Satoshi Nakamoto created Bitcoin to be an online cash system and he explicitly stated that the reason for creating this digital cash system is to remove the third-party intermediaries that are traditionally required to conduct digital monetary transfers. He was the first to solve the double-spending problem for a decentralized digital currency, creating a new asset, the like of which the world had never seen before and could be traded across all borders. This has been the main driving force to this currency of choice.
Bitcoin was designed to only allow for 21 million Bitcoins to be created in total, and we're at 18.5 million now. The halving and the increasing mining difficulty keep the supply neatly in check, ensuring a limited supply, but for years to come (the final Bitcoin should be minted around the year 2140).
It's all quite predictable because the math is embedded into Bitcoin's software. But the conditions surrounding Bitcoin have changed tremendously. The price of Bitcoin has surged from a few Dollars in 2012 to nearly twenty thousand dollars in 2020, growing by around 300% per year on average and making it the Investment of the Decade.
Bitcoin can be classified as a rare digital commodity that has unique attributes. Although it has no industrial use, it is scarce, durable, portable, divisible, verifiable, storable, fungible, saleable, and recognized across all borders, and therefore has the properties of money. Like all “potential” money, though, it needs sustained demand to have value.
Currently, Bitcoin’s market capitalization is about $350 billion, or roughly 2/3 of the value of Tesla and is larger than Paypal. The total market capitalization of the entire cryptocurrency asset class is about $540 billion, with Bitcoin as the dominant share, giving it about 65% of the market share.
When Bitcoin was created, it was the only cryptocurrency and thus had 100% market share. Following the rise of Bitcoin, now there are thousands of different cryptocurrencies. First, there was a trickle of them, and then it became a flood. Out of thousands of cryptocurrencies, Bitcoin still has nearly two-thirds of all cryptocurrency market share.
Ever since Satoshi solved the hard parts of digital scarcity and published the method for the world to see, it’s easy to make a new cryptocurrency. The nearly impossible part is to make one that is trusted, secure, and with sustained demand, which are all traits that Bitcoin has.
Bitcoin security is tied to its network effect and in Bitcoin's case, it has the most integrated security of all. There are so many devices verifying the network that they collectively consume more electricity per year than a small country, like Greece or Switzerland. The cost and computing power to try to attack the Bitcoin network are immense, and there are safeguards against it even if attempted at that scale by a nation-state or other massive entity.
Bitcoin’s programmed difficulty for verifying transactions is automatically updated every two weeks, and it seeks the optimal point of profitability and security. In other words, the difficulty of the puzzle to add new blocks to the blockchain is automatically tuned up or down depending on how efficiently miners as a whole are solving those puzzles. It has by far the best security and leading adoption of all cryptocurrencies, cementing its role as the digital gold of the cryptocurrency market.
There is a whole ecosystem built around Bitcoin, including specialist banks that borrow and lend it with interest. Many platforms allow users to trade or speculate in multiple cryptocurrencies, like Coinbase, but there is an increasing number of platforms like VALR and Luno that enable users to buy Bitcoin. Bitcoin now offers Credit Cards as well as ATM's across the world for making cash currency withdrawals.
The ongoing stability of Bitcoin’s network effect is one of the reasons Investors trust Bitcoin’s future going forward. Bitcoin’s network effect of security and user adoption is very, very hard for other cryptocurrencies to catch up with at this point.
The number of new coins will asymptotically approach 21 million. Every four years or so, the rate of new coin creation gets cut in half (called Halving), and in the early 2030s, over 99% of total coins will have been created. The current number that has been mined is already over 18.5 million out of the 21 million that will eventually exist.
Bitcoin has historically performed extremely well during the 12-18 months after launch and after the first two halvings. The reduction in new supply or flow of coins, and the growing demand for coins, unsurprisingly tends to push the price up.
Here’s Bitcoin’s historical price chart in logarithmic form, with four red dots indicating the earliest price point close to launching, and the three halvings, which represent the start of the four Bitcoin market cycles so far:
Chart Source: Blockchain.com
We are currently 7 months after the last halving (11 May 2020) and if history repeats itself another 5-11 months of high performance can be expected.
Whether it ultimately succeeds or fails, Bitcoin is a beautifully-constructed protocol. Genius is apparent in its design to most people who study it in-depth, in terms of the way it blends math, computer science, cybersecurity, monetary economics, and game theory.
The regular halving events consistently reduce the flow of new coins, causing the price to rise in value over the course of each halving cycle.
The thought put into its architecture likely played a strong role in why Bitcoin achieved a twelve-figure market capitalization. In addition to solving the challenging technical problems associated with digital scarcity and creating the first cryptocurrency, Satoshi also chose a smart set of timing and quantity numbers (out of a nearly infinite set that he could have chosen from, if not carefully thought out) to maximize the incentive structure and game theory associated with his new protocol. Or, he was brilliantly lucky with his choices.
Bitcoin is not the fastest growing cryptocurrency, it’s not the most energy-efficient cryptocurrency, and it’s not the most feature-heavy cryptocurrency, but it’s the most secure and the most trusted cryptocurrency with the widest network integration and first-mover advantage.
In early May 2020, Paul Tudor Jones (American Billionaire and Hedge Fund Manager) became publicly bullish and went long Bitcoin, describing it as a hedge against money-printing and inflation. He drew comparisons between Bitcoin in the 2020’s and gold in the early 1970’s.
Smaller hedge funds have already been dabbling in Bitcoin, and Tudor Jones may be the largest investor to date to get into it. There are now firms that have services directed at getting institutional investors on board with Bitcoin, whether they be hedge funds, pensions, family offices, or RIA Firms, by providing them the enterprise-grade security and execution they need, in an asset class that has historically been focused mainly on retail adoption. Even an asset manager as large as Fidelity now has a group dedicated to providing institutional Bitcoin solutions. And speaking of retail, the onboarding platforms for Bitcoin are getting easier to use. Since its inception, it has evolved into a new era of usability.
Some major businesses are already on board, apart from the ones that grew from crypto-origins like Coinbase. MTI (Mirror Trading International) has been growing Bitcoins for their customers at rates you won't see anywhere else, by them trading the Cryptocurrency market. This is what has turned them into one of the fastest-growing companies in the world with currently 10000 members joining on a weekly basis.
In essence, Bitcoin should be seen as a small part of a diversified portfolio. If a few percentage points (2-5%) of a portfolio are allocated to it, there is a limited risk of loss. Bitcoin, although very volatile, has the potential to triple, quadruple, or have a potential moonshot price action from current levels over the next period if it plays out anything remotely like the previous three launch/halving cycles.
What will happen in this cycle? I don’t know. The more we observe the ecosystem around Bitcoin over the past years, and being the preferred currency used by more and more Businesses and Institutions, it should continue to be used as the online currency of the future. With it being in high demand and in limited supply, this is a recipe that has only one result, and that will cause the price to rise.
People ask me if they should get involved in Bitcoin or any Cryptocurrency for that matter. And the answer is this. If you keep the risk in your overall investment portfolio to a level you are comfortable with, most definitely. Satoshi designed it that through scarcity it has to increase in value. Spreading your risk is always a good thing and when managed to a level that works for you, it will serve you well in the future.
If you want someone to trade and grow your Bitcoins, consider joining MTI. They have grown tremendously and have a track record of growing their clients' Bitcoins at around 7-10% a month on average over the past 18 months, over and above the growth that Bitcoin has achieved. Although past results are not an indicator of future returns, this is an impressive return. They also boast zero sign-up fees, monthly fees or transaction/withdrawal fees. Use this link should you choose to benefit from their trading growth.
There are more models for the future price of Bitcoin that I will share and post on the Forum in the weeks to come.
Edited by Pilotpilot, 14 December 2020 - 08:41 AM.