How To Ride The Bitcoin Roller Coaster

What is Bitcoin?

Bitcoin is a digital currency that was created in January 2009. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous Satoshi Nakamoto.1

The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms, and, unlike government-issued currencies, it is operated by a decentralized authority.

Bitcoin is a type of cryptocurrency. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to. All bitcoin transactions are verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. 

Bitcoin is commonly abbreviated as "BTC."

The bitcoin system is a collection of computers (also referred to as "nodes" or "miners") that all run bitcoin's code and store its blockchain. Because all the computers running the blockchain has the same list of blocks and transactions and can transparently see these new blocks being filled with new bitcoin transactions, no one can cheat the system.

Bitcoin's 70 million times increase in 12 years!

Photo: coindesk

Bitcoin Mining

Bitcoin mining is the process of creating a new bitcoin by solving a computational puzzle.

Bitcoin mining is performed by high-powered computers that solve complex computational math problems; these problems are so complex that they cannot be solved by hand and are complicated enough to tax even incredibly powerful computers.

The result of bitcoin mining is twofold. First, when computers solve these complex math problems on the bitcoin network, they produce new bitcoin. Second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and secure by verifying its transaction information.

When someone sends bitcoin anywhere, it's called a transaction. Transactions made in-store or online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same thing by clumping transactions together in "blocks" and adding them to a public record called the "blockchain." Nodes then maintain records of those blocks so that they can be verified in the future.

When bitcoin miners add a new block of transactions to the blockchain, part of their job is to ensure that those transactions are accurate. In particular, bitcoin miners make sure that bitcoin is not being duplicated, a unique quirk of digital currencies called "double-spending." 

The amount of new bitcoin released with each mined block is called the "block reward." The block reward is halved every 210,000 blocks (or roughly every four years). In 2009, it was 50. In 2013, it was 25. In 2018 it was 12.5, and in May of 2020, it was halved to 6.25.

This system will continue until around 2140. 

What Determines the Price of 1 Bitcoin?

1. Supply and Demand

New bitcoins are introduced into the market when miners process blocks of transactions and the rate at which new coins are introduced is designed to slow over time. 

Secondly, supply may also be impacted by the number of bitcoins the system allows to exist. This number is capped at 21 million, where once this number is reached, mining activities will no longer create new bitcoins.

2. Competition

While bitcoin is still the dominant option concerning market capitalization, altcoins including Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), and Polkadot (DOT) are among its closest competitors as of March 2021

New initial coin offerings (ICOs) are constantly on the horizon due to the relatively few barriers to entry. The crowded field is good news for investors because the widespread competition keeps prices down. 

3. Cost of Production

While bitcoins are virtual, they are nonetheless produced products and incur a real cost of production - with electricity consumption being the most important factor by far. 

4. Availability on Currency Exchanges

Just as equity investors trade stocks over indexes like the NYSE, Nasdaq, and the FTSE, cryptocurrency investors trade cryptocurrencies over Coinbase, GDAX, and other exchanges. Similar to traditional currency exchanges, these platforms let investors trade cryptocurrency/currency pairs (e.g., BTC/USD or bitcoin/U.S. dollar).

The more popular an exchange becomes, the easier it may draw in additional participants to create a network effect. And by capitalizing on its market clout, it may set rules governing how other currencies are added. 

5. Regulations and Legal Matters

The rapid rise in the popularity of bitcoin and other cryptocurrencies has caused regulators to debate how to classify such digital assets. The regulator will set the rules for cryptocurrencies has created uncertainty—despite the surging market capitalizations. 

Buying and investing in bitcoin

For those who aren't keen on the idea of actually handling or owning bitcoin themselves, one simple option is to buy shares in a publicly traded bitcoin trust. Similar to ETFs or mutual funds, these offer a portfolio that holds or trades the currency. 

Recently, there has been a small number of financial and investment apps jumping into the cryptocurrency fray whict lets users automatically invest in the cryptocurrency at regular intervals.

Investors can also trade Bitcoin CFDs on our platform. We also provide a variety of cryptocurrency types, such as Ethereum and Litecoin. To open positions for Bitcoin price trends, you only need to create a trading account.

Bitcoin forecast

A Bloomberg Intelligence report released this week pegged $100,000 as a "key threshold" for the price of Bitcoin. The cryptocurrency could eclipse that six-figure mark before the end of 2021, in Bloomberg's estimation. 

"The process of Bitcoin replacing gold in portfolios is accelerating," wrote Mike McGlone, Bloomberg Intelligence senior commodity strategist. 

Bloomberg Intelligence is an investment research arm of Bloomberg. 

Bloomberg found that institutions that have traditionally maintained heavy gold exposures as both a hedge against inflation and a store of value have been increasingly snapping up Bitcoin to diversify their investment portfolios. 

Jesse Powell, who heads San Francisco–based Kraken, believed that the current enthusiasm over Bitcoin is at unprecedented levels.

Powell's price target is, unsurprisingly, much higher than those offered by top U.S. investment banks. Powell—and Kraken—stand to gain from increases in Bitcoin's price, of course. He has reason to evangelize cryptocurrency. 

Last November, Citibank analysts said Bitcoin could pass $300,000 by the end of 2021. JPMorgan analysts are less bullish, though they say the price could reach as high as $146,000 "in the long term." 

Billionaire investor Ray Dalio, the founder of the world's largest hedge fund Bridgewater Associates, thinks bitcoin may have a similar fate as gold did in the U.S. during the 1930s.

″Back in the '30s in the war years ... because cash and bonds were such bad investments relative to other things, there was the movement to those other things, and then the government outlawed them," Dalio said. "They outlawed gold."

"That's why also outlawing bitcoin is a good probability," he said.

Bitcoin, the largest cryptocurrency in terms of market value, has "proven itself" as its blockchain hasn't been hacked, and it has a large following, Dalio said. "It is an alternative store-hold of wealth. It's like digital cash. And those are the pluses."

"So I think that it would be very likely that you will have it under a certain set of circumstances outlawed the way gold was outlawed," Dalio said.

Dalio explained that "every country treasures its monopoly on controlling the supply and demand. They don't want other monies to be operating or competing because things can get out of control."

As an example, Dalio cited India and its efforts to ban cryptocurrency.

However, James Ledbetter, editor of fintech newsletter FIN and CNBC contributor, previously said that it'd be quite difficult for the government to effectively ban bitcoin.

Although there's "concern or risk around regulation" of bitcoin, "I don't think even a concerted effort among different countries and different central banks could actually shut down bitcoin," Ledbetter said. "I don't think that's technologically possible. But there are ways that bitcoin could be regulated."

While he hasn't mentioned a ban, Federal Reserve chairman Jerome Powell has repeatedly warned against cryptocurrencies like bitcoin.

"They're highly volatile and therefore not really useful stores of value and they're not backed by anything," Powell said during a virtual panel discussion on digital banking. "It's more a speculative asset that's essentially a substitute for gold rather than for the dollar."