In the year of 2009 after the housing market crashed, a pseudonymous name Satoshi Nakamoto appeared and this mystery person or a group of people created something that would later be praised as the future of money – digital currency, Bitcoin (BTC). From that moment on, this technology was set on a path to change the way we perceive money. Bitcoin cannot be backed or issued by any bank or institution in the world as it is not government-issued currency. It is “completely decentralized with no server or central authority.” Anonymity is promised as there are no names, social security numbers or tax IDs needed; encryption keys are used which ensures additional security. So, how does it work, what’s it worth and why is it dubbed “digital gold”? We’ll try to elaborate.
It might sound abstract but the way it works is by “mining” – a person or a company uses a synergy of advanced math and record keeping powered by a massive amount of computing power. Physical tokens do not exist; every transaction ever made is recorded on a transparent, access-to-all public ledger, blockchain. This technology, also known as DLT – distributed ledger technology is praised as the biggest thing that happened in the IT world since the internet itself. The peer-to-peer topology (P2P) allows data to be stored in a thousand of servers while permitting anyone on the network to see all entries in near real-time. This ensures user autonomy and prevents one particular user to monopolize the system.
By utilizing this energy intensive specialized software, so-called miners convert blocks of information into code sequences also known as “hash”. Producing this type of code requires immense computational power and a large number of miners compete daily to acquire it. After its mined, the hash is placed on the end of the blockchain list and the miner who succeeds is awarded with 12.5 BTC. It’s important to note that there is a limit to these awarded Bitcoins, and this is where we get to the coined phrase “digital gold”. By now, around 18.5 million Bitcoins were already mined and the protocol Satoshi Nakamoto established implies that the maximum number of Bitcoins mined can be $21 million. The efforts applied to extract these digital coins are similar to the ones that are used to extract gold. It cannot simply be created from scratch, because there is only so much to work with – a limited supply. Protocol change can be implemented in order to attain a larger Bitcoin supply, but we’re not there just yet. Some estimates suggest that the last Bitcoin will possibly be mined in the years around 2140. So, why is Bitcoin so popular among modern investors and what determines its value?
Negative connotations tied to modern monetary policies and rising inflation are anchoring modern investors toward an alternative way to preserve capital value. The risk reward equation is suddenly flipping from traditional financial assets to alternatives, the one in the lead being cryptocurrency – a more reliable, less risky storage of wealth. With no government or central authority to control the supply, the value of Bitcoin is open to interpretation and is determined by the people who are willing to invest in it. This “price discovery” themed value determiner is directly correlated to the frequent fluctuations in Bitcoin’s price. And this is where we get to the most recent news.
Last Monday, Bitcoin reached an all time high, almost $20,000 or $19,857 to be exact. The sudden high was preceded by a drop below $4,000 in March of this year, caused by the sudden economic halt the coronavirus pandemic created. After hitting this peak, Bitcoin is now being considered by many potential investors for a long term investment. Analysts claim that this sudden rise is different from the one that happened in 2017 (when the last record high value was set at $19,783), which was largely contributed by Asian investors who had just learned about this digital token. The initial hype soon withdrew as questions rose about the safety of the currency. This new all-time high is fueled by regular buyers; American companies and other traditional investors, treating Bitcoin as a valuable alternative asset that can prevent potential decrease in wealth value. More and more investors are placing larger parts of their alternative investment portfolios away from the traditional financial system, using Bitcoin as a safe haven.
To conclude, it seems like Bitcoin is set on reaching new highs, as this new peak also put a psychological boost in motion with the potential to propel its value once more. Some experts anticipate the price to eventually break $100,000, since the “digital gold” fever seems to be normalizing. The rising demands of the market, inflation and continuous distrust placed in modern monetary policies are leaning investors toward “decentralized finances” or DeFi for short. This ongoing trend will definitely increase Bitcoins value in the coming years, diversifying investors portfolios and keeping the value of their capital thus changing the future of money once more.