The Banking Executive Magazine - March 2024 Issue

What Affect Bitcoin Price increases, the price increases. When demand for Bitcoin falls, the price falls. On the supply side, Bitcoin is a unique asset in that its new supply schedule is absolutely inelastic; it is completely immune to fluctuations in demand. When most goods, in- cluding fiat currency and gold, expe- rience a rise in demand, producers react by increasing production and returning prices to an equilibrium. When demand for Bitcoin rises, thanks to the difficulty adjustment, the production of new Bitcoin does not rise. The stock-to-flow (S2F) model is commonly used to analyze the im- pact of scarcity on the price of an asset. The stock-to-flow ratio is a number that indicates how many years it will take to produce the cur- rent stock at the current production rate. Essentially, the stock-to-flow ratio is the inverse of the inflation rate of an asset. According to the stock-to-flow model, a higher stock- to-flow ratio should yield a higher price. Every four years, the Bitcoin halving cuts the block subsidy in half, reduc- ing the flow of new Bitcoin into the market, thereby increasing the stock- to-flow ratio and making Bitcoin even more scarce. If the stock-to- flow model is applied to Bitcoin, this should trigger a rise in price, and in- deed, each past halving has triggered a dramatic price rise. Bitcoin’s scarcity significantly im- pacts its price, largely because there is a hard cap on the total amount that will ever exist (only 21 million Bit- coins). Unlike fiat currencies, which central banks can print indefinitely, Bitcoin’s supply is fixed. This scarcity is reinforced by the way new Bit- coins are created through the mining process, which is designed to slow down production over time through the halving. Bitcoin’s monetary policy is transpar- ent and predictable since everyone knows exactly how many Bitcoin are currently available and what will be the maximum that will ever be cre- ated. This transparency gives in- vestors confidence, knowing that Bitcoin’s value cannot be diluted by unexpected increases in supply. This known scarcity and predictability make Bitcoin a compelling option for investors looking to protect their wealth from inflation or monetary debasement, where traditional cur- rencies might lose value over time. Bitcoin is deflationary due to its finite supply. The finite supply protects Bit- coin from hyperinflation. BITCOIN ASSET PROTOCOL BRC-20 BRC-20 is an experimental token standard that enables the minting and transferring of fungible tokens on the Bitcoin blockchain. It stands for Bitcoin Request for Comment and is similar to the ERC-20 token standard on ethereum (ETH). BRC-20 tokens were first proposed in March 2023 by an anonymous de- veloper known as Domo. The devel- opment of the BRC-20 token standard rose from the growing de- mand for fungible tokens within the realm of the Bitcoin blockchain. While ERC-20 tokens are widely em- braced on the ethereum blockchain, they don’t have the same compatibil- ity with the Bitcoin blockchain. This gap acted as the driving force behind the inception of BRC-20 tokens, pro- viding developers with a tailored so- lution to generate fungible tokens that seamlessly integrate with the Bit- coin blockchain via the ordinals pro- tocol. BRC-20 tokens represent an emerg- ing token standard that harmonizes effectively with the Bitcoin blockchain. They bring forth a host of promising advantages. Con- structed on the foundation of the Bit- coin blockchain, recognized for its unparalleled security and decentral- ized structure, BRC-20 tokens estab- lish a high level of security and safeguarding against fraudulent ac- tivities. Notably, these tokens adhere to the principle of fungibility, signify- ing their ability to be swapped out and represent diverse values inter- changeably. This inherent adaptabil- ity positions them as a prime candidate for diverse applications, including but not limited to loyalty programs and crowdfunding plat- forms. Moreover, BRC-20 tokens possess transferability, implying their capability to be smoothly transmitted and received between different wal- lets linked to the Bitcoin network. This inherent feature ensures user- friendliness and broad accessibility across a diverse user base. Transaction fees associated with BRC-20 tokens are settled in Bitcoin. ISSUE 183 MARCH 2024 the BANKING EXECUTIVE 9