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“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.”
This is what Satoshi Nakamoto imagined Bitcoin to do.
On Oct. 31, 2008, an unknown person or group of people known by the pseudonym Satoshi Nakamoto published a paper called "Bitcoin: A Peer-to-Peer Electronic Cash System”. 12 years later, we still don't know who or what Satoshi Nakamoto is, but pretty much everyone knows about Bitcoin.
From a low of 3400 USD in January 2019 to currently being traded above 52,000 USD, Bitcoin (BTC) has proved its critique wrong and has made its HODLers rich. Insanely rich in some cases. It's been lauded as the future of money, and it's been called a pyramid scheme and a fraud. And while it hasn't fulfilled the lofty of promises made by its evangelists yet, ten years after its inception it still endures. Some critiques, like Jamie Dimon, have now scaled back on their criticism and are supportive of the technology behind BTC i.e. the Blockchain.
What Exactly is Bitcoin?
Bitcoin has lots of meanings, depending upon whom you ask. To some, it is a commodity. To others, it is digital cash. Critiques would define it as a huge electricity-consuming speculative asset. However, the most concrete definition of bitcoin is this: It is software, a program designed to allow people to exchange value directly with each other. What makes Bitcoin unique is that this piece of software is run across a network of linked but independent computers. It’s a completely decentralized asset with no central bank or government having any say over its price.
By the virtue of its origin, the number of Bitcoins in circulation would never be more than 21 Million. The scarcity which Bitcoin’s code creates has now become its major attraction point, a lot more after the historical amount of dollar printing by the USA and currency interventions across the globe in the aftermath of the Covid Pandemic. This scarcity is what makes Bitcoin a popular store of value and gives its holder an edge against inflation.
Why is Bitcoin Soaring Now?
Bitcoin, by its design, is a scarce asset. With a limited supply and increasing difficulty in mining new coins into existence, Bitcoin is now entering a stage where it is witnessing a Supply-side shortage i.e., there is more demand than the supply of bitcoin, which has resulted in its meteoric rise. In its previous Bull cycle of 2017, Bitcoin mainly surged due to demand from retail investors. In its current Bull cycle, it’s the institutional demand which is now fuelling Bitcoin’s rise. Recently, there has been a trend where public companies are converting their cash treasuries into cryptocurrency. Square, an American payments company, bought $50 million worth of Bitcoins. Following this, Microstrategy- a public listed company in the US, converted $425 million worth of cash reserves into Bitcoin, considering it to be a better store of value, and has now announced another round of debt offering to raise cash to invest in Bitcoin. In early February, Tesla disclosed it had invested $1.5bn of its reserves in bitcoin and unveiled plans to accept payments in the cryptocurrency for its electric cars, albeit “initially on a limited basis”.
(Credits: Bloomberg)
Another factor that has majorly contributed to BTC’s rise is the Halving Principle of Bitcoin. Bitcoin halving is an important event in the Bitcoin network that happens every four years. The Bitcoin network works because it introduces new bitcoins in the market by a process called Bitcoin mining. Bitcoin miners do this mining by verifying Bitcoin blocks which are simply groups of Bitcoin transactions. Every 10 minutes, a miner who can verify one block of transactions and add it to the Bitcoin network gets awarded a certain amount of bitcoins as a reward. Currently, this reward stands at 6.25 BTC per valid block mined. But this reward per block reduces by half roughly every four years, or after every 210000 blocks are mined. This phenomenon of Bitcoin block reward getting reduced by 50% every four years is termed as Bitcoin halving. It also doubles the stock to flow ratio (total currency available: total currency in circulation) making it highly scarce.
A strong sense of holding Bitcoin (and not selling it for profit, to HODL if you like a meme reference) is another factor contributing to Bitcoin’s rise. Currently, around 78% of issued bitcoins are either lost or being held with very little intent to sell. This leaves less than 4 million bitcoins to be shared among future market entrants - including large institutional investors such as PayPal, Square, S&P 500 companies, and exchange-traded funds, blockchain data provider Glassnode said.
However, there are many valid criticisms of Bitcoin as well such as Bitcoin being used to facilitate crime, the insane amount of volatility of its price, the carbon footprint of the BTC Network (read how the carbon footprint of BTC should be a concern for a clean energy car company Tesla) or its failure to replace any major currency.
Governments’ Stand on Bitcoin and Cryptocurrencies
Different countries have had different approaches towards dealing with Cryptocurrency. From incredibly welcoming and forward-thinking ideas in places like Malta and Switzerland to an all-out war within China. In India, a legislative bill has been proposed and is to be laid in the Parliament which states that the Government of India would ban all private cryptocurrencies (good luck figuring out what that means) and that the Reserve Bank of India will issue its own regulated public cryptocurrency (goodbye decentralization).
Japan is an interesting case-study of cryptocurrency regulation as the country has suffered the two biggest exchange hacks in history - that of Mt. Gox and Coincheck. Thus, when the Japanese government intervened and started cracking down heavily on exchanges, it could not be called surprising. Business improvement orders were doled out across the country’s exchange ecosystem to force these companies into offering safe, secure, and effective cryptocurrency services. Some could not get themselves up to a suitable level, and rather shut down, while others banded together to form a self-regulatory committee.
Whatever be the government’s stand on cryptocurrency, one thing is for certain and that is the fact that Bitcoin and the technology behind would be one of the most important technological advancements of our generation. As Rana Faroohar writes in this beautiful piece for Financial Times, “Cryptocurrencies have a place in a new world order where the dollar has less of a starring role”.