The economics behind Bitcoin.
Bitcoin is an unavoidable topic because it is attracting a lot of investors, Making some big news and it is even considered as Gold 2.0, if fact outperformed gold returns. So, should you invest in it? Well, this post is all about Bitcoin and cryptocurrency in a simple and easy to understand way. you will get it despite your knowledge about Bitcoin and Crypto Space.
Introduction and Original Purpose
For those of you who have very little knowledge about Cryptocurrency and Bitcoin, here is an introduction about them and why they exist in the first place.
Cryptocurrencies are not that old and in fact, bitcoin was invented by a Japanese person right after the 2008 crisis. I mean in 2009. What's a cryptocurrency? well, it is basically a digital form of cash similar to dollars and rupees but cryptocurrency is a digital version of cash that is used for traction between two people. But unlike traditional money(which is controlled by a central bank) cryptocurrency is not regulated by any government or central bank which is considered as a pro and a con, more about that later in this article.
That's it? Nope. The main purpose of cryptocurrency is to make traction to any person on earth in a simpler and easier way by eliminating the middle man such as banks.
For Example, You live in India and your friend lives in United States. Now, say your friend wants to send 1lach rupees(1370$) to you. He can't send money directly to you, right? He must go to a bank, do some paperwork, get both of your ID verified, then the bank will collect you some money for facilitating the traction and the whole process will take few days.
Huh! sounds tedious right? yeah. This is where cryptocurrency comes into action. There are many types of cryptos. Let's take Bitcoin for example. since Bitcoin is a digital form of cash, your friend can directly send 1 lakh rupee worth of Bitcoin to you within few minutes and without any middleman like a bank and with minimal charges for a transaction. Those were the main advantages of bitcoin or cryptocurrency in general and it has some disadvantages as well like, the transactions are irreversible if you send bitcoin to someone else instead of the person whom you should send bitcoin, you will know the person whom you sent your bitcoin because transactions don't take place on your Name but a unique ID. Since sender and receiver's identity is not unveiled it is used as funding for illegal activities
This whole traction happens with the help of a technology called BlockChain, which's an excellent technology and a bit complicated to explain in text so I don't want to speak about the technical aspects of the BlockChain and there are many other sources that do a good of doing that.
You must have definitely heard this term if you know about bitcoin and cryptocurrency in general. Bitcoin mining is similar to gold, I mean not the process but the end goal. People do gold mining to get gold, and Bitcoin mining to get bitcoin. That's a No Brainer.
There is 21 million bitcoin in total but only 18 million are in circulation right now.
Now let's go back to the previous example. where you Live in India and your friend lives in United States. Your friend sends you 2 Bitcoin. I'm going to explain the process behind the traction to explain Mining.
So, in order to receive 2 bitcoin, the transaction must be verified, and in the case of traditional currency( Rupees, Dollars, etc..) Bank does that job. But in the case of Bitcoin and cryptocurrency, there are people called miners who do it.
When your friend sends you bitcoin, It won't be registered or noted down on a piece of paper or something but a maths problem will be generated, and these miners who are all over the world and thousands of them in fact. will solve that problem using super high powered computers and as a reward for solving that problem, they will receive some bitcoin and the transaction will be completed, you will receive 2 Bitcoin from you friend. Cool right! and that may never happen 😂. sorry! for kidding you
Why is bitcoin rising?
Since you just learned that Bitcoin is a cryptocurrency and now you know the purpose of it
if that's just a thing for easy transactions why more and more people are buying it? and why does its value keeps increasing? This part will answer these questions.
Remember? earlier where I told you there are only 21 million bitcoins. That's one of the important reasons why bitcoin is raising but Bitcoin has gone downhill as well in the past.
Unlike traditional currencies, where the central bank or the government can print as much as they want. But the number of bitcoin available is fixed
So, when more people want a thing(bitcoin) that is limited in quantity, its price will increase and make it less affordable and hence reducing the demand. and that's basic supply-demand economics behind anything that's limited in quantity.(please read that again)
This why Bitcoin might hit $50000 in the future.
This might make Bitcoin an attractive investment, making it more volatile and push it further away from its original purpose. If bitcoin is so valuable why would anyone use it for transactions?
But why is Bitcoin price is increasing especially now in 2020 and 2021?
the one-word answer is "liquidity". I spoke about it previous blog post as well, check that out!
Liquidity is basically more availability of cash with people and the economy. where do business and people get money from?, Central Bank( RBI ). How? They have been printing more money and lowered the interest rate to boost the economy which was hit hard by the pandemic. Not just RBI, central banks around the world have been doing the same thing.
So, excess Money flows into digital assets such as bitcoin and cryptos, and the supply-demand economics thing hikes prices.
History Repeats Itself
But the reason why the whole situation of bitcoin might be a bubble because it appears similar to the Tulip bubble, which happened in the Netherlands around 1630s
The Tulip Bubble
Here is a short into about it. There where flowers called Tulip in the Netherlands, Dutch people thought that it is a rare flower and it is limited in quantity. So, people started buying them like crazy, and the supply-demand thing jumps in and increase the price. More and more people started buying Tulip flowers with the hopes of making a profit. which further hiked the prices.
But after few years it turns out that tulip flowers are not that rare and they found that Tulips grow and blossom every spring. so now tulips are like any other flower right? So price fell(when a thing is available more in quantity, its price will decrease). people who invested made huge losses.
That situation sounds familiar, right? People think that bitcoin is limited in quantity but is not sure that there are only 21 million of them available and we have very little information about the founder of bitcoin and there lot of uncertainty about the future of bitcoin. Since more and more people are investing in it based on speculations it can be an economic bubble, similar to the housing bubble and tech bubble, and this might bust anytime like them too.
Investing in bitcoin has become more or less like gambling.
But despite all those volatility, many people have made huge profits from cryptocurrency, and congrats! if you are one of them.
Just don't forget to do your own research before investing in any asset for that matter. Don't invest based on speculations.
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