A Closer Look at Bitcoin

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Bitcoin’s origins and value proposition

Bitcoin is the oldest and in terms of market capitalization the by far leading cryptocurrency. It was first proposed in 2008 by the anonymous developer Satoshi Nakamoto who mined the first block in 2009. Nakamoto famously inscribed the words “Chancellor on brink of second bailout for banks”, a headline from that day’s London Times, in the first block and thereby proved that he did not selfishly begin mining bitcoin earlier than he had stated. He also positioned Bitcoin as an alternative to the traditional banking system.

Since its inception, Bitcoin has evolved from a niche technology to a globally recognized asset, finding various uses in today’s world. Let’s look at the two most prominent use cases:

Bitcoin Use Cases

Store of value

Means of exchange

Bitcoin can serve as an alternative store of value to traditional assets like gold or real estate and is even sometimes referred to as “digital gold”. Bitcoin and gold share many properties, most importantly a limited supply. Unlike gold, bitcoin has a “perfect scarcity”, with a hard supply cap of 21 million coins which is technically secured through the Bitcoin protocol. Nevertheless, for centuries gold has served as a store of value in disruptive times, while Bitcoin has only been invented in 2008.

Bitcoin can be used for payments, including online payments, peer-to-peer payments, and remittances. Through its digital and global nature, bitcoin can be sent easily around the world. However, bitcoin’s adoption for payment use cases currently remains limited, mainly due to its high volatility. Nonetheless, Bitcoin may already today offer a viable alternative for certain payment use cases where the traditional financial system fails to offer cost-efficient solutions, e.g., remittances.

What makes Bitcoin valuable?

Bitcoin derives its value from three core factors, its decentralisation, security, and scarcity. Bitcoin therefore has succeeded in attracting many users, which has already led to strong network effects.

  1. Decentralisation
    Bitcoin is built on decentralised blockchain technology which means that it does not depend on any central authority. Bitcoin was the first successful application of the then new technology, building on decades of scientific research. Read the section below titled “How does Bitcoin work?” to understand its technical setup. Its decentralisation brings credible neutrality and resilience to the network.
  2. Security
    The Bitcoin blockchain has been operational without any major issues since its launch in 2009. It is secured by a so-called “proof-of-work” consensus algorithm. Any attempt to cheat would require an impractical amount of computational power. The transparency and immutability of the blockchain enhance trust in the Bitcoin network and enable anyone to independently verify the entire transaction history.
  3. Scarcity
    Bitcoin’s supply is technically limited to 21 million coins; more than 19.6 million are already circulating[1]. New bitcoins are issued with every new block that is added to the blockchain. The Bitcoin protocol defines the issuance schedule: When the network was launched, 50 new bitcoins were generated per block. Approximately every four years the number of new bitcoins per block reduces by 50%, commonly referred to as “halving” events. It is estimated that the last new bitcoin ever will be mined in 2140.


Did you know:

  1. Bitcoin was created in 2008 by an anonymous developer named Satoshi Nakamoto. Until today Satoshi Nakamoto remains anonymous. He disappeared in early 2011.
  2. Bitcoin has hundreds of millions of users globally[2].
  3. Bitcoin’s protocol limits it to 21 million coins total, which gives it a defined, limited, and inelastic supply. 1 bitcoin is divisible into 100 million Satoshi.
  4. “Bitcoin” with a capital B refers to the blockchain network, while “bitcoin” with a lower-case b refers to the cryptocurrency.
  5. On average, every 10 minutes a new block is added to the Bitcoin blockchain, containing roughly 4,000 transactions per block[3].

How does Bitcoin work?

Bitcoin mining explained easily

Bitcoin mining describes the process of how new blocks with new transactions are added to the Bitcoin blockchain. So called miners compete to solve a task that requires a high quantity of qualitatively simple computational work: It can only be figured out by repeated try-and-error, but the solution is very easy to verify. An analogy would be the children’s game “Where’s Wally?”: Children screen a highly detailed picture to find a minor detail– which is a simple but laborious task. The solution – Wally’s location – can be easily verified. Back to mining: Instead of Wally, miners look for a so-called “nonce” that they need to create a new block. The Bitcoin network pays miners for adding new blocks. The reward consists of all transaction fees for the transactions included in the block and a block subsidy, i.e., newly minted bitcoins. This process is called “proof-of-work” and lies at the heart of the Bitcoin blockchain.

Bitcoin mining explained a bit more technically  

The Bitcoin blockchain consists of various blocks that are immutably chained together. Each block consists of user transaction data and technical data that secures the blockchain. The mining process creates parts of the technical data.

The below picture shows three consecutive Bitcoin blocks.


Graphic: DWS International GmbH, 2024
Data source: Blockchain.com Explorer, as of February 2024

Miners must create technical data for the new block such that the result of a so called “hash function” meets certain requirements. This hash function uses the user transaction data and the technical data as input and computes a “hash”. As the Bitcoin network requires the hash to begin with a prescribed number of zeros, miners must find additional technical data that yields the desired hash. They must add a random number, a so-called “nonce”, to the technical data already contained in the block. Thus, mining is simply the process in which miners use try-and-error to test a multitude of possible nonces until the hash function yields a hash with sufficient leading zeros.


Input for Bitcoin hash function Hash
Satoshi Nakamoto a0dc65ffca799873cbea0ac274015b9526505daaaed385155425f7337704883e
satoshi nakamoto aa2d3c4a4ae6559e9f13f093cc6e32459c5249da723de810651b4b54373385e2
Chancellor on brink of second bailout for banks 8131e6f4b45754f2c90bd06688ceeabc0c45055460729928b4eecf11026a9e2d
Input from Block #827,170 0000000000000000000293fc2e8ce78bea83764d568b4b65e07f3e41930d7e67

Source: DWS International GmbH, 2024. Different input data and corresponding hashes for Bitcoin’s hash function (SHA-256). Every input change changes the hash, which has a fixed-length.

Common controversies

“Bitcoin will be de-throned by a competitor”

Bitcoin’s first-mover advantage and its smart design have secured high user adoption. Strong Bitcoin network effects boost its market position even more. It would be very difficult for another cryptocurrency to de-throne Bitcoin. More than 15 years after its introduction and in spite of thousands of competitors, Bitcoin continues to dominate the cryptocurrency market. Nonetheless, Bitcoin is still a young technology and other cryptocurrencies might gain more market share in the future.

“Bitcoin has no intrinsic value”

Bitcoin lacks backing by a physical asset like gold, similar to most major fiat currencies like the USD and the Euro. But unlike fiat currencies, where supply is determined by a centralized authority, bitcoin is decentralised and scarce by design. Thus, in a certain sense, it is backed by its code. The question about Bitcoin’s “intrinsic value” depends on the quality of its code and its adoption.
In general, the notion of the “intrinsic value” of stores of value is difficult. Nearly all monetary goods have in common that their purchasing power is higher than the value, which can be justified by their use-value alone. This difference between purchasing power and exchange value is often referred to as a “monetary premium”. It is reasonable to state that gold, the most prominent store of value, is traded at a premium to its demand for industrial use. According to the World Gold Council, the demand for gold for technology, electronics and other industrial use cases was less than 13% of all gold demand in 2023[4].

“Bitcoin consumes too much energy”

Bitcoin’s high energy consumption arouses much environmental concern. As of 2023, Bitcoin mining was estimated to be responsible for 0.1% of global greenhouse gas emissions[5]. Nonetheless, while Bitcoin’s high energy consumption remains controversial, it is at the same time vital for mining and therefore secures the network. In that sense, for its community, Bitcoin’s high energy consumption is “a feature not a bug”. In the end it comes down to balancing the value offered by Bitcoin with its environmental impact.

“Bitcoin cannot function as a payment network as transaction costs are too high”

Between 2021-2023, the daily average Bitcoin transaction fee paid by users was USD 5.27[6], ranging from USD 0.50 to USD 60.95[6], making Bitcoin transaction costs at times too high and generally too volatile for small payments. For low-value transactions, layer 2 solutions offer an alternative. Bitcoin’s most prominent layer 2 solution, the Lightning Network can settle up to 1 million transactions per second[7] compared to about 7 transactions on the Bitcoin base chain, reducing typical transaction costs on Lightning to less than 1 cent USD[8].

Cryptocurrency specific risks

Risk types

Risk type description

Cryptocurrency price volatility High intra-day price volatility of cryptocurrencies may result in potential losses for investors
Blockchain technology risk Nascent blockchain technology may result in system disruptions, cyber security risks, source code risks, hacking attempts, forks, problems relating to activity peaks, etc.
Regulatory and policy risk Ongoing changes in regulations and policies in relation to cryptocurrencies may lead to adverse impacts for investors
Counterparty risk Crypto brokers and counterparties (e.g., cryptocurrency custodians) may be less established compared to traditional counterparties
Liquidity risk Instability in cryptocurrency markets may lead to (temporary) illiquidity of underlying assets
Adverse Environmental and Social Impacts (ESG) Certain cryptocurrency features such as the consensus mechanism may lead to adverse environmental and social impacts
Fraud risks Cryptocurrencies may be used for criminal activities (e.g., ransom software, money laundering, terrorism financing)
Operational disruption Immature processes in combination with above general risks (e.g., blockchain technology risk) may lead to operational disruption and risks

Source: DWS International GmbH as of 03/2024

1. Coinmarketcap, as of March 2024

2. Crypto.com, Crypto Market Sizing Report 2022

3. Blockchain.com Explorer, as of February 2024

4. World Gold Council, as of January 2024

5. Bitcoin GHG emissions for 2023 from Cambridge Blockchain Network Sustainability Index; World GHG emissions for 2021 from Our World in Data

6. Galaxy Research, Coin Metrics, as of March 2024

7. Kraken

8. 1ML, as of March 2024


Any opinions stated reflect the current assessment and are subject to change without notice. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.
Source: DWS International GmbH; Date: 20.03.2024

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