Disclaimer: This is not financial advice. I am not a financial consultant, I am just a pragmatic person, writing about a pragmatic world.
If you haven’t heard of Bitcoin so far, you may be really behind. However, a brief summary will help to get started. Bitcoin is something called cryptocurrency or digital currency, which can be used as a store of value and a means of transaction. There are thousands of cryptocurrencies, but Bitcoin is the first and largest cryptocurrency by market capitalization. There are only 21 million bitcoins in existence, and only about 3 million are yet to be mined. Mining is the process by which computer hardware obtains more bitcoins by verifying transactions. Bitcoin was created by a man named Satoshi Nakamoto. Bitcoin was born in 2009 and released as open source software. Bitcoin is unique in that it is decentralized, which means that no central bank is linked to it. Transactions can be sent between parties, and records are stored on the so-called blockchain, which is essentially a digital ledger that stores encrypted data. The price of Bitcoin fluctuates violently and has experienced crazy volatility since its birth. Most people may remember that they heard about Bitcoin in 2017, when it was during the so-called “FOMO Fear of Missing Out” (FOMO Fear of Missing Out) period. Bitcoin is the topic of many Thanksgiving and holiday gatherings. The price of Bitcoin jumped from $1,000 to $20,000 that year, but it fell back in the following years. But this is only the beginning of the Bitcoin story.
In this article, I will provide some examples to illustrate the power of Bitcoin. I will elaborate on the rationale for Bitcoin as a store of value and an effective means of transaction. The first thing I want to say is that Bitcoin has not yet entered the mainstream. It is still in its infancy, but the prospects are very bright. Financial institutions and retail investors like digital gold. As more and more people continue to talk about it, use it, and develop correct regulations around it, Bitcoin and cryptocurrencies as a whole will still have a bright future.
Store of value
Before discussing Bitcoin as a store of value, let us first look at Amazon to better understand why it is a store of value. Amazon is a public company and therefore allows investors to buy ownership (shares) in the company. These stocks are a kind of equity, and their value can increase or depreciate. They are also supervised by multiple government agencies to ensure that the necessary standards and policies are maintained and implemented. The price of any stock is usually based on forward-looking forecasts; however, it can also fluctuate based on real-time news. When Amazon releases quarterly earnings, the rise or fall of its stock price is usually based on executives’ predictions for the future, not on past events. This means that, in essence, the stock market is a measure of the future. Investors buy Amazon stock because they believe it will appreciate over time. Most people who hold Amazon stock see it as a long-term investment. In other words, they have a long-term vision because they believe in the company’s long-term vision and strategy. For investors, this approach works well. Since its listing, the stock has risen more than 100,000 times. One thing that needs to be clearly pointed out is that Amazon stock itself is not a currency that can be used to obtain goods and services. However, it is an obvious store of value, which can be used to pay when exchanged.
Now let’s go back to Bitcoin. Why is Bitcoin valuable? Many people think that there is massive speculation in Bitcoin, and for them, this means that it really has no future. As I mentioned before, there are only 21 million Bitcoins and will always exist. Limited quantity means scarcity, psychologically speaking, scarcity is very important. Compared with the U.S. dollar, more U.S. dollars are printed every day, which is why the value of the U.S. dollar has been declining in recent years. Gold is the closest example to Bitcoin. The supply of gold is relatively stable for a period of time, while the supply of bitcoin is declining exponentially over time. This psychological component makes it more valuable, even if it is not effective. Due to the rapid decline in the supply of Bitcoin, investors are mining and buying Bitcoin faster and faster, and they speculate that the utility of Bitcoin will increase over time, making Bitcoin more valuable. Bitcoin was only worth a few cents when it was first created. It is now hovering around $20,000. This proves that as a long-term investment, Bitcoin has always performed well. Investors will continue to buy more and more bitcoins because they believe that the value of bitcoins will continue to grow over time. They believe in the long-term technology and practicality of coins, just as they believe in the long-term vision of a company.
Another reason why Bitcoin is so valuable is its built-in security. The data on the blockchain is anonymous and encrypted. This does not mean that digital forensics companies will ultimately be unable to disclose some transaction details, but the data is still anonymous. It is almost impossible to counterfeit Bitcoin. Historically, counterfeiting dollars has been a long-standing problem, but counterfeiting dollars with Bitcoin will require taking over most of the network. Bitcoin also uses SHA-256 encryption, and it applies this layer of encryption twice to make it more secure.
Means of transaction
The true use of Bitcoin is its potential as a means of exchange. First, there is no central bank to manage the transfer of money. This means that middlemen will eventually be excluded from the equation. All transactions are carried out in a peer-to-peer (P2P) setting. The transaction itself is fast and the cost is very low. Bitcoin is traded between so-called wallets. Every wallet has an address, and a wallet can hold a small portion of Bitcoin.
Due to the fast transaction speed and low cost of Bitcoin, this means that it can become an effective method of remittance between countries. In addition, Bitcoin is borderless and can be regarded as a global currency. Having a single currency that is fair and transferable in every country is a major advantage. There are also some countries around the world facing challenges with their currencies. The currencies of countries such as Argentina or Lebanon have depreciated sharply, but Bitcoin purchases have increased significantly as a result. Using global currencies means that individuals do not need to exchange currencies when traveling abroad, nor do they need to pay huge fees for this. In addition, if companies never need to deal with currency challenges and can accept global currencies, they will eventually see more success. One argument against companies accepting Bitcoin is that this currency has historically been more volatile, which means that they may sell a product and immediately lose the value of Bitcoin. Another related advantage of Bitcoin is that it is available 24/7. This is not to say that it can only be used every day, but that it can be transferred and invested every day. In contrast, the stock market is only open 9 hours a day and 5 days a week. Similarly, we are all too familiar with the phrase “business day” brought to us by financial institutions. “Every day is a business day. Why don’t financial institutions know this yet?”
The proof is in Bitcoin
I want to provide a few real-world examples to illustrate the power of Bitcoin. The first question is related to international transfers.
International transfer-I have a family who lives in the Middle East. Due to the recent difficulties of the country’s currency, it is very difficult to send and receive funds. This process is slow and expensive, and banks tend to set limits. Specifically, if I want to send USD 1,000, it usually takes 3-5 days, and the cost ranges from USD 20 to USD 50. If you do receive the money, the bank may not let you withdraw it. There was a time when banks only allowed withdrawals of no more than $1,000 per month. Compared with Bitcoin, if I send Bitcoin through Coinbase, the most well-known trading platform, it can be received within 5 minutes at a cost of about $0.5-3.00. I recently transferred more than $15,000 at a cost of $2.25. Transaction costs vary greatly. In addition, as mentioned earlier, there is no central bank to limit how much bitcoin can be transferred. In addition, as Bitcoin has become more and more popular in Lebanon, more and more merchants have begun to accept it.
IOU-I own a real estate investment company with a few partners. We are all professionals and have a lot of bigger expenses. We also have our own investment properties that are constantly buying, selling or refinancing. Because of this, cash reserves tend to decrease. We all own Bitcoin or other cryptocurrencies. Since cryptocurrencies are not currently considered traditional stocks, they cannot be used for loan purposes. This makes cryptocurrency an option for us to constantly transfer IOUs back and forth. If the partner owes a down payment of $3,000 but is currently unable to pay, they will send more than $3,000 in Bitcoin as an IOU. I will deposit bitcoin in my account, and once they pay me cash, I will return the bitcoin.
Appreciation-When Bitcoin first started trading, the transaction price was less than 1 cent, but it quickly soared to around 8 cents. All this happened in 2010. Fast forward to the beginning of 2017, and Bitcoin has reached $1,000. At the end of the year it reached 20,000 US dollars. In the next few years, it experienced a decline and did not continue its growth momentum until 2020. The current price is hovering around US$20,000, and this year’s increase has exceeded 100%. What I want to emphasize is that Bitcoin has been rising like a value stock. A study before 2020 showed that 98% of bitcoins held for more than 1,300 days are profitable. This further proves that Bitcoin has been rising in value. It also highlights the risks. Intraday trading or volatility trading Bitcoin is very dangerous and unstable. If you buy Bitcoin in December 2017 and sell it a few months later, you will lose most of your investment. I personally do not recommend trading Bitcoin, but there are many people who are much smarter than me and they make a lot of money through trading.
Merchants-Finally, more and more merchants are beginning to accept Bitcoin as a payment method. Some companies include Overstock.com, Newegg and Shopify. These well-known companies are exploring the true purpose and use of Bitcoin. These companies see the value of lower transaction costs and faster acceptance.
What’s next for Bitcoin?
As I mentioned before, Bitcoin is still in its infancy. Although the largest cryptocurrency by market capitalization has a bright future, it still has a long way to go. The following are some developments in the Bitcoin and cryptocurrency fields that I would like to see.
Regulation is a hot topic of cryptocurrency, and opinions vary from different parties. Some people think that regulation is bad, not the original intention of creating a decentralized currency. I believe that regulation is very important for the large-scale adoption and development of cryptocurrency and blockchain technology. I finally hope to see Bitcoin be treated like other stocks. Of course, this also has negative effects, but if the ultimate goal is to create a global digital currency, the regulation surrounding it must be in place. Regulation needs to bundle identity and transaction, specific tax guidelines, the creation of new currencies, security requirements, and sales and transfer policies. I believe that regulation ultimately minimizes volatility and injects more confidence in encryption technology and uses.
For Bitcoin to be widely adopted, there must be institutional interests. I believe that with the increase in supervision, the interests of institutions will also increase. Institutional interests are so important recently because financial companies manage so much money. They have the ability to send the price of Bitcoin to the moon (To Da Moon). On the contrary, they have the ability to control prices and manipulate the market. Another reason why institutions are so important is that they have the ability to bring Bitcoin to the public. They can start putting Bitcoin in indexes and mutual funds and allow people to trade on major platforms.
Bitcoin must be easier to buy. At present, few platforms even allow you to buy Bitcoin with U.S. dollars, and some platforms do have too many restrictions on when you can buy, sell, withdraw, and the amount. These restrictions are based on your identity verification level. There is no need to think about buying Bitcoin, my grandparents can do it. Think of the wallet address or gasoline, blocks, etc., all need to be hidden behind the scenes. These important components of cryptocurrency should not be part of the user experience.
In addition to buying bitcoins, tax processing needs to be more user-friendly. Coinbase is the largest cryptocurrency company in the United States and has yet to publish tax returns. They allow me to download a transaction report. In order to calculate all crypto taxes, I had to pay an additional $100 to my CPA. There should be 1099 forms and other tools to make tax calculations more efficient. However, I understand that some of these shortcomings are due to lack of supervision.
Finally, more businesses must adopt it. It’s great to have companies like Shopify and Newegg supporting Bitcoin. I heard that Square manages Bitcoin and recently PayPal is also great. What I’m really waiting for is Amazon, Facebook, Google, Apple, Starbucks, Nike and other widely recognized and used companies to start accepting Bitcoin payments. This will send a signal to all other companies that Bitcoin is a legal form of payment and supporting it is critically important commercially.
in conclusion
Bitcoin does have a bright future. In my opinion, 10% of people worldwide use it on a large scale. Data shows that 10% of the currency system that flows into Bitcoin is equivalent to a price of approximately $10 million. There are many models that support this theory. A popular model is called the “from inventory to flow” model. This analyst, aliased as “Plan B”, has conducted extensive research and testing on it. The model expects the price to be between US$100,000 and US$288,000 by the end of 2021. At the same time, merchants should take the time to learn more about the benefits of Bitcoin and consider offering it as a form of payment. The government should take time to evaluate the necessary regulatory requirements that will increase confidence without stifling innovation. Blockchain technology and security need to continue to develop. The most important thing is that more people need to start buying Bitcoin, not necessarily holding it for the precious life, but to recognize its potential, exchange it across borders, and use it to buy products. Somewhere, Satoshi Nakamoto is happily watching his children grow up so much, but even if he knows that Bitcoin is still crawling slowly…
