At first, it was the anarcho-capitalists and libertarians—people with political beliefs on the fringes of society—who adopted Bitcoin. Then, came those who took notice of it as an experimental investment asset, profiting from its volatility, and making a lot of money that was unheard of at the time.
But, something strange happened around 2017. Regular people (not those who work in technology or banking), started getting interested in cryptocurrency.
Bitcoin started being used to buy pizza, cars, property, and seats on a Virgin Galactic flight.
The Simpsons made an episode about it, musicians and artists started to use it, and people started trading virtual cats with crypto technology. Suddenly, it became an Internet sensation. A whole new set of Internet memes emerged from cryptocurrency culture.
But why now do many people now believe in Bitcoin so much, that they’ve started investing in it alongside traditional stocks, bonds, and commodities?
And why is now a particularly interesting time for Bitcoin?
Origins of Bitcoin 📊
Following the 2008 financial crash, central banks around the world opted to pursue a monetary policy of quantitative easing.
In practice, this means that new money is printed and circulated into the economy, which results in the devaluation of national currencies.
While this policy is well-intentioned, it doesn’t always work as intended, and can result in inflation, where the prices of consumer goods rise against the devalued currency. It was amid home foreclosures and bank bailouts, that Bitcoin’s anonymous creator Satoshi Nakamoto wrote the Bitcoin whitepaper and published it to a small group of “cypherpunks” via an Internet mailing list of cryptographers.
Satoshi created Bitcoin as a direct response to the 2008 crisis and the subsequent devaluation of national currencies through quantitative easing. Bitcoin, unlike national currencies, was designed to have a fixed supply. With Bitcoin, only 21 million Bitcoins will ever exist. Unlike a national currency, no more can be printed.
Bitcoin is inflation-proof.
Bitcoin as a scarce asset 💰
Bitcoin’s fixed supply lends itself to another property: scarcity.
Its fixed supply is programmed to be even scarcer than precious metals such as Gold, Silver or Platinum, having a much higher Stock-to-Flow Ratio, a measure of scarcity for evaluating the value of precious metals.
However, Bitcoin did not start out with all 21 million units in circulation.
In order to minimise the ability for early adopters to hoard the asset, and to incentivise people to secure the network, these Bitcoins are released over time, in a process known as “mining”.
To make mining worth miners while, the Bitcoin network needed to offer an incentive. This is why mining Bitcoin comes with rewards.
When you successfully mine Bitcoin, the network rewards you with a certain amount of Bitcoin. This has the same effect as “printing new money”.
How does this relate to scarcity again? A peculiar feature of Bitcoin, is the amount of Bitcoin you receive when you successfully mine a block actually halves every four years which we’ll be touching on in our next article.
This means that the supply of Bitcoin is being reduced as time goes on. Interestingly, the next halving event is due to happen next week: so whilst most national currencies are now being devalued through money printing to combat the effects of Covid-19, Bitcoin is actually having the opposite happen, and it’s supply is actually being reduced due to the halving event.
Bitcoin was created for times like these 🎢
Armed with an understanding of why Bitcoin was created, and how it might react to today’s financial climate, we hope you’re able to better understand the current excitement currently surrounding the crypto markets.
Bitcoin was originally designed to try to be resilient in the types of conditions seen post 2008. Its creators released Bitcoin to take away power from the centralised banks of the modern world and to offer more protection to people's hard won earnings.
Cryptocurrencies, along with Bitcoin, are also powering a new economic ecosystem where the common person is in charge of their own money and has more choices for participating in the economy.
With the Bitcoin halving event coming up we’ll be looking at it in detail, and talk about what’s happened in the past, what we can expect from this halving event, and how it will affect the future of not just Bitcoin, but also other cryptocurrencies.
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