Bitcoin Prices: A Deeper Dive
Since Bitcoin is traded in an open market, its price is entirely dictated by what users think it is worth and by how many people happen to be buying or selling at a given time. Currently, less than 1% of the world population is even involved with Bitcoin! This means that movements in the market can come rapidly. The graphed price of Bitcoin often has a ‘crocodile tooth’ shape - it swings up wildly and regularly crashes back down afterwards. However, over the last few years the price has trended steadily upward.
The recent, rapid upswing of Bitcoin prices has prompted some people to declare that cryptocurrencies are in a ‘bubble’, meaning that the current prices are not reflective of real value. This is a valid point, as recent returns have been near exponential. No one likes bubbles (economic bubbles of course, we assume everybody likes actual bubbles), especially given our delicate history with them (the dot-com boom, 2008 crisis, etc.). While we can’t say for sure that the price of Bitcoin will not crash occasionally, we can say that Bitcoin is not like traditional investments and should not be viewed in the same way.
When you make an investment in the traditional sense, you put money (resources) into something external that creates value for you, be it a company, tulips, or a vintage car. When you buy Bitcoin, the value comes from the Bitcoin itself. It is the resource. Your investment is not in a product - it is in a currency. In an increasingly technological world, cryptocurrency serves as the transition away from fiat money. In fact, some think it is natural evolution of our global monetary system. Therefore, Bitcoin has inherent value as a resource, value that cannot be ‘popped.’
To put it simply: money is the bubble that never pops, and if bitcoin is just better money… well, we’ll let you guys do the math.
Theory aside, one pattern is clear: the price of Bitcoin has trended steadily upwards through the surges and crashes because more and more people are entering the crypto market for the first time. This trend is not due to market frenzy - it’s simple supply and demand. And as more people invest, the price continues to increase. Put on your seatbelts, we’re going up!
(10/25/17- showing the last 10 months)
This is not to say that Bitcoin is a riskless investment, as there is always risk in moving your money around. While we believe in the future of Bitcoin and its value (oh so much value), it is unlike anything human beings have ever seen before. Consequently, you should learn to expect large swings in the market. Once you fully understand how Bitcoin operates, it will become clearer why we feel so strongly about its future. If you’d like to discuss this more, don’t hesitate to reach out to us!
So let’s take a closer look at how all this works.
Peer to Peer Transactions
To understand how Bitcoin works, you must first understand how ‘peer to peer’ transactions relate to Bitcoin and cryptocurrencies. Peer to peer means person to person - Bitcoin is sent directly from one person to another instead of using a bank as the distributor. All accounts are completely anonymous and referred to only by a long string of numbers, but if Lucas decides to pay Maverick one Bitcoin, one Bitcoin is deducted from the account associated with Lucas and added to the account associated with Maverick without any physical money or goods ever changing hands. It’s just like our digital orange exchange. Expand this concept to every single person that uses Bitcoin, and you have a very long list of accounts and associated values. But how is this system regulated without a central authority? Enter the blockchain.
The Blockchain, Explained
The big question is, how can we secure a digital ledger? What about hackers who may want to disrupt it? To solve this issue, Bitcoin and other cryptocurrencies use a revolutionary technology known as the blockchain. The blockchain system is very similar to a ledger and keeps track of all Bitcoin transactions, as we talked about earlier. This is where decentralization and cryptography come in. Written into the blockchain itself is a verification system that ensures the validity of all Bitcoin transactions. Each time you make a transaction using Bitcoin, the following process occurs:
First, transactions are coded into variables (the amount of Bitcoin, the account numbers, and more), which are then scrambled into a string of 1s and 0s using a hashing algorithm. A hashing algorithm works by taking inputs and giving outputs. For example, let’s say our algorithm is “add the numbers” and the inputs are 5 and 5. The output would, clearly, be 10. But think about how many possible inputs there are for an output of 10. We could have 1 and 9, 8 and 2, and so on. The algorithm used by the blockchain is orders of magnitude longer and more complex. The absurd complexity of these algorithms means that the blockchain itself cannot be hacked. Then, powerful computers owned by people called ‘miners’ race to verify the transaction by unscrambling the hopelessly complicated string of numbers.
So what incentivizes miners to mine? After all, they have to buy computers and pay electric bills. Miners are paid in two ways: first, they earn fees. Each time you make a transaction using Bitcoin, a very, very small fraction of the amount transferred is used to pay miners who secure your transaction. Additionally, the miner who is able to verify the transaction first is awarded Bitcoin that is created out of thin air. But wait – doesn’t that mean the currency inflates? Keep in mind that the amount of Bitcoin awarded to miners decreases exponentially over time, so that the total amount of Bitcoin in existence never exceeds 21 million coins. At that point, enough people will be using the network that miners will get by on fees alone.
The technical specifics of the blockchain are difficult to understand, but the basic idea is simple. The blockchain creates an impenetrable ledger of transactions which is stored on millions of computers around the world. There is no central owner or controller, so the blockchain cannot ever be destroyed.
Okay, so that’s how the blockchain works. Whether we exchange “digital oranges” or Bitcoin, the blockchain protects our money. So, how do you access it?