Originally posted August 8, 2018. Last Updated July 4, 2023.
What is a Bitcoin?
Bitcoin is a cryptocurrency allegedly created by someone named Satoshi Nakamoto (no one actually knows who this person is).
S/he created an incredibly complicated formula (or “algorithm”) for computers to calculate (or “mine”) over time. When a computer – or groups of computers – cracks a part of a formula, some Bitcoin are released. In addition, the formula gets more difficult to crack over time as more and more Bitcoin are found.
Nakamoto also wisely capped the number of possible Bitcoin to 21 million. Once 21 million Bitcoin are mined, no more will ever be created. The fact that there are a limited number results in rarity and creates some inherent value.
How does it work?
Bitcoin transactions are held in a digital ledger. Like any paper or electronic ledger, the Bitcoin ledger tracks the unique identification numbers of each Bitcoin, which accounts have held it, where it is right now, and additional information.
Anyone can access the ledger.
The ledger is shared by hundreds (if not thousands) of computers that track every transaction that takes place in all of Bitcoin. This verification by so many computers means you cannot simply say that you have ten Bitcoin when you don’t – the transaction must be verified by a MINIMUM of six (6) registered ledger-holders.
Anonymity presents opportunity
Although anyone can see when one account sends Bitcoin to another, we don’t necessarily know who owns either account since the account numbers aren’t directly linked to identifying criterion.
This anonymity created a lot of controversy for Bitcoin because, in its earlier days, criminals used Bitcoin to pay each other for “goods and services” since there was no way of tracking the accounts (unless someone identified themselves as the holder of a specific account number).
What is the Blockchain?
This ledger verification system is a form of a blockchain. A blockchain is basically a database where each piece of data also carries identifying characteristics. For example, Bitcoin’s blockchain tracks all of the individual Bitcoin, the accounts who have held each coin, all of the times each coin is sent and received, and the accounts that sent and received it.
This verification process takes time – sometimes as little as 20 minutes and sometimes as long as several hours – depending on the number of transactions taking place on the Bitcoin blockchain network at the time of the transaction.
It’s important to remember that the rising popularity and success of blockchain technology has almost nothing to do with whether cryptocurrency will be successful. IBM, freight companies and many other companies and industries are working on developing blockchain technology. For example, the real estate industry may eventually put all property titles on a blockchain so owners can buy and sell properties without the need for registering the transaction at the courthouse or the need of an attorney. Critically, “blockchain technology” simply refers to a database network with a multiple-verification system and intelligent data packets, it does not specifically mean blockchain is connected to a cryptocurrency.
These companies can (and will) create their own blockchains in many cases. Many investors are under the mistaken belief that these companies will use smart blockchain currencies like Ethereum to run their blockchains. Personally, I don’t see why they would use an expensive public blockchain when they could create their own internal blockchain that would operate for significantly less.
Blockchain technology is certainly here to stay, but cryptocurrency’s longevity or value is an entirely separate conversation.
Bitcoin’s weakness could be its strength
Due to its slow transaction-verification speed, many people believe Bitcoin can never be a true currency – millions of U.S. dollar transactions are performed every minute – however it could be like gold – a slow currency where people store value, a form of “digital gold.”
The Rise of the Other Cryptocurrency
Bitcoin’s limitations have resulted in the rise of many other cryptocurrencies. Some offer additional features – like smart contracts – and some offer faster networks. Some have limited quantities, like Bitcoin, and some can print as many as they want.
From 2017 through to the present, many – MANY – individuals and startup companies created their own cryptocurrency. Some are legitimate. Some are scams. Some were even jokes – Dogecoin was based on an Internet meme and was initially created to mock Bitcoin. In a bizarre twist of the world, Dogecoin has actually become a coin that people trade.
The Many Crashes of Bitcoin
After a huge run-up to $19,891.99 in December 2017 as Bitcoin got a ton of publicity. The price plummeted to less than $3,200 in December 2018. Then, Bitcoin rallied to a new all-time high of $69,000 in 2021 before crashing to less than $15,500 in December 2022.
The repeated rise and fall of Bitcoin has led skeptics to claim Bitcoin is a bubble, comparing crypto to the Tulip Bulb bubble where tulip bulbs rose in value to astronomical levels and then crashed when everyone realized their true value.
However, unlike the Tulip Bulb Bubble, so far, Bitcoin rises from the ashes and, each time it returns, it makes significantly higher all-time highs than its last bull market.
Why are there other cryptocurrencies?
The other cryptocurrencies have additional “features” attached to them. Litecoin is similar to Bitcoin in that it attempts to be a store of value, however, Litecoin has a faster network which could make it potentially more useful as an actual currency whereas Bitcoin’s slow network makes it more like gold.
Ethereum has the ability to create “smart contracts.” As just one example, I could make a contract to pay you 100 Ethereum to design a website for me and pay you with an Ethereum smart contract that would pay you automatically only when you had finished the job.
Because of the blockchain, you would know that those 100 Ethereum are not in my account – they’re held in escrow – until you do the job. I get the benefit of knowing you won’t get paid until the job is complete. This is just one simplified example of what’s possible with blockchain technology (blockchain is the technology – not a specific product).
Bitcoin as a store-of-wealth alternative
Bitcoin has a long way to go to make itself a viable currency, and, even with recent improvements to Bitcoin with its Lightning Network, it simply doesn’t have the bandwidth to handle the transactions necessary to replace existing currency in the ways that say, VISA or Mastercard process millions of transaction every second.
That being said, Bitcoin is a global story. Although many countries appreciate the U.S. dollar, the appeal of a currency with no one nation driving its value is strong for many throughout the world (including right here in the United States).
In my opinion, Bitcoin, and any cryptocurrency, should not be a primary investment in any portfolio – only a speculative one. I find the cryptocurrency story intriguing enough to use as my speculative play. Personally, I am willing to allocate as much as 5% of my portfolio to Bitcoin.
Bitcoin’s Future – Irk’s Perspective
Bitcoin and all cryptocurrency are part of an asset class with no determined value at this point. There are Bulls with price targets for Bitcoin that are as high as $2,000,000 (or higher) eventually with Bearish skeptics claiming Bitcoin will eventually become worthless.
At this point, many consider Bitcoin a store of value, similar to that of gold. Intriguingly, North America actually makes up a minority interest in Bitcoin; the majority of the interest stems from Asian markets where their own country’s currency is unstable (also think about Venezuela). These traders and investors are buying Bitcoin because it has recognized value outside of their own countries. In some cases, individuals in these countries only buy Bitcoin to transfer it to “stablecoins” which track the value of the U.S. dollar so residents can own USD electronically.
So far, I think the other cryptocurrencies may have been dramatically overvalued due to the excitement in the space. Just like when the Internet became incredibly popular in the late 1990s, we’re going to see a lot of players go to zero (remember pets.com?).
The only crypto I currently hold in any significant quantities are Bitcoin and Ether with 90% of my crypto holdings made up of Bitcoin, 7% in Ether, and 3% in speculative “altcoins” like Litecoin.
When I first bought some Bitcoin in January 2018, the price was $15,000. I spent the next several months learning trading techniques and trying to right-side my cost basis. In July 2018, I took the biggest rip of my life (a loss of –36.6% of my crypto portfolio) and sold all of my crypto, deciding it was safer to trade rather than hope for a price jump.
Hope should NEVER be a part of your investing thesis.
At this point, playing in the crypto space is a form of gambling, not investing. We don’t know what the true value of these currencies will be, so extreme caution and conservative approaches must be considered before entering the space.
Because of the intrinsic value millions of people hold in it, I don’t believe Bitcoin’s price will ever go to zero (tulip bulbs still aren’t free), but I wouldn’t be shocked if Bitcoin was $10 per coin in a few years. On the flip side, it wouldn’t surprise me if Bitcoin was $250,000 per coin in a few years, either. This asset class really is that volatile and has that much potential.
As for me, I’m slightly bullish on Bitcoin for the long-term but still remain extremely conservative. I only trade Bitcoin bullish (I never short Bitcoin). How am I bullish? I keeping my trading profits in Bitcoin. This way, if we suddenly experience a 15% jump, I don’t have FOMO (Fear Of Missing Out) because I have a significant position already.
On the flip side, if Bitcoin drops 50%-80%, I don’t feel (as much) pain because the lowest my account can go is to my locked-in cash value.