layer building on the previous one to accomplish greater advancements.

The Lightning Network's adoption has been remarkable. Between August 2021 and August 2023, the number of monthly payments on the Lightning Network surged by an estimated 1,200%.

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Innovative Security Measures

Security is crucial in Bitcoin, and the Lightning Network addresses this innovatively with solutions such as vaults and multi-signature transactions.

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Vaults

The concept of vaults is a critical innovation for Bitcoin's security. Picture this: Alice wants to send Bitcoin to Bob. Instead of the transaction completing immediately, it goes into a "vault" where it stays for a predetermined period, similar to a pending status. This vault acts like an escrow account, holding the transaction temporarily.

During this holding period, the transaction is in limbo, meaning it hasn't been finalized yet. This mechanism is particularly beneficial if Alice's private key is compromised. For example, if a hacker gains access to Alice's key and tries to steal her Bitcoin, the transaction isn't completed right away. Alice has a window of time to notice the unauthorized attempt and reverse the transaction before it leaves the vault. This added layer of security significantly reduces the risk of losing funds to theft or accidental transfers, providing a crucial buffer for users to react to potential threats.

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Multi-Signature Transactions

Multi-signature (multi-sig) transactions add another robust layer of security by requiring multiple parties to approve a transaction before it can be executed. In a multi-sig setup, a transaction might need signatures from three out of five possible signers to be valid. This means that even if one private key is compromised, the bad actor cannot authorize the transaction without the additional required signatures.

For instance, a company might use a multi-sig wallet for its treasury. If the wallet is configured to require three out of five directors' signatures to authorize any transfer, an attacker would need to compromise at least three directors' private keys to move the funds. This setup distributes the responsibility and control over the funds, making it much harder for unauthorized transactions to occur.

By implementing multi-sig, organizations can ensure that no single point of failure exists.

"Bitcoin is like packets on top of lightning, which is kind of TCP/IP. And so you convert currency into the most neutral form of digital internet money that has ever been created for the time of one second." – Alex Leishman

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Integration with AI and Autonomous Transactions

Looking to the future, the integration of Bitcoin with artificial intelligence (AI) represents a new paradigm in financial technology. Alex Leishman highlighted this transformative potential: "Bitcoin is set to become the cornerstone of the machine economy, enabling seamless, autonomous transactions between AI agents."

This vision entails a future where machines can conduct transactions independently, without human intervention, using Bitcoin as the medium of exchange. AI agents are already emerging in various applications, such as Conversate, where AI agents manage specific tasks and interactions. As these agents become fully autonomous, they will need to handle their own finances.

A machine cannot and will likely never be able to open a bank account. As highlighted by Lyn Alden in her analysis of the Lightning Network, "With Lightning, you can send payments worth a fraction of a penny. This opens up new use-cases that aren’t possible with credit cards, for example, such as machine-to-machine payments, the streaming of micro-payments, or the usage of micro-payments as a spam-prevention technique." In practical terms, this means an AI agent could generate a Bitcoin wallet, earn funds through online activities, and spend those funds autonomously to complete tasks. AI agents managing Bitcoin via the Lightning Network shows Bitcoin's potential in the machine economy.

"In ten years, every company in the world that needs to send payments cross-border will use lightning to do that either knowingly or not knowingly but the underlying technology that will transport value cross-border for the world will be lightning for any consumer and any company."

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IoT (Internet of Things)

IoT devices also present many interesting use cases. For instance, smart appliances could automatically reorder supplies when they run low, paying for them directly using Bitcoin. Similarly, industrial machines could autonomously manage their maintenance schedules and procure necessary parts, streamlining operations and reducing downtime. It will take a long time to truly think through all the new business models and use cases that can come out of this technology.

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Conclusion

Bitcoin's dual role as a treasury asset and technological innovator positions it uniquely in the global financial landscape. Its adoption by corporations and institutions for treasury management underscores its value as a stable, long-term asset, while ongoing technological advancements highlight its potential to revolutionize payments and security. Together, these facets of Bitcoin are fostering a new era of finance and technology.

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