At last, my worlds have collided. No, not in the way they collided for social miscreant George Costanza, but rather in a beautiful and harmonious way. Software company MicroStrategy will soon issue a $400 million bond in order to purchase Bitcoin only weeks after it converted $250 million of its treasury reserves from dollars to Bitcoin. And with that, the bond markets and the Bitcoin market will merge, and the two parallel careers I’ve built for myself will suddenly become one.

Bonds and Bitcoin

I spent my youth aspiring to participate in the financial markets, learning how to analyze charts and observe linear…


1. The Bitcoin Second Layer

Bitcoin’s antifragile protocol and its exponentially increasing network effects make it a behemoth, gradually swallowing up global economic activity. The latest of these network effects is a second layer protocol called Lightning Network, which uses bitcoin’s base layer protocol as its security. The concept of layered money is not new in monetary history. In this writing, I’ll be using gold as an analogy to describe why bitcoin will evolve in layers on its way to world reserve currency status.

Layered Money

Gold has served as money for millennia due to its unique chemical properties and its global network effects. But…


The Lightning Network Reference Rate, Part 4 of 4

Abstract

I present a three part proposal for Lightning Network node operators. The first and most crucial part of the proposal is a node-level calculation standard for the accrual of satoshis. The Node Accrual Rate (NAR) is offered as a formula to calculate the profitability of an individual Lightning node, expressed as an annualized interest rate.

The second part of the proposal is to convince Lightning node operators to disclose their NARs to each other. …


Bitcoin is digital gold, and this continues to be its most appropriate and concise metaphor. I recently discussed some parallels between gold and bitcoin in an article about layered money and Lightning Network. In this writing I’d like to focus on the storage analogy. The capital market of gold relies upon protected, armored, and insured storage vaults around the world. Without a robust vault infrastructure, multi-generational savings held in physical gold would be impractical. Bitcoin, going forward, will be no different. Individuals keep gold secured in their homes, but countries and central banks build vaults. Individuals keep bitcoin private keys…


Verifiable NAVs via public key disclosure are essential for a symbiotic relationship between bitcoin and traditional financial institutions.

Financialization

Let’s get one thing straight before we dive into the financialization of bitcoin: bitcoin doesn’t need any ETFs or legacy custodians in order to survive. In fact, bitcoin thrives because it didn’t closely interact with traditional financial institutions in its early years and thus cemented its decentralization. The relationship between bitcoin and traditional financial institutions, however, is about to change in a big way. …


The Lightning Network Reference Rate, Part 1 of 4

Bitcoin’s antifragile protocol and its exponentially increasing network effects make it a behemoth, gradually swallowing up global economic activity. The latest of these network effects is a second layer protocol called Lightning Network, which uses bitcoin’s base layer protocol as its security. The concept of layered money is not new in monetary history. In this writing, I’ll be using gold as an analogy to describe why bitcoin will evolve in layers on its way to world reserve currency status.

Layered Money

Gold has served as money for millennia due to its…


The most common question I’m asked is if I know what the interest rates of a Lightning node might be. Now I finally have an idea, thanks to Alex Bosworth’s tweet today containing valuable data points:

Andreas posted he is making 4204 fees/week on his node, which he put $325,000 on. (week_fee_sum”: “4204”). My node has $7,500 which is about 40x less, but I’m making almost 2x his weekly fees. (“week_fee_sum”: “7829”). Why do I make more with less? Capital isn’t the only factor.

@alexbosworth

https://twitter.com/alexbosworth/status/1019985943321706496

I organized his information into a table and provided some conversions and calculations given…


Bitcoin is already a reserve asset. It is the world’s first true example of decentralized digital scarcity, and its elegant, predetermined supply schedule reinvents monetary policy. Its value is recognized by millions of people who own bitcoin as a savings vehicle, speculative investment, or currency hedge. Bitcoin is a reserve asset because millions of people own it as one. Its next step is to transition from a reserve asset to a functioning reserve currency by unlocking the bitcoin capital market. …


tl;dr

The HTLCs in Lightning Network give bitcoin a path to become a global reserve currency.

Abstract

Lightning Network provides a framework to measure the time-value of bitcoin, a precursor for a capital market and reserve currency status. Observable variables in Hashed Time Locked Contracts can be used to calculate the interest rate received on bitcoin held in payment channels, allowing investors to measure their opportunity cost of capital. Lightning Network wallet software should include ways to calculate interest and prove the rate received in a trust-minimized way. A reference rate should be developed akin to US Dollar LIBOR, using…

Nik Bhatia

bitcoin-native financial theory, adjunct professor of finance and business economics @USCMarshall

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store