Bitcoin! Bitcoin! Bitcoin! Crypto this – Crypto that!
It’s all we seem to be hearing about these days right? So, what is it? Why all the hype? And, should you be taking a seat at this table? Let’s jump right in!
This article is intended to be a very basic overview of what Bitcoin, and by extension, other cryptocurrencies are. We will expand on the technology and investment potential in later articles. The below is truly a ‘beginners guide’ approach to this deep well of information and learnings.
Any investment expert the world over would agree on one thing, cryptocurrencies have outperformed any other asset class in the last decade.
Every week it seems that there is major adoption or acceptance from government, large institutions, fund managers, investors, and regular people like you and me.
In short, crypto is not going away. It is quite simply the future of finance and investing.
So, what is it?!
Bitcoin, the ‘Godfather’ of cryptocurrencies, began its life in 2009 out of the ashes of the Global Financial Crisis. It was intended to be a digital cash system that could one day take away the need for, replace, or simply complement a country’s ‘fiat’ currency (the local currency like the NZ Dollar). The original reason for Bitcoin has arguably changed over the years, which we’ll touch on later. Suffice to say though, it was created to replace the debasing currencies every country on this planet uses.
The problem with any sort of digital version of cash up to the creation of Bitcoin was just that – It was digital. And, like any digital file that can be copied, and copied, and copied again, there seemed to be an impossibility to creating a digital currency that could be immune to fraud, hacking, or counterfeiting. To really simplify what I mean here, I’ll use two words: Copy. Paste.
Along comes Bitcoin with its blockchain technology (as it later came to be known), birthing a revolution in security that created an environment that became commonly known as ‘immutable’. It was/is unhackable. You can’t defraud it. You can’t copy/paste it. It is beautifully ‘trustless’. Not in that there’s no trust in the system, rather simply that trust is not even required as it does what was intended to do 100% of the time, without fail, without compromise.
How?
Bitcoin’s ‘blockchain’. A blockchain is essentially another word for database or a ledger. The Bitcoin blockchain stores all of the data for all movement of this digital currency. Bitcoin is divisible to one hundred million, meaning one Bitcoin has eight zeroes behind it. Or in other words, you can own as little as .00000001 of a Bitcoin. So, despite its current value of around NZD$40K (as of Feb 2023), you can invest into or purchase really any amount. These smaller increments are known as ‘Satoshis’, in memory of the anonymous person or people who created Bitcoin, Satoshi Nakamoto.
As you can imagine, there is a lot of movement around this ledger or blockchain, as people move their increments of Bitcoin from virtual wallet, to virtual wallet.
This database is shared across quite literally thousands of computers the world over. It is impossible to affect the data that sits on so many unrelated parties computers. Hence, unhackable, immutable, or trustless. Every time there is a transaction in this ledger, every computer holding access to this database the world over will verify the validity of it, and record it. Every computer has to agree on the transaction, or it is simply not recorded.
You would have to simultaneously hack every one of those thousands of computers the world over to alter the Bitcoin blockchain/ledger/database. In other words, it is impossible.
Because of the spread of Bitcoin worldwide as above, it is also impossible to ban it or to ‘switch it off’. It would be akin to switching off the internet… Again, impossible.
The way the Bitcoin blockchain is programmed, is that there will only ever be 21 million created. They are released through a concept known as ‘mining’ (we won’t go into mining in this article). There have already been about 19 million Bitcoin already mined or created, leaving about 2 million to go. The production of these Bitcoin will continue to slow along a programmed timeframe, until all have been mined by the year 2140.
It’s widely believed that from these 21 million Bitcoin, that around 7 million are lost, or irrecoverable. Meaning the true total Bitcoin likely to ever circulate will be around 14 million.
This is truly a very deflationary asset. It is much unlike a country’s currency which is very much ‘inflationary’. What do I mean by that?… It’s not hard to understand… Bitcoin went from being worth pennies at its inception to around NZD$60K as mentioned above. As time goes on, it will take less and less Bitcoin to buy goods with it as it goes up in value. The opposite is true for say the NZ Dollar. It will cost you more and more to buy goods with the NZ Dollar as time goes by due to inflation. This is because a government can simply print more and more of its currency. Versus there being less and less Bitcoin over time, as more and more people adopt this technology/currency/investment.
Does that mean there wouldn’t be enough Bitcoin if everyone wanted to get their hands on some? No, remember it’s divisible to 100 million. That means of the likely 14 million Bitcoin to ever be in existence, it could be split into 1,400,000,000,000,000 increments (or Satoshis as they’re known). More than enough to go around!
With this backdrop, it doesn’t take much thinking time to understand how very powerful Bitcoin is.
In fact, with the stratospheric rise in its value since inception, it is very easy to understand why most will not sell their Bitcoin once they own it. Bringing many to refer to Bitcoin as ‘virtual gold’, or a true store of value, as opposed to a spendable currency. Why would they sell it when the price has risen so sharply, and is predicted to continue to do so?!
So, there you have it! This article was intended to give you a very quick and easy understanding of this increasingly popular investment space. And of course, of its potential.
We are scratching the surface here. In future articles we will expand on Bitcoin and other crypto assets and how they might fit into your investment portfolio.
This rabbit hole has only just begun!
Daniel Carney
Financial Adviser
Goodlife Financial Advice