Bitcoin first appeared in the media after its financial boom in 2017. It has grown to about $20,000 before hitting more than 80 percent. At the peak, it’s mostly kept below 50 percent of its former level.
Traders still widely underestimate digital currencies due to their decentralized existence, technical sophistication, and the fact that they are still fairly recent.
It is also necessary for a digital currency investor to understand what produces value. Any meaning added it’s just a game of speculation.
Who controls bitcoin?
Bitcoin is decentralized. This means that no one legally owns or manages Bitcoin. Much like no one owns the Internet, telephone, and text/SMS messaging. It is essentially a delivery network and an alternate payment mechanism.
Bitcoin code is open source, so making new bitcoins requires “mining bricks”. The cumulative number of bitcoins in circulation cannot exceed 21 million. They’re about 90% in there as of April 2020.
When is all the bitcoin going to be mined?
The development rate is half per 210,000 blocks. Based on that amount, it would take until about 2140 before all bitcoins have been mined. That means that bitcoin will be mined slower over time, and it will become more difficult to do so. When setting up Bitcoin, the principle of artificial scarcity was the base of its monetary policy. When supply is constrained, it supports its value (which will ultimately be driven by demand for it).
What’s a fork?
A fork occurs when new features are added to a blockchain to deal with hacks, glitches, increase the number of transactions that may occur every second, and so on.
Bitcoin Cash (BCH) was created from bitcoin (BTC) to expand block size ability to support more transactions. The hope is that it will increase demand as a medium of trade. Currency usage as a medium of trade is one of the two fundamental items that bring value to a currency. The other is a store of money.
And, when a BTC new fork appears, the founders of BTC retain the same number of BTC and BCH. Each of them subject to its own supply and demand issues, mostly a necessity function because production didn’t rise significantly over time.
Bitcoin SV is a fork from Bitcoin Cash to increase the chain’s size.
How forks happen?
Forks are simply software updates.
You take the existing code, which anyone can do, considering the open-source nature of the code, and change it.
The BCH camp, business people, creators, advocates, etc., rally around a certain concept, took the bitcoin code and changed it. They created their own guidelines and named it Bitcoin Cash.
It’s like you were attempting to build a new version of a similar form of program. If you knew the code of that software, you could copy it and make your changes and sell it. The price would be a function of supply and demand.
How close are cryptocurrencies to sustainable long-term investments and not just financial instruments?
There are no cryptocurrencies in any of the qualities that make money worth what it is, i.e., the medium of trade, store of capital. It’s important to know who the buyers and sellers are. How large they are, and what drives them to get a taste of each market. Cryptocurrency exchanges are mainly full of speculators seeking to take advantage of wild fluctuations to sell it for a better price than they bought it.
This is no reliable source of demand owing to restricted transactional value ( i.e., one cannot use cryptocurrencies to buy a lot) and uncertainty (i.e., restricting their usage as a store of wealth). Central banks are obviously not going to use competitive currencies as reserves. Institutional investors do not use them as currency hedges against monetizations when real rates become unacceptably low.
They don’t have long-established track records of alternative reserve assets, such as gold, or track records that they’ll keep up during turbulence. These were priced nearly exclusively in cash during the coronavirus crisis, as was the case for other types of financial assets.
Yet gold’s usage as a financial currency for thousands of years has many problems, such as comparatively low, illiquid demand than global debt and stock markets. It is not a feasible option for large sums of debt wealth to change to about 1% of the size (though its price may drop significantly in the event of such a transfer).
Throughout history, some states, including the US, ban gold possession has from time to time, from 1933 to 1975 (some limits were repealed in 1964). State crackdowns are still a serious possibility for some new payment schemes or asset management structures.
Some things to remember as a cryptocurrency investor
Certain cryptocurrency considerations for a long-term investor (not usually a speculator or day trader):
- Is the technology stable and reliable?
- Whether used as part of a payment network or an inter-application payment system, is it capable of generating operating efficiency?
- Is it scalable? Will a lot of people use it to boost their transactional utility?
- Is it worth constant to improve its use as a store of wealth? (This is the stablecoin concept that has caught on with some, including Tether and Facebook’s Libra.)
- How’s the governance system? Is it fair to all those involved?
- How is the regulatory reaction likely to turn out? If you’re a country, you don’t want these off-grid payment systems to exist.