Bitcoin is a decentralized network, created by Satoshi Nakamoto in 2009. The purpose of Bitcoin was to create “a platform for electronic trades without depending”. The underlying code of Bitcoin is based on cryptography and it is practically impossible to break Bitcoin’s code and then control the money supply.
Bitcoin was the best performing asset of the last decade. After a parabolic rise of almost 9,000,000% in the last decade, a big question that has been lingering is that is Bitcoin still worth it?
Here I will discuss with you the fundamentals of Bitcoin and how Bitcoin might go on and repeat history.
1- How Does Bitcoin Work?
To begin, we need to understand what we are dealing with. As I mentioned, Bitcoin is a decentralized system. This means that everybody who participates acts as an authority for a certain number of transactions. Now how does that happen?
The Bitcoin system is an interconnected web of servers (referred to as nodes) worldwide. When someone starts “mining” Bitcoin, their personal computer is fundamentally trying to find the “key” to the lock or to solve the complex “mathematical equation” governed by Bitcoin’s cryptography. The stronger the computer (node), the greater the range of guesses and thus, the more the prospect of winning the match.
Each time the miner solves a computational problem, they get to publish the next block in the chain of the Bitcoin blockchain. It takes roughly 10 minutes to mine a new block. Therefore, each new block inserted by a prosperous miner is made up of the transactions that were carried out since the creation of the last block. The new block is subsequently validated by the entire Bitcoin network. This is the reason why Bitcoin is practically impossible to break because even if you manage to disrupt one node, it will be invalidated the pool of nodes in the Bitcoin network.
So, what drives the miners to give all that energy and effort? The answer is simple, the miners do most of this because of their own benefit. For each block they solve, they get 6.25 BTC as a reward. So technically, getting bitcoins is a by-product of writing the upcoming block in the Blockchain. So, this drives miners to keep mining for Bitcoin, and the wheel of the Bitcoin network keeps spinning.
2- Is It Worth To Invest On Bitcoin Today
So, after a parabolic rise over the last decade, what makes Bitcoin still suitable for an investment? Is it a bubble about to burst? Or is it going to continue the trend.
There is various ways to explain it in terms of financial markets which I have explained here
But more technically, one of the most important concepts that we need to understand is halving Unfortunately today, the Bitcoin community is filled with people who are trading it for earning quick bucks. They do not understand the fundamentals. In my opinion, if you really believe in the Bitcoin fundamentals – you should get a ledger, store your coin for a few years and come back to it after some time. Anyways, that is a topic for another time. Let’s go back to the Bitcoin Halving.
2.1 – The Bitcoin Halving
So, what is the Bitcoin halving concept? Let me simplify it for you. Whenever a miner successfully solves the “complex equation” of this Bitcoin system, per block, he is rewarded 6.25 BTCs. Four years ago, the miners used to be rewarded 12.5BTCs per block. And four years before that, 25BTCs per block. This is the Bitcoin halving concept. Every four years, the BTC reward becomes halved.
This will keep reducing Bitcoin supply in the market until approximately 2140 when most of the bitcoins are mined. Miners will just be rewarded with the transaction fees. So, the point here I am making is that as the halving generally reduces the Bitcoin supply, it’s frequently accompanied by a parabolic bull-run escalating the Bitcoin price. So, we are still in for a treat!
See the Bitcoin graph below that shows the halving marks and the purchase price pattern that follows directly afterwards.
3- How Does Bitcoin Have Value?
There are various properties of Bitcoin that can explain the value of Bitcoin. I have discussed some of them briefly here:
1. Scarcity
Bitcoin is designed such that the maximum supply is fixed at 21 million. Because the supply of the coins cannot be increased, Bitcoin cannot be inflated after the 21 million coins are mined.
This is one of the reasons why investors tend to use Bitcoin as a hedge against inflation. It is also anticipated that once all the Bitcoins are mined, Bitcoin’s divisibility property will come into play and people will start doing transactions in fractions of Bitcoin. All of this will add value to the Bitcoin currency.
2. Transactions Fees & Speed
One of the reason Bitcoin is a real threat to our current financial system is the ease of transactions. The fees associated with Bitcoin transactions are minimal. Now for an ordinary Joe, the fees would not be the biggest deal breaker. But when you put into perspective, and you scale it up to the transactions that are carried out in a certain country or hell in the whole world, all of a sudden it becomes a huge sum of money and the role becomes extremely important. Low transaction fees and faster transactions (specially with the Lightning network) gives Bitcoin an unprecedented edge over our current monetary system.
3. Privacy
Unlike the conventional system where the banks have your entire identity and are aware of every move, Bitcoin provides complete privacy. In the world of Bitcoin, you are identified by your wallet and that is all that matters.
Although our current system does a good job of providing security in terms of breaches and hacking, and while that does play a role. The other question is, what if the protectors go corrupt? There is nothing much that can be done there.
4. Decentralized Nature
If you ask me personally what I value the most about Bitcoin, it is the decentralized nature of it. Unfortunately, we live in a world where we are being controlled. Our phones are tapped, our data is sold, privacy breached and what not. The decentralized nature of Bitcoin completely eliminates the central bank or any governing authority.
Bitcoin is a peer to peer network and if it is established as a dominant financial system, this will revolutionize the way of living. Because the government restrictions on your finance would be no longer in place.
Therefore, it is not easy for Bitcoin to become mainstream as it is definitely going to face the regulators and governments. But our current system is so flawed, that there is no stopping to a digital currency system anymore.
Too Long Didn’t Read (TL; DR)
Bitcoin has been the best performing asset of the last decade and there is every chance it is going to repeat history this decade as well. Some people tend to be cautious to see Bitcoin at prices as high as $30,000, but the truth is, you just must stick to the fundamentals. The properties of Bitcoin such as halving. And then coupling that with the reasons why Bitcoin has value, reasons such as its scarcity, privacy, decentralized nature, etc. say that Bitcoin is still undervalued.