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If there’s one cryptocurrency you should know about, it’s Bitcoin.
As the first cryptocurrency, Bitcoin has become the most valuable and most commonly owned among the thousands of cryptocurrencies created since. Its rise in value and popularity has been constant, if not without ups and downs.
The price of bitcoin topped $ 60,000 in April 2021, setting a new record and coinciding with the Coinbase cryptocurrency exchange going public. This high follows a meteoric rise in value in the first few months of 2021, after surpassing $ 20,000 for the first time in December 2020.
Here’s what you need to know about the world’s best known and most established cryptocurrency.
What is Bitcoin?
Bitcoin was created in 2009 in the wake of the economic recession. Bitcoin was created to be a peer-to-peer electronic payment system, but has also attracted curious crypto investors as a store of value, comparable to gold.
History of Bitcoin
The concept of Bitcoin was published in a white paper written by an anonymous character under the pseudonym Satoshi Nakamoto in 2008. No one knows the true identity of the perpetrators or if it is even a single person, rather than d ‘a group of people. The document described how Bitcoin works and the currency officially launched on January 3, 2009, according to Ollie Leech, editor at CoinDesk, a leading cryptocurrency news outlet.
How Bitcoin Works
The maximum Bitcoin supply is 21 million and that’s all there will be.
When a cryptocurrency is released, the creator (s) can set its parameters (how many there are, rules for buying and selling, how new Bitcoins are added to the market, etc.), which cannot be changed after the fact. Locked in from the start, these rules make Bitcoin a truly scarce resource, with a cap on the total amount that will ever be available.
No one, not a government, not Satoshi themselves, can change this now that he has been released, Leech said. You cannot duplicate Bitcoins, you cannot recreate them.
This is where the comparison to gold falls a bit flat, as gold is constantly entering the market as new ores and pockets are discovered, making it a relatively scarce resource.
Bitcoin is also much more transferable and easier to store compared to a resource like gold. If you want to move gold, it will cost a lot of money (armored transport, security, cost of storage in a secure facility, etc.). Bitcoin can basically be stored on a USB drive in what’s called a cold or hard wallet.
Investment vs Cash
Bitcoin was designed to be electronic money, as its white paper explains. But currency volatility almost immediately abandoned that initial intention, according to Leech.
For example, no sane person would want to buy coffee with Bitcoin, says Leech. That’s because you could buy $ 3 worth of coffee today with Bitcoin, and tomorrow that same Bitcoin is worth $ 30, and you actually spent $ 30 on a cup of coffee.
Or from a traders perspective, you are using Bitcoin for your $ 3 coffee, and tomorrow that Bitcoin is worth 60 cents. Then the merchant lost. Price volatility makes it completely useless as an electronic payment system, explains Leech.
As with gold, people buy Bitcoin not because they expect to be able to go to the store and spend it, but because they expect it to retain its value, explains Galen Moore, data and index manager at CoinDesk. For the same reason that people would have diamonds, or $ 100 bills or gold coins in a safe, they would keep a digital wallet with their Bitcoin on it.
Why is Bitcoin so volatile?
The volatility of cryptocurrencies is mainly due to the immature market, explains Leech. Traders are very sensitive to emotions, fear and greed, so you get these really extreme market reactions.
There are also new regulations and policies that are constantly reshaping the market and causing drastic fluctuations. And then there are social networks.
It’s this strange new thing where viral social trends, like Wall Street Bets or Elon Musk for example, have a huge influence on crypto, Leech says. If Elon Musk puts the hashtag Bitcoin in his Twitter bio, it earns 10% Bitcoin.
While social media has a unique power to intrigue and excite, its influence in the Bitcoin market is also a reason for casual investors to be cautious. Please don’t invest in cryptocurrencies based on trends on Twitter, says Kiana Danial, author of Cryptocurrency Investing for Dummies and the personality behind the @Investdiva account on Instagram.
With so little historical context compared to more conventional investments, Bitcoin and other cryptocurrencies should always be viewed as riskier assets, Danial says. With the potential reward comes a higher risk, so make sure any investment in Bitcoin is included in your larger wallets, riskier and more aggressive allocation.
Bitcoin mining
With Bitcoin, there is a limited supply of 21 million coins, although not all of them were released when Bitcoin launched in 2009. About 18 million of the 21 million Bitcoin have been added to circulation since the Genesis block, Bitcoin’s first block, was mined by Satoshi Nakamoto, Leech says.
New gold also enters the market from mining, but with gold it’s impossible to know exactly how much is left to be discovered and mined.
New Bitcoin is discovered and made available for purchase and sale through a digital mining process, which involves discovering new unique hash blocks (a very long string of numbers and letters) using ‘an algorithm. Blocks are just groupings of transactions occurring within a specific time frame, and new blocks are constantly being made available.
Each block discovered through the mining process unlocks a set amount of Bitcoin. This reaps rewards for those who discover new blocks and makes new Bitcoins available to buyers. There is no rhyme or reason for every block hash, so miners set up their computers to create many guesses per second to try and guess these random codes.
Miners use powerful computers called nodes to search for and discover new blocks. Anyone can be a Bitcoin miner using free software available at Bitcoin.org, but running a computer like this consumes a lot of storage space and energy.
Whoever guesses the code first has the right to create the next block and recover the transaction fees when their Bitcoin is bought and sold. Each new block has a treasure chest. And inside is a block reward which is free Bitcoin entering the market, Leech says.
This mining process is another factor contributing to the wild daily fluctuations of Bitcoins.
Today, around 900 Bitcoin come into circulation every day through mining, according to Leech. But there is a cyclical trend called halving written in the original Bitcoin code. Every four years, the amount of new Bitcoins entering circulation each day is halved.
The last halving took place in 2020, so in April or May 2024 the amount of Bitcoin entering circulation each day will be reduced again. The reduction will continue until the last Bitcoin is mined, which is expected to happen in 2140, Leech says.
This halving has happened three times since the introduction of Bitcoin, with its adoption increasing all the time. The effects of the halving on the price of Bitcoin are therefore difficult to pin down. The first halving, in 2012, led to a rise in the value of Bitcoin, while the second halving in 2016 led to a first drop before rising again. The third halving in May 2020 had no drastic impact on the price of Bitcoin, which has maintained record prices since late 2020.
With each halving, there is more market fluctuation in the price of Bitcoin. It’s deflationary by design, says Leech.
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