What is Bitcoin? What is the point of Bitcoin? And other curiosities I tried to answer…
About a couple of weeks ago, my interest in Bitcoin, and crypto in general, was piqued once more. It was by way of a newsletter from one of the writers I follow. I do not follow him for financial advice nor tech, but he writes about them every once in a while. This time, it was about moves that the author is making to avoid getting broke as the recession gets worse.
The newsletter really tells of investing less money into Bitcoin and other crypto. Of course, less does not mean zero. Which says that, despite the current economic climate and everything that Bitcoin has been through, Bitcoin is still worth your time.
If you were online during November 2021, you would have heard of it even if you did not follow tech or finance news. That is because Bitcoin was making headlines everywhere when its value was surging, at that time reaching a peak of over US$68,000.
If a nebulous thing costing that much did not enter your radar, then it is possible that you need to go get your radars checked.
So, what is Bitcoin exactly? Or, in general, what are cryptocurrencies?
Cryptocurrencies, or crypto, in the simplest terms are digital currencies processed through cryptography – this is where the name comes from. As of this writing, there are already tens of thousands of different kinds of cryptocurrencies available. Of course, not all of them are going to be successes. More will be created in the future, more will fail, more will go to the moon.
Bitcoin is one of the very many cryptocurrencies now in circulation in some form. It was created some time during the 2008 global financial crisis by someone (or something) called Satoshi Nakamoto. It started its life as a whitepaper published in October 31, 2008 and its software was implemented by the same entity in January 2009.
The premise is to build a new system of payments that will allow people to transact without having to go through a financial institution. Instead, money will be moved directly between peers.
As a concept, this is not exactly new, but this was the first time when it was implemented to the level of usefulness where transactions could actually be made in this system.
Or so that’s what it was supposed to be.
Today, Bitcoin is still essentially a form of currency. You can pay for things using Bitcoin if you can find the merchants willing to accept Bitcoin as payment.
However, unlike regular fiat currency that has a stable value that you can trust to hold for a significant period, it has been shown that the value of Bitcoin is incredibly volatile.
If you bought anything with Bitcoin today, you could be depressed tomorrow by how much you’ve thrown away as the coin would be worth 10 or even 100 times more than it was when you let it go.
This is the same for other cryptocurrencies. The value of the others generally follow the same trend as that of Bitcoin. Basically, when Bitcoin goes down, everything else go down. When the value of Bitcoin goes up, everything else go up.
So, I couldn’t help but ask… Could cryptocurrencies actually ever become like regular currency?
For now, it doesn’t look like it.
People are not holding Bitcoin so that they can use it to pay for goods and services. Instead, they hold their crypto as part of their portfolio. As the author put it, Bitcoin is now a form of a tech stock.
Some experts describe the entire situation as an economic bubble – essentially saying that the value of Bitcoin is simply an inflated amount compared to what it’s actually worth.
Others predict that the value of Bitcoin could surge up to US$100,000 in the 2023-2024 period. Going further, predictions are much wider with some even stating that the value of Bitcoin could go into the millions.
With that much volatility, it does not make sense for anyone to use it in the same way you would use regular currency.
So, what is the point of Bitcoin?
As already mentioned, it is a tech stock. People hold Bitcoin as they would other assets. People hold Bitcoin so that they can trade it in the markets and profit off it.
So, if there is all that, where does Bitcoin get its value?
From the people.
Basically, Bitcoin is valuable because people believe that it is valuable.
It’s like gold and diamonds and other precious metals and rocks. They cost plenty because people believe that they should cost plenty.
Of course, in a sense, that is oversimplifying it.
Blockchain, the technology on which Bitcoin stands, does have many other applications. It truly has potential to change how things work traditionally. Whether that potential becomes anything more is something still to be seen in the future.
As for Bitcoin itself…
Well, as they say…
To the moon!
(Possibly.)
Sources:
- Bitcoin, https://en.wikipedia.org/wiki/Bitcoin
- Bitcoin Price History: 2009 to 2022, https://time.com/nextadvisor/investing/cryptocurrency/bitcoin-price-history/
Disclaimer: This article is not to be taken as financial advice. I am not an economic expert, nor a finance expert, and I do not claim to be either. This article was written to answer some of my curiosities about Bitcoin and all crypto.
Originally posted on November 4, 2022 at Substack.