Why is Bitcoin rising? And its impact on digital money

Last week we discussed about the future of money, with specific focus on closed source digital money like the central bank digital currency, and its potential negative impact on the GDP of economies. (If you missed it, you can read it here ). So it only makes sense for us to turn our attention to open source digital money, and watch out for tell tale signals about their future right?

And this week has been particularly exciting for the OG of digital money - Bitcoin! The market cap of the cryptocurrency quietly crept up to 1.2 Trillion USD, and the price action met its all time high since November of 2021. With bitcoin price going upto $63,000 for 1 bitcoin.

And ever since its inception in 2009, this cryptoasset has seen meteoric rise in price followed by dramatic crashes, that experts and layman alike, have often derided it as being dead or worse a scam. More so in 2021, when it climbed to being valued at $61,000 per bitcoin, before plunging to the abyss of $17,000 where it stayed for a good year and a half.?

The real question is what is behind this bull run this time? And more importantly, what are the fundamentals of bitcoin that make it so appealing to some?

What is Bitcoin (BTC) ?

And because you all seem to love these explainers so much, here are 5 levels of difficulty in understanding bitcoin.

Bitcoin for Toddler?

Imagine you have a toy box with different toys. On the lid of the toy box, it tells you exactly how many and what kinds of different toys you have inside. And this is verified by everyone who has a sneak into your toybox. But only you can access your toys. And if your friends find your toys valuable they can give you candies in order to "buy" it from you. that is how Bitcoin function.?

Bitcoin for Teenager?

Think of Bitcoin as a unique book in a library. This book is special because there’s only one copy, and it can’t be taken out of the library. But, anyone can read it. If you want to ‘own’ this book, you get a special library card that says you have the rights to this book. You can transfer these rights to someone else, like trading books with a friend. Or if others find the book valuable enough, they'd offer money, or other books in exhcange for it.?

Bitcoin for College students

Bitcoin is like a superhero in the world of finance. Just like how superheroes have special powers, Bitcoin has unique features that traditional money doesn’t. It’s decentralized, meaning no single entity controls it. This is different from traditional money, which is controlled by banks and governments. It’s like a superhero who doesn’t answer to any government or organization but works for the benefit of everyone. Moreover, Bitcoin transactions are transparent and can be tracked, which promotes accountability. Also, once a transaction is written to the underlying distributed Ledger it cannot be undone. This ensures that the chances of fraud and manipulation are reduced.?

Bitcoin for university graduate

Do you have a Starbucks loyalty card? Do you use it to frequently buy your daily dose of caffeine from Starbucks? Well imagine you could do that and more with another form of digital currency. This is a new kind of ‘money’ that isn’t controlled by any government or bank, called Bitcoin. Unlike traditional money, Bitcoin is not subject to inflation because there’s only a finite amount of it. This makes it potentially more stable in the long run compared to fiat currencies, which can be printed at will by governments and are therefore subject to inflation.

Bitcoin for experts

Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin(BTC) was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The key difference between BTC and traditional money is that BTC operates on a decentralized network, which means it’s not controlled by any government or financial institution. This decentralization makes Bitcoin resistant to censorship and gives users full control over their money. Furthermore, Bitcoin’s supply is capped at 21 million coins, which protects it from the inflationary practices that often devalue fiat currencies.

Blockchain for beginners

Before we delve in, just 2 more key concepts to quickly brush up.?

What is blockchain?

Basically, blockchain is like a fancy digital record book that keeps track of transactions and assets in a business environment. Assets can be physical, like stuffs you can touch (like a house or car) or even conceptual (like patents or branding). You can pretty much keep tabs on anything valuable and easily trade it on a blockchain, which helps lower risks and save money for everyone.

Why is blockchain important? In the business world, having the right info fast and accurate is key! That's where blockchain comes in handy. It keeps info shared, immediate, and secure on a ledger that only approved peeps can check out. With blockchain, you can keep track of orders, payments, production and more. Since everyone sees the same truth, you can trust the deets of a deal from start to finish. It boosts your confidence and opens up new ways to work smarter!

What is cryptocurrency?

Cryptocurrency is like digital money that uses advanced tech like blockchain to make secure transactions. And blockchain makes it, decentralized, transparent, and super hard to mess or tamper with. The cool thing about cryptocurrency is that no one's really in charge of it - it's all run by the blockchain. That means governments can't really control or mess with it like they do with regular money. With cryptocurrency, you can send money directly to someone else using secret codes. And the best part? The fees are way lower than what banks charge. So you can avoid getting ripped off by big financial institutions.

How does Bitcoin work ?

As you can see, understanding bitcoin isn't too hard. Even a toddler could do it! But what's harder to grasp is how it functions. Which is where I'd introduce us to the (tricky?) concept of Blockchain technology.

A blockchain is a distributed ledger, or a shared database of information that is chained together via cryptographic techniques. "Distributed" as in? it is stored on several different computers rather than on a centralized server, as is typical of data storage. A network of automated programs installed on these computers maintains the blockchain and performs the functions necessary for it to operate.

A block on a blockchain can be compared to a cell in a spreadsheet that contains a block header, transaction counter, and the transactions recorded in the block. The transaction counter lists how many transactions are in the block, while the block header in itself is a complex entity made up of:

• Software version
• Previous block hash: The encrypted information from the previous block
• Merkle root : A single encrypted line containing info on the previously committed transaction to the block
• Timestamp: When the block started
• Difficulty target: the complexity of the algorithm miners are solving for in order to write transactions to the block
• Nonce: Abbreviation for number used only once. It is a common feature in the majority of cryptographic algorithms.

Ok, then. Now who are Bitcoin Miners exactly ?

How to Mine Bitcoin?

So basically, Bitcoin mining is all about confirming the info in a block of the blockchain by coming up with a secret code that adheres to certain rules set by the bitcoin protocol. If you crack the code first, which is also known as proof of work, you get rewarded for your hard work. In, you guessed it, Bitcoin! And ladies and gentleman is the secret to how bitcoin is created.? As time goes on, the reward for mining bitcoin keeps decreasing. This is prescheduled into the protocol, in an event known as bitcoin halving (or halvening, I keep getting confused). Why? because there can even only be 21 Million bitcoins that can ever be mined. That was what Satoshi Nakamoto, the creator of bitcoin, hard coded it to do.?

Why is there only 21 million bitcoins?

But why is the number of bitcoins capped at 21 million? I think this has to be the most asked question of all time. Really, why is that?

There are 2 answers to that, one is slightly mathematical, and I shall try my damnest to ensure I translate it well to english. The other is kind of economics/logic oriented. So here goes.?

1. Maths: every 10 minutes news blocks are added to the chain and mining rewards half for every 210 blocks added.? This means that it will simply start becoming that much more harder to mine the next bitcoin.? Because the complexity of the algorithm required will start becoming computationally harder to handle So when he started, it used to be 50 btw, then 25 , 12.5.6.25…. If you add them all up it is ? 100 bitcoin. That’s the mathematical limit . When we reach that limit the mining reward will be ? 0. Computationally it means, no matter how hard you try you can’t get anything out of it. In math, this beauty is called at asymptotic curve !

2. Economics/Logic: When Satoshi san created the bitcoin protocol, he wished for it to replace the dollar in every day transactions. And so he had to mimic the currency in flow at that point in time. Which was roughly $21,000 trillion.? Now 1 bitcoin = 100 million Satoshis (the smallest divisible unit of a bitcoin).? Doing the math 21 Million * 100 Million =? 21,000 trillion sats.? So really what he was trying to hard code was what the economy looked like at that point in time.

What happens when we mine all 21 million bitcoins?

In the early days of bitcoin, for every block that miners were able to add to the blockchain, they'd be rewarded with 50 bitcoins!

However, with very halving, the rewards got cut into half, while the complexity of adding to the chain got more and more difficult, to now miners earnign 6.25 bitcoins.

So basically, there are over 19.5 million Bitcoins out there right now, and only 1.5 million left to be mined before they hit the 21 million limit by 2140. Even though the amount of Bitcoin you get rewarded for mining has gone down, the value of Bitcoin keeps going up, so it all balances out in a way. And now that Bitcoin is becoming more popular, the fees for transactions are going up too. People like to call Bitcoin ‘Digital Gold’ because it’s got a limited supply of 21 million coins, just like how there’s only so much gold in the world. But what happens when all the Bitcoins have been mined and miners can’t get any more rewards? Why would they still bother to keep the network secure?

Here are some key reasons miners will continue to mine:

Transaction Fees

So, as miners move on from block rewards, those who are like the heart of the Bitcoin network, aka the miners, will be motivated mostly by transaction fees. This will help keep the network strong and able to handle transactions all the time. People predict that the fee will be enough in sats to make it fair and reasonable when converted to US dollars.

Economic revolution

Bitcoin being limited in supply could make it a really valuable thing to have. Since there won't be any more new coins coming in, the scarcity might make its value go up, making it even more popular as a way to protect against regular money systems.

Innovation and Evolution

The crypto world is always changing. It's pretty possible that there are new ideas or ways coming up to make things easier and cheaper for everyone after rewards run out.

Bitcoin as an alternate to Fiat currency

That means we can breathe a sigh of relief and have faith that mining rewards (or lack thereof) won't be the reason for the collapse of bitcoin.?

That brings us to the next juncture, which is that...

Why or for what do I use bitcoin?

Bitcoin as a store of value

A store of value is an asset that retains its purchasing power over time and can be readily exchanged for something else. Some properties of Gold, which make it a great store of value are:

• durability
• fungibility
• scarcity
• verifiability

Bitcoin shares those properties as well as being much more:

• portable
• divisible
• verifiable

Convinced yet about it being a good store of value?

Bitcoin is anti inflationary

Yet another reason is the touted anti inflationary properties of bitcoin.

Because there is a finite supply of it, and assuming demand as a % of the popualtion stays the same, then by the demand supply laws of economics, the value of bitcoin would continue to go up. Making it an instrument that can beat inflation.?

Can bitcoin be a medium of exchange?

But, if we know that the value of bitcoin tomorrow would be worth far more than it is today, would i be willign to expend it in exhcange for other goods?

That is kind of the situation a ot of El Salvadorians are now finding themselves in, after their government adopted bitcoin as a legal tender in the Country. And gave several benefits, like housing benefits, the last 2 years. It worked well back then because the value of bitcoin plummeted. But as many of them are finding out now, because their repayments too are in bitcoin, the pinch hurts a lot more than anticipated.?

What makes Bitcoin unique ?

And yet, we have not yet been able to undersand why is it tha tbitcoin commands such a pull, when we have hundreds of other cryptocurrencies, as well as government sanctioned central bank digital currencies competing with it too.?

To understand the uniqueness of Bitcoin lets refer to the Fidelity report titled " Bitcoin revisited" because of the following:

1. first mover technology: some bitcoin nazi would claim that the only real life implementation of blockchain was Bitcoin!
2. fully decentralised thanks to no node in the network being able to capture more than 50% share of the network?
3. secure and transparent due to its proof of work protocol

I could play devil's advocate here, but that would warrant another edition of the fintech chronicler to do justice to it. Leave a comment if you'd wanna read about that too.

Bitcoin Bull run: What is the real reason?

And that brings us to today, when we saw bitcoin climb from the trenches of $17,000 to kissing $63,000 in just 2 years. Did the fundamentals of the cryptocurrency sudeenly change? or is this really just driven by FOMO, in which case why was it hibernating for the last 2 years ?

In my mind there are possibly only 2 answers to that question

Influence of traditional Finance : Bitcoin ETF

the first reason is kind of a dirty word borrowed from traditional finance: ETF. Or equity traded funds. (read more about the impact of ETFs on the price action of Bitcoin )

A bitcoin exchange-traded fund (ETF) is like a workaround that lets you invest in bitcoin without actually holding the digital currency in your wallet. It's basically a way to bet on the price of bitcoin without dealing with the hassle of owning it. Instead of buying bitcoin directly, you can buy shares of a bitcoin ETF on the regular stock market. This makes it super easy for anyone to get in on the action and ride the ups and downs of the cryptocurrency market. ETFs are a hot topic for both small retail investors and big institutions because they offer a safe and convenient way to get into the price action of bitcoin. They're perfect for people who want to dabble in cryptocurrencies but don't want to deal with all the headaches of managing them with a cold wallet and what not. Right now, there are approved ETFs for spot bitcoin trading in the US.

But, honestly, Institutional investors were always investing via other ways (by exposure to mining companies), so what changed now to impact the price of bitcoin so much?

Bitcoin Halving

That brings us tp the next probable cause, that people are beginning to realise that bitcoin is getting more rare ?

But to understand the future lets take a look at the past. So, like, the last time the halving went down was in May 2020, when Bitcoin was sitting at around $8,750. Fast forward six months and the price shot up by 79%, and a year later it was a crazy 547% higher.

But, experts beleive that won't be happening this time around.?

When asked why, the heads at JP Morgan said that the halving and the next ethereum upgrade are largely baked into the current price.?

JP Morgan thinks the price at bitcoin after the halving would settle around $ 42,000. How did they arrive at that value? Using 2 of my favorite tools, math and guestimate.

It currently costs about $26,500 to make a bitcoin. But after the halving, they reckon that cost is gonna double to $53,000. That means, it will become untenable for some small time miners, to stay inthe game, if the price of bitcoin drops below $50K. Lets say that is around 20% of the miners.? That brings us to a price of around $46,000 for the take.

Who are the bitcoin whales who are buying now ?

One of the biggest whales (whales are bitcoin wallets with more than 10,000 bitcoins in it) btw happens to be law enforcement agency!?

The others? Usual suspects:

1. GrayScale, BlackRock and other regulated entities who have been allowed to sell Bitcoin ETFs
2. MicroStrategy - 10k coins
3. BlockOne with 10k coins
4. The Winkelwoss twins
5. Tether
6. Michael Saylor
7. Tesla
8. El Salvador
9. A few other public listed mining companies amongst others

Bitcoin price action after this?

And so what do I think?

It doesn't really matter that I feel once people realise that so much power is concentrated in the hands of few, will they not feel like it is like old wine, in a new bottle. And will the demand still be there once that veil is lifted? Or will there really come a moment, when we realise we all need to own one bitcoin in order to secure our financial futures ?