After a torrid 2018 which saw Bitcoin drop to just over $3,000 in December of that year and having peaked at $20,000 in December 2017, Bitcoin roared back to life in April 2019 and peaked at around $14,000 in June this year. Now, in January 2020 the pre-eminent digital currency is trading at $8,700.
Bitcoin looks set for another volatile year.
So what is Bitcoin?
Bitcoin is a digital currency (and it is also a store of value like gold): that means it’s similar to the money in your online bank account and your payment cards. The difference is you do not need a bank to send money to another person with a Bitcoin transaction. You can send it directly and instantly to anyone you want anywhere in the world via a mobile phone or other device and they can be sure that the money is genuine. Before any Bitcoin transaction is completed it is verified on the Bitcoin network. This verification process has a powerful effect, it removes the need for trusted intermediaries ie banks.
And what is money?
The first and most well-known form of money is gold. It’s been around for millennia.
Human kind needed an object to exchange value in order to trade with each other. Gold was chosen out of all the metals because it was scarce, non-corrosive, durable and could be melted down and divided into coins. Otherwise it could have been any other random metal or object.
Gold was hard to move around so central banks issued notes that were backed up by the gold. Essentially notes were paper promises of gold, all of the paper notes were backed up by the equivalent value of gold.
That’s how money was used and valued for centuries. In 1971 the gold standard was replaced by the current system of Fiat currency.
Bitcoin v Real “Fiat” money
Fiat currency is not backed by gold, it is backed by governments. Bitcoin proponents believe that this type of money enables governments to control money for political purposes. Governments can essentially print as much money as they want without it having any intrinsic value.
In countries like Venezuela, Zimbabwe and Argentina the value of their currencies have been obliterated by inflation caused by their respective government’s monetary policies. Bitcoin on the other hand is not controlled by any government it is decentralized, it cannot be adjusted or censured and its rules are predetermined and immutable. It is deflationary. There will only ever be 21 million Bitcoins and approximately 17 million of them are already in circulation.
Bitcoin v Gold
Bitcoin is considered by some to be an alternative or even replacement store of value to gold. Bitcoin is scarce like gold, and there will only ever be a maximum of 21 million. It is more portable than gold and is impossible to counterfeit. It is also easier to store and easily divisible.
Bitcoin and payments
In addition to being seen as a store of value/alternative to gold and Fiat currency, Bitcoin is seen as potentially a much more efficient way of making international payments. Any amount of Bitcoin can be sent anywhere in the world from a mobile phone in less than a minute. No exchange rates are charged and no bank fees are paid.
Note “Bitcoin is not yet an efficient payment system and to date not enough users are spending Bitcoin. The majority of retailers do not accept Bitcoin and as Bitcoins price is so volatile it does not currently make it a viable every day payment option.”
Historically (and currently) banks have been able to charge high fees and have used inefficient systems to send money internationally. Even today it can take a week to send small amounts of money around the world.
Banks are used as trusted intermediaries (you can trust that the money has been sent and received). With Bitcoin all payments are confirmed by the network and are irreversible and stored forever on the blockchain (Bitcoin’s public database) so as safe as a bank payment but much quicker and has virtually zero cost. With a blockchain there is no need for a trusted intermediary.
Where do Bitcoins come from?
Traditional currencies like the dollar or euros are issued by central banks. These banks can issue new money at any time.
The maximum number of Bitcoins that will ever be issued will be 21,000,000. New Bitcoins are released every 10 minutes by the network. Bitcoin mining is the process of solving complex mathematical problems using computer power to unlock these Bitcoins. The network is designed to make it difficult to solve the problems and this means that the cost to mine a Bitcoin is high, therefore it should add value to Bitcoin and the more miners involved in mining the harder the process of solving the problems and the higher the cost of mining. So Bitcoin is not made out of thin air it is produced from substantial investments in electricity and computer hardware.
Can I get rich if I buy bitcoin in 2020?
Some early adopters have already made huge sums of money, but to put it into perspective the current value of Bitcoin in issue is around $160 Billion. The value of all gold is around $8 trillion and the approximate value of all Fiat currency is estimated at around $90 trillion.That leaves Bitcoin at around 0.16% of the value of gold and fiat.
Given the very high values attributed to gold and fiat currency and given bitcoins potential to disrupt, it is no surprise that some investors are getting excited.
Prominent venture capitalist and early investor in Skype and Twitter, Tim Draper (who has a substantial holding in bitcoin) believes that a $250,000 bitcoin price by 2023 may be an under estimate. Whilst on the flip side Warren Buffet one of the most successful investors in history famously called bitcoin rat poison squared.
Other bold predictions made in recent days include Antoni Trenchev co-founder of Nexo and Sonny Singh the CCO of bitpay citing $50,000 and $20,000 + respectively for bitcoins price in 2020.
Sometime around May this year the block rewards for bitcoin mining will cut the supply of new bitcoins in half. The number of bitcoins released every 10 minutes will reduce from 12.5 to 6.25, this is generally seen as positive for the bitcoin price.
The Bitcoin experiment may or may not be a success but you should always remember any investment in Bitcoin is classed as high risk and therefore only funds that you can afford to lose should be invested in Bitcoin other Crypto currencies or any other high risk investment for that matter.
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