After the 2008/9 financial crisis, the public confidence in government regulators was at a historic low. The public felt betrayed by the regulators who were created to protect them. In the aftermath of the crisis, a person going by the name of Satoshi Nakamoto created Bitcoin, as a decentralized digital currency with no single regulator. In the beginning not many people took Bitcoin seriously.
It took 2 years for Bitcoin to reach a value of 1 USD.
The most important aspect of Bitcoin is that it creates digital scarcity. There will only be 21 million coins maximum. Each bitcoin can be divided into 100 million satoshis.
Bitcoin is o.k. enough as a payments technology, but it really excels at being a saving technology.
Thanks to the inherent scarcity the value is expected to go up over time and Bitcoin will become the best money humanity has ever had.
Bitcoin: how the mining works
To be more precise, when you have bitcoin you actually have control over a private key that can send bitcoin to another address. Sending to another address means that you create a signature with your key, which is submitted to a node. Bitcoin nodes validate transactions and the bitcoin miners do the calculations that guarantee the safety of the network. On average every 10 minutes a new block is mined.
A block stores all the transactions that were done in the time needed to mine this block. The mathematical calculation that was needed to mine the block, safeguards the correctness of this block and thus the transactions stored in this block. And so, basically, this is how Bitcoin creates a publicly accessible and verifiable database of transactions. This is also called the blockchain.
Bitcoin mining power use
The massive amount of calculations are using a lot of energy. Some people are upset about this. But if you look closer into this:
- Bitcoin mining is a highly competitive industry, forcing miners to move to the cheapest forms of energy, in most cases this is environmentally friendly
- As of 2019 CO2 emissions from bitcoin are roughly the same amount of emissions of Kansas City (less than 1 million people)
- If we as the whole of humanity want to move up on the Kardashev scale we better start using and controlling a lot more energy soon.
At some point Ross Ulbright saw the potential of a currency that can flow freely on the internet and decided to create Silk Road, a digital marketplace where people would trade in everything, including any type of drugs. If he would have tried to build Silk Road using US dollars, it could be traced by law enforcement officers. As such, since Bitcoin could not be tracked, it became the default currency used in Silk Road.
As Silk Road became more popular, the concept of Bitcoin started to attract more attention. This attention led to a massive rise in price.
Bitcoin also led to the creation of copycat digital currencies like Ethereum, Ripple, and Litecoin. Today, there are more than 2000 digital currencies. Almost all of these are or will be worthless. They’re called altcoins and the term shitcoin was even used in US congress to describe these alternatives to Bitcoin in July 2019.
At its peak in December 2017, the price of Bitcoin reached almost $20,000 and the entire market capitalization of cryptocurrencies was more than $800 billion. Since then, the price of Bitcoin has declined to about $3500 at its lowest point, and the market cap of the digital currencies has declined to $172 billion.
How to Invest in Bitcoin
Most people who invest in Bitcoin, buy them from exchanges such as Kraken and keep their bitcoins stored in secure hardware wallets such as Trezor. The key here is to HODL. If you want to use the Bitcoins also to send to friends or to do private payments, we recommend to use a mobile wallet such as Samurai Wallet.
Note, if you don’t have the financial means to buy one or more bitcoins, you can always buy a part of a bitcoin. These portions are also called Satoshis. By far the best way to invest in Bitcoin is dollar cost averaging. Therefore, it the best way to buy Bitcoin is to regularly buy a little bit,
#stackingsats has become a popular meme over the course of 2019.
Bittr can be a good way to stack sats, if you live in Europe or you have a European Bank account. You can set up an automated way to buy bitcoins straight from your bank account and have the coins send to your own bitcoin wallet for minimal fees. If you don’t have a bank account in Europe, you can open a virtual European bank account even if you live elsewhere.
Buying real bitcoins
If you believe that the price of Bitcoin will ultimately recover, you can buy the Bitcoins from the leading brokers. In the United States, the biggest cryptocurrencies exchange is Coinbase, which has recently been valued at more than $8 billion. Other US-based exchanges you can use are Bittrex, Kraken, and Gemini among others.
The exchange you use is important because of the risky nature of the industry. Ideally, it should hold most of the currencies it holds online, with the rest being in the so-called cold storage. In addition, the exchange should be insured, which will help you recover your funds in case of a security breach. A few months ago, customers of QuandrigaCx lost their funds when the founder of the company died. He was the only one with the company’s password and the exchange was not insured.
Exchanges come with two big temptations: trade altcoins and trade bitcoin. Don’t touch altcoins. And don’t trade bitcoin, it’s much better to buy and hold.
Cash app is currently one of the best ways to get into Bitcoin if you’re in the US.
Buy CME Futures
In 2017, Chicago Mercantile Exchange (CME) launched Bitcoin futures. This happened a few weeks after its competitor, CBOE launched a similar product. While the futures offered by CBOE are no longer available, it is possible for you to invest in those offered by CME. The benefit of trading these futures is that a physical wallet is not needed because the transactions are financially settled. Another benefit is that you can short the futures, which allows you to benefit when the price declines. You can also trade these futures using companies like Interactive Brokers.
Robinhood is an online broker that allows traders to transact without any commissions. The company is preparing to launch its IPO, which will value it at more than $5.6 billion. In 2017, the company started offering a product that allows you to invest in Bitcoin.
Another way you can invest in Bitcoins in the US is by mining them. This process involves the purchase of hardware that will do the complex mathematical calculations that produce Bitcoins. The challenge with mining in the US is the cost of electricity. This has pushed the cost of mining a single Bitcoin to almost $5000, which makes it a bit unprofitable for now.
Finally, you can invest in companies that are closely associated with Bitcoins. For example, a company like Nvidia, which is listed in Nasdaq offers chips that are used in the Bitcoin mining. The same is true with a company like Overstock that has transitioned itself to be a Bitcoin company.
What is the Future of Bitcoin?
PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.” –Peter Thiel, Co-Founder of PayPal
Bitcoin is still a controversial ‘asset’, with supporters and critics on both sides. Supporters argue that it is the currency of the future. Some have argued that its price could reach more than $1 million. Critics on the other hand have argued that Bitcoin is worth zero.
At present, it is difficult to see the future of Bitcoin for a number of reasons. First, more than ten years after its launch, no significant retailer accepts the currency. Those who used to accept them initially like Microsoft have stopped doing so because of their volatility. Therefore, it is almost impossible for a currency to do well when no retailer accepts it.
Second, the competition in the cryptocurrencies industry is enormous. Today, there are more than 2,500 currencies. There are also stablecoins that are backed by real assets like gold and US dollar. Also, Bitcoin can easily be diluted through the forking process. Forking leads to the creation of a new currency.
Third, the role of Bitcoin as a digital gold does not make a lot of sense. This is because in case of an armageddon, Bitcoin would be the last asset you would want to own. In fact, rather than being a safe haven, Bitcoin’s volatility has made it a risk asset.
Fourth, the volumes of Bitcoin transactions have decreased significantly. This was the main reason why CBOE stopped offering its futures in the first place. Part of the reason is that Bitcoin does not serve as an anonymous means of exchange because transactions can be tracked online.
Fifth, Bitcoin does not serve any of the four main functions of money. These functions are store of value, medium of exchange, standard for deferred payments, and a measure of value.
Finally, the security of Bitcoin has made it difficult to own. In 2018 alone, cryptocurrencies worth more than $1.7 billion was stolen. It is therefore difficult to see how the currency will be accepted globally as a means of payment.
Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities.