“There are three eras of currency: commodity based, politically based, and now math based” – Chris Dixon
“I think the fact that within the Bitcoin universe an algorithm replaces the functions of government is pretty cool. I’m a big fan of Bitcoin” – Al Gore
“Bitcoin will do to Banks what email did to the postal service” – Rick Falkvinge
“People buy and sell them because they hope they go up or down just like they did with tulip bulbs a long-time ago. I guarantee it won’t end well” – Warren Buffett
The genesis of Bitcoin was 2008 when an individual or group, nobody to this day knows who, called Satoshi Nakamoto posted access to the code to mine Bitcoin.
This is the first of a number of concepts related to Bitcoin you need to get your arms round.
Bitcoins were and still are rewarded for solving complex ‘hashing’ (computer data) problems.
So, earning Bitcoins has always felt like panning for gold in the digital realm. It is very complex, very time consuming and very expensive to do.
Bitcoin as a concept only became actionable when advancements in computing power and software created ‘The Blockchain’.
It is worth the time to understand blockchain technology, it’s going to be hugely important going forward in any number of digital applications.
What is blockchain?
In essence a blockchain is a way of creating, storing and constantly updating data files with absolute security.
Think of it as a recurring ledger of transactions which are stored on nodes or blocks. This means there is no single store of the information but rather organic recurring ledgers in a chain (blocks). As each new block has data encrypted linking it to the previous block, it makes the chain absolutely tamper proof.
The blockchain allows Bitcoin to function entirely digitally, with absolute security and outside any Governmental scrutiny.
Bitcoin development
There were only 21 million available to be mined, and around 88% have been. There will never be more Bitcoins made so it is finite, and this is important because unlike Government controlled currencies Bitcoin cannot be debased by printing more.
First transaction was in 2009 when 2 pizzas were purchased for 10,000 bitcoins. So, the cost today of that meal was $500 million.
The first major adopters of Bitcoin were the traders on the Silk Road which was a ‘dark web’ site trading illegal goods and services. This gave them the ability to pay for items in a digital currency which could not be tracked by law enforcement.
By the end of 2011, the value of a coin had risen to $5.27.
By the end of 2016, a coin was $998
By the end of 2017 it was $19,783
By mid-2018 it had fallen to $5,848
In early 2021 it is around $50,000
Bitcoin is increasingly gaining legitimacy within the conventional financial markets. PayPal and Square allow it to be held and used. Major banks such as JP Morgan are in the process of engaging with it. Large retailers are increasingly accepting it and Elon Musk recently bought $1.5 billion for Tesla.
As it grows in value and becomes more widely utilised it increasingly becomes ‘real’ and legitimate.
Why the rise in value?
It is estimated that the top 2% of holders control over 90% of Bitcoins.
As the quotes at the start of the blog attest, Bitcoin is something of a faith. If you believe in it then you can list a number of its attractions and conclude it will succeed.
- It is safe
- It cannot be debased. It has scarcity value
- It is outside of governmental control
- It is like gold which has no actual practical value either and gold is not doubted
- It is unchained from the banking system
If you do not believe, then you can list reasons it is a mania.
- Bitcoin is not the only digital coin to be accepted. There are more and more being created so digital currencies will not be scarce
- Does anyone think Governments will let this happen? Will they allow themselves to lose control of tracking, controlling and taxing money flows?
- Governments will create their own digital currencies
- There are examples such as Dogecoin which was created as the currency of a breed of Japanese dog, the Shiba Inu as a joke. It is up 1,400% year to date.
So, the rise in the value of Bitcoin is either because the early adopters who perceived its true value were right and it will become an incorruptible store of value like gold.
Or
It is a mania, a bubble, a nonsense, a classic ‘greater fool’ episode like the tulips.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.