If you invested $ 100 in Bitcoin in 2011, this is what you would have now

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In early 2011, the then obscure cryptocurrency Bitcoin (CRYPTO: BTC) hit $ 1 per coin for the first time. It was a milestone celebrated by the few crypto enthusiasts at the time. The rest of the world was either oblivious or puzzled as to what even Bitcoin was.

Everyone has heard of Bitcoin by now. As of this writing, the price per coin is over $ 57,000, which represents a total market cap of nearly $ 1.1 trillion, according to CoinMarketCap. Therefore, owning 100 bitcoins – an investment of just $ 100 at the start of 2011 – would be worth $ 5.7 million today.

Of course, this hypothetical windfall ignores a very important point – you probably couldn’t have invested $ 100 in Bitcoin at the time. At least not as easily as it is today. Here’s why, why it’s important, and what it could mean for the price of Bitcoin going forward.

Image source: Getty Images.

Why it was difficult to buy Bitcoin in 2011

Bitcoin was established in 2009. If you want to own bitcoin today, you can simply deposit money into an app like Coinbase, Square, or Robinhood and click “buy”. But in the beginning, there were no reliable third-party methods of exchanging dollars for coins.

Bitcoin Market was a first attempt to exchange cryptocurrency. He used PayPal as a means of exchanging money, but PayPal eventually stopped allowing transactions on Bitcoin Market due to fraud allegations.

The Bitcoin market and other early exchanges were unreliable, which made it difficult to invest $ 100 in Bitcoin in 2011. Chances are, if you had Bitcoin in the beginning, you got it in mining it yourself. Either that or you were a restaurant in Jacksonville, Florida where a customer bought two pizzas for 10,000 bitcoins in 2010.

Bitcoin was not meant to be an investment

The struggle to convert dollars to bitcoin early on reminds us that Bitcoin was not necessarily intended as something to invest in, hoping its value would rise. Bitcoin was designed to be a digital currency used to buy and sell goods and services. We can joke that these two pizzas cost $ 500 million at today’s prices, but buying pizza was, in fact, precisely how Bitcoin was to be used.

Although Bitcoin was designed to serve as currency, critics point out that Bitcoin would struggle to handle the world’s financial transactions. Consider that there are relatively few transactions on the Bitcoin blockchain compared to the global financial system. With its current infrastructure, Bitcoin is prone to get bogged down and as a result transaction fees climb to outrageous highs from time to time.

Bitcoin transactions per day given by YCharts

Bitcoin is due for an upgrade called Taproot, which should help alleviate its scalability bottleneck. But I think the most important point is that Bitcoin is not being used as intended. People don’t buy and sell Bitcoin as much as they hold Bitcoin.

For example, consider cryptocurrency mining companies. Two of the biggest are Marathon Digital Holdings and Riot Blockchain. Marathon Digital and Riot Blockchain have mined 2,098 and 2,457 bitcoins, respectively, so far in 2021. Neither company has sold any, meaning Marathon Digital now has 7,035 coins while Riot Blockchain has some. 3,534.

Many investors do the exact same thing. They buy bitcoin and hold it, expecting it to increase in value over time.

Image source: Getty Images.

What this means for Bitcoin prices

For me, a conversation about cryptocurrency always comes down to supply and demand. Consider mining to be the process of unlocking new bitcoins and releasing them into the overall supply. However, as miners hold it for the most part, the supply available for trade is not increasing as it would otherwise. And investors hold bitcoin instead of spending it, which has the same effect of reducing bitcoin float.

As a result, the supply of Bitcoin is tightening but the demand appears to be increasing. This demand is not just coming from investors – companies and governments around the world are buyers too. MicroStrategy is a business intelligence software company that owns over 100,000 bitcoins. But companies like MercadoLibre, the Latin American e-commerce and payments giant, have also quietly added bitcoin to the balance sheet in recent months.

El Salvador, meanwhile, recently made Bitcoin legal tender alongside the US dollar. But to make this monumental change, the central government of El Salvador bought bitcoins. By holding Bitcoin, he hopes to reduce the coin’s volatility for local traders. The Brazilian legislature is expected to hold a vote to make Bitcoin legal tender as well. Like El Salvador, would Brazil buy and hold bitcoin to reduce volatility risks for companies? Time will tell us.

In short, Bitcoin is largely held instead of spent, which limits the supply. Meanwhile, demand from investors, businesses and governments is increasing. If this continues, it won’t be surprising to see the price of Bitcoin rise in 2021 and beyond.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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