Bitcoin time value on the Lightning Network : Interview with Nik Bhatia ②

Nik Bhatia is the author of Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies. Previously, he was a trader of US treasuries at a large investment management company in California, and his job was to both trade interest rate products and help set strategy for clients. Nik Bhatia is a former Wall Street trader, adjunct professor at the University of Southern California Marshall School of Business, and a private asset counselor. He helps onboard to Bitcoin both in a retail and institutional setting. He is also a counselor for investment managers with clients that are demanding a solution to get allocated to Bitcoin.

Interview Date : 3rd February 2021

Who will benefit from Bitcoin the most?

Bitcoin is storage for wealth today, so it primarily is still a savings technology. While it experiences this huge wave of adoption and high volatility, the main people that will benefit from Bitcoin are the people that don’t spend it and hold it. As the user base of Bitcoin grows far beyond 100 million people and we start to approach maybe 1 billion cryptocurrency users around the planet over the next few years, more goods and services will be priced in both fiat currencies and Bitcoin at the same time. Good and services may be priced exclusively in Bitcoin only, and that whole Bitcoin denominated economy will continue to develop. Right now, it is still a little young but it is developing one user at a time, and one merchant, one company, and one government at a time. This will not exclusively cancel our currency; we are going to do a dual denominated balance sheet where we have everything accounted for in dollars and Bitcoin. That is the vision I have for the future.  

How can Bitcoin be bought through Bond Issuance?

I wrote an article a couple of months ago called “Bond Issuance and Bitcoin buying”  about the company MicroStrategy that issued bonds, meaning they issued debt and raised dollars to immediately use that cash for purchasing Bitcoin. They believe that Bitcoin is a superior treasury asset to the dollar, and decided to take that bold move. It was the first of its kind and something very exciting from a financial theory perspective. The bond market and bond issuance itself is an enormous market with 10s of trillions of dollars per year in bond issuance in which the government and companies borrow money through it. People issue bonds and they owe bond companies that money in the future but they get that cash today to use it for investments, boosting their earnings, for research and development, etc., but MicroStrategy used the money to just buy Bitcoin. And, if other companies around the world mimic that activity, it has the potential to blast the Bitcoin price to the moon. Besides, there’s so much money that is waiting to buy bonds that if that money is a conduit or if the bond market itself is a conduit to purchase Bitcoin, it brings a whole new buyer base and a slew of demands that previously didn’t exist.

How did Microstrategy impact Bitcoin’s price?

MicroStrategy has set a precedent. Their huge purchases and accumulation of over 1 billion dollars’ worth of Bitcoin was done at a price that is currently 50% lower than the current price today. That bond issuance happened at 17000 dollars/BTC. This is not to say that the Bitcoin price rose because of one bond issuance, but we can’t rule out the effect it had. That purchase was a huge influence on the price, and that was just one company. So, imagine other companies around the world and even governments getting involved in issuing bonds, getting capital, and start pouring it into  Bitcoin. There is only a finite supply of Bitcoin, and this supply-demand dynamic has the potential to boost the price of Bitcoin. 

Does Bitcoin OTC negatively affect the market?

I don’t think it does. Off-chain or Over-The-Counter transactions are an important part of the market. Bitcoin is this wild west type of free market in which there is no single price of Bitcoin. Everybody loves to say Bitcoin is at this or that price, but which price are you looking at? There are hundreds of exchanges around the world and those are only the prices we can see. Where Michael Sailor bought it, and how much he paid for it, etc., that has been hidden from us, and that’s okay. In the end, the real price will eventually be discovered by the marginal buyer or the marginal seller. Bitcoin trades 24/7, 365 days a year in every corner of the planet, both digital and by hand. Bitcoin buying and selling that goes on in the shadows is a natural thing and probably a good thing for the market because people know that if an exchange closes there’s a market somewhere else where they can get on. Besides, a lot of OTCs happen over text messages on Signal or Telegram apps.

It’s important to separate one from every other cryptocurrency out there because Bitcoin doesn’t have an issuer; it’s an algorithmic issuance. There is nobody that controls it, so the government cannot subpoena any farm or person to shut down Bitcoin. The OTC market is available to the everyday person. People can purchase and sell Bitcoin through peer-to-peer markets now, without going through an exchange. Also, there are several OTC market platforms around the world where people hand to hand are buying and selling Bitcoin for cash. It is a market where you can conduct such transactions pseudo-anonymously. You do not have to go through KYC and share your personal information. I don’t think that large buyers are necessarily at an advantage by being able to do so in OTC markets,  and OTC markets are just a different corner of this market’s nature. Small buys and sells and very large buys and sells aren’t going to happen in the same place.

Does Bitcoin have time value on the Lightning Network?

The Lightning Network changes the time-value aspect of Bitcoin because Lightning Network is a network of Bitcoin peers that agree to financial contracts that allow them to transact Bitcoin instantly with each other. Now if you have your Bitcoin dedicated to this network, you can facilitate payments between people. And, when facilitating the payment, you can earn an income for providing liquidity. So, with Lightning Networks, Bitcoin gains the time value of money in which you can earn income. Now, it’s not Bitcoin in cold storage anymore where it’s offline in your keys are private, rather it is now in a hot environment where your Bitcoin in an online environment and it’s being used. It will be locked up by hash time-locked contracts, HTLC, which are smart contracts the Lightning Network uses to function. In brief,  while your Bitcoin is tied up in a smart contract in the Lightning Network, it will gain time value, but if it’s not, it won’t have time value.

My very first research paper was called “The Time Value of Bitcoin” in 2018-19. It was about the idea of the Lightning Network bringing time value to Bitcoin, and there was a Japanese enthusiast who was the first person to translate my article into a foreign language, which I appreciate until this date. My role in this Bitcoin world is to present the financial theory behind this new technology. 

Isn’t there a risk to giving Bitcoin time value?

Absolutely, there is a risk factor. However, this risk isn’t a counterparty risk like we have in the traditional banking system. It is not a small risk either, and it is a risk factor most people don’t know how to manage properly. Using HTLC, there might be the risk of entering the wrong amount, you may mismanage the computer science aspect of it, your equipment may fail and you might lose your money. So, there are several risks involved in dedicating your Bitcoin to the Lightning Network and earning an income.

How can the average person manage a node?

Managing a node isn’t something that the average person is going to do or even be interested in doing.  The average person has 99+ % of their wealth in deposit banking, so we know that there is an absence of the average person’s desire to take custody of their money, or to take responsibility for the custody of their money. I am no computer scientist, no programmer nor an expert, and I don’t have my  Lightning Network node either.  I am not experimenting with earning income in the Lightning Network with Bitcoin because I don’t believe that I have the technical capabilities to do that. I haven’t signed up for managing my assets on the Lightning Network and earn with my Bitcoin because my expertise is in financial research, theorizing, writing,  and it’s not computer science. Most people aren’t going to be node operators and that’s okay. Most people aren’t even going to their  Bitcoin private keys, and I won’t go out as far as to say that that’s okay, but it is a natural state where people will trust exchanges to hold Bitcoin for them. In the United States, we can see that Coinbase is one of the largest holders of Bitcoin on the planet. Another entity called GBTC, an investment fund started by Grayscale, is one of the largest holders of Bitcoin on the planet because people trust Grayscale to hold their Bitcoin or give them exposure to Bitcoin.

Even if most people do not take custody of their  Bitcoin, it hasn’t negatively affected Bitcoin. We can confirm that by looking at the price: we are at all-time highs and Bitcoin keeps growing and getting stronger. Even though it has these huge swings up and down, it is on a steady increase in the long term.

How can I learn about taking custody of my Bitcoin?

If you want to truly be on the first layer of money and not have any counterparty disclosure,  know your  Bitcoin and figure out your custody. It is not that difficult for people that want to learn. You can buy a book on Bitcoin programming and wallets. You can research different hardware wallets, different software wallets, and how to make your wallets. I’m not a programmer but I learned some of it. I didn’t have anything except YouTube, Google, and the great people that have helped build Bitcoin to help me figure it out. Also, there’s a lot of great people that are willing to help you learn how to do this yourself, and Bitcoin is so empowering for that reason. It does empower people, like me, to learn computer science and to hold my private keeps.

Interviewer , Editor : Lina Kamada


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