Just in case you’ve been orbiting earth from the International Space Station and hadn’t heard, Bitcoin recently rocketed to $60,000 per coin in just a few short months.
Bitcoin is one of thousands of cryptocurrencies that appear to have sprouted from nowhere and are now being bought, sold, held or traded around the globe. Cryptocurrency at its simplest is just a form a digital currency that is secured by cryptography. If you’ve seen the news about crypto but don’t really understand what it means for you and your financial independence journey, read on. In this post we’ll give you a simple introduction to investing in Bitcoin, as the king of cryptocurrencies. Believe me financial freedom seekers, if you don’t know about this stuff it’s time to get educated.
Bitcoin – the king of crypto
Bitcoin started as an electronic cash system in 2008. It was in the midst of the GFC when Satoshi Nakamura (pseudonym for person(s) unknown) went live on the internet with an alternative to fiat currency (think US dollar) designed to solve some of the major problems of the global money system.
In short, Nakamura opposed the de-pegging of the US Dollar from gold enabling unbridled money printing by central banks and nation states to do things like ‘save the world from the Global Financial Crisis’. Sound familiar? Fast forward to 2020 and it should….
The idea was to create cash for the internet that did not require central authorities (banks or governments) to supply or control it. To do this, Nakamura dreamt up some key design differences between bitcoin and fiat currency – the Bitcoin difference.
How does Bitcoin work?
Bitcoin is created and exchanged on the internet via technology called blockchain, which acts as a secure digital accounting ledger. But…instead of having banks control the ledger, this is performed by a network of independent and decentralised ‘miners’ who contribute their supercomputing resources into the network. Transactions on the network are secured via cryptography. Miners gather up these transactions into ‘blocks’ and solve math problems to verify each block and add it to the chain of past blocks (blockchain). Miners are rewarded in Bitcoin for this role. This validation process replaces the role of trust (in banks and governments) that underpins the fiat money system.
Now this all sounds a bit like a parallel universe of virtual BS, but at its core it’s just a technology and a system to execute ‘trustless’ money transactions that don’t require a central ‘authority’ to verify them.
What drives the Bitcoin price?
Another key characteristic of Bitcoin is that its supply is limited in the blockchain code. Unlike the limitless printing of fiat that is devaluing the dollars in our pockets, only 21 million Bitcoin will ever be issued. The rate of issuing halves every 4 years (called ‘Bitcoin halvening’). The last halvening was 2020, smack bang in the middle of the largest round of central bank quantitative easing the world has ever seen. This feature is about supply, demand and pricing. If you look at Bitcoin’s price history there’s a strong and repetitive correlation between the Bitcoin price and these Bitcoin halvening events. The governance is set in code so that supply goes down, and if demand goes up then so does price. In a period of inflationary monetary policy, Bitcoins deflationary design has driven new demand for the coin.
What are ‘satoshis’?
It doesn’t sound like much when you think of the $USD9 trillion that rolled off the printing press in 2020 alone, but one Bitcoin can be broken down into 100,000,000 ‘satoshis’ (like cents or pennies) and this is how Bitcoin is traded – in satoshis. So there is plenty of scope to denominate and scale, but new supply of Bitcoin will halve every 4 years until it runs out completely in the year 2140.
Other cryptocurrencies that are like Bitcoin are built around these same principles as well.
Is investing in Bitcoin worth it?
With all this tech mumbo jumbo I bet you’re asking – Why should I care about any of this? Here are seven powerful reasons Bitcoin should be on your radar if you’re a financial freedom seeker:
- Inflation or even hyperinflation. Money printing is killing our purchasing power peeps! The cost of food, housing and other essentials is going up and will become more unaffordable as wages stagnate (as these tend to be more fixed or static). Bitcoin has a deflationary and controlled money supply and is in growing demand as a hedge strategy.
- Listed companies have begun to add Bitcoin to their balance sheets. Most famously Tesla. Some are taking advantage of cheap debt rates or stimulus money to buy Bitcoin.
- Mainstream adoption is happening. Bitcoin and crypto’s use as a means of exchange in a more digitally-oriented global economy is growing. Paypal just launched a crypto check-out service for all of its 29 million merchants, coming in the next few months.
- Institutional money has begun to ‘follow the crowd’. Goldman Sachs and Morgan Stanley have both entered the crypto space. Canada has approved the world’s first Bitcoin Exchange Traded Fund. Van Eck and Grayscale are both looking to launch in the US. ETFs could bring ‘old money’ into crypto and light a fire under demand for larger coins such as Bitcoin, Ethereum and Litecoin. We’ll explain the crypto market and how money moves between Bitcoin and large and small cap ‘altcoins’ in an upcoming post.
- Trust and legitimacy are growing as more recognised brands and institutions buy in, leading to a ‘FOMO’ effect on demand. Trust matters in the money system. After all, isn’t fiat currency just our trust in a government IOU?
- The Bitcoin price has 20x-ed in 12 months. Without doubt it’s among the best performing assets of 2020 and so far in 2021. Will this continue? If I had a crystal ball I probably wouldn’t be posting on the internet about it…
- It’s still early. In terms of adoption and distribution that is. Retail money has not yet entered the market. Less than 2% of the global population is thought to own Bitcoin which means there’s stacks of growth potential.
These are notable changes in the cryptocurrency world, but be warned: it’s not for the feint hearted. The space is largely unregulated and this goes in keeping with the ethos of decentralised money and individuals controlling their own finances rather than banks controlling them for us. Just like any investment it’s important to know the risks before you dip your toe in the water (if you do) so keep an eye out for our upcoming post about the risks of investing in cryptocurrency.
The final word
None of this is financial advice peeps! Investing in cryptocurrency is like the wild west. The whole point here is to broaden your horizons, get educated about opportunities. But the great thing about financial independence is you get to make your choices yourself. Huzzah to that!