What is Bitcoin?

I know what you are thinking… Are people really walking around exchanging what looks like made-up coins? (See picture above)

No, this currency is not held in a leather wallet or purse. It is held in a digital wallet. 

Today Bitcoin has surpassed the $20,000 milestone. Why has Bitcoin become popular?

To be able to understand Bitcoin, you must first understand crypto.

What is Crypto?

Cryptocurrency or crypto is a digital currency or asset secured by cryptography. Essentially, a currency derived and protected by very complex mathematical puzzles. There are now currently thousands of them. In general, they have characteristics like:

  • Many are decentralized meaning not controlled by one entity or government
  • Use blockchain technology — imagine an excel spreadsheet that is verified by hundreds of computers (miners) around the world
  • Allow transfer of coins or tokens without a third party and stored within a digital wallet

Bitcoin was the first of these cryptos to catch on. In 2008, a white paper was created by an individual or group known by the pseudonym Satoshi Nakamoto. Within this document was a model for a peer-to-peer version of electronic cash.

All transactions happen directly between equal, independent network participants, without the need for any intermediary to allow or facilitate them. No third party like a bank or federal reserve to transfer money from one person to another and transactions would be visible for all to see. See the transactions here.

Satoshi launched Bitcoin the following year. In 2020, it dominates the space with over 60% of the market cap of cryptocurrencies. 

Why Bitcoin?

Bitcoin was the first crypto to become popularized, giving it first movers advantage. It is transparent, all transactions can be seen on the blockchain and is verified by a network of computers from around the world.

It one of the safest, secure, and resilient networks in the world. Hackers have been trying to hack into Bitcoin for the past 10 years. Being a $350B+ opportunity if they succeed, hackers have continued to fail. 

Peer-to-Peer Cash

Money can be sent nearly anywhere, instantly throughout the world without using the banking network.

People in the US sending remittances will typically use Western Union. It can take a few days and can be expensive. Bitcoin can be a better way to do this. It allows individuals without bank accounts to send money back home faster and likely with lower costs. All you need is a smartphone, bitcoin wallet, and you can transfer money. 

Store of Value

Let us pretend, that you live in a country where your government is printing money to pay for its large deficits and thereby increasing the supply of the currency. Keeping demand constant, will devalue the currency and lower the currency’s purchasing power – meaning you can buy less stuff with the cash in your bank account.  

During these times investors look for assets with a limited supply that will increase with inflation ie. real estate, fine art, or gold. For thousands of years, gold has been used to store value. There is a limited supply of gold, so in theory, it will hold its value or purchasing power during inflationary times.

Bitcoin also has a limited supply, written into its code. A maximum of 21 million bitcoins will be created. Many proponents think this is the biggest use case for Bitcoin.

Challenges for Bitcoin

Exchange Risk – The average person must go to an exchange such as Kraken, Coinbase, or Binance to buy bitcoins. In the past, exchanges have been hacked and people have lost all of their bitcoin. The biggest known being Mt. Gox in 2014. It is a good habit to not store your crypto on exchanges rather store offline in cold storage.

Fees can be high. Exchanges can also charge deposits, transfers, withdrawals, and buy/sell spread fees. The lightning network is being rolled out to address this issue.

There is much internal conflict within the bitcoin community. Search Roger Ver or Bitcoin block size.

Lastly, it is not user-friendly for the average person. Banks make it easy to secure currency without a large education curve. To secure your Bitcoin users must be educated in security practices, terminology such as public and private keys, and how to store this information. 

Summary

I think cryptocurrency is here to stay. The technology has 2 major use cases 1) It can make sending money cheaper, faster, and more secure than options in the past (Peer-to-Peer Cash) 2) It can be a store of wealth (value). 

Over-time the surrounding ecosystem will continue to improve. Exchanges will improve, miners will improve, and users will have a better understanding of the technology. It is unknown whether bitcoin will continue to be the dominant crypto or if another one will overtake its place.

There are many considerations that one should take before buying cryptocurrencies such as where it fits in an overall portfolio and tax implications when selling.

Let me know your thoughts on cryto and bitcoin. Are you excited about Bitcoin?

-Mike

Disclaimer:  This article is for informational purposes only and is not a recommendation of WealthU Advisors, Michael Uehlein. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product, or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.