To understand the essence of bitcoin, it would be good to first look at the circumstances of its creation. So, let’s start not with an explanation of the technical aspects of the cryptocurrency, but with the fact that its appearance coincided with a period when the whole world felt the consequences of a huge economic crisis. This is important, because both the causes of its occurrence and the methods of saving the economy implemented later (mainly mass printing of money) led to a drop in confidence in governments and central banks.
- What is Bitcoin and who created it?
- What is the BTC cryptocurrency for?
- How does Bitcoin work?
- Technology, mining and other technical aspects
- How to make money on Bitcoins and what profit can you expect?
- Trading and earning on Bitcoin
- The highest bitcoin rate and potential profit
- Bitcoin lowest price and investment risk
- Will Bitcoin be worth a million dollars? Price forecasts and popular theories
- Bitcoin stock-to-flow model
- Theory of the 4-year cycle of Bitcoin and the cryptocurrency market
- How to buy Bitcoin and is it worth it at all?
Bitcoin was supposed to be an innovative virtual currency that would allow people from all over the world to become independent of the flawed (according to the creators of the cryptocurrency) financial system. This was to be made possible by two key features: a predetermined supply (twenty-one million units) and the ability to enter into fast and secure financial transactions that did not require the participation of banks and were not controlled by governments. For these reasons, cryptocurrency enthusiasts have come to see it as the epitome of freedom, as well as a kind of “digital gold” that should hold the value of money well over time. But is it? Is Bitcoin a cure for the imperfections of the modern financial system?
The article will help you find answers to these and other questions related to the oldest (of the current) cryptocurrencies. From it you will learn what Bitcoin is, how it works and how its rate behaves. In the text, we will also tell you where and how to buy Bitcoin and analyze whether it is worth investing in it at all.
What is Bitcoin and who created it?
So if you want to invest in BTC, you buy a peer-to-peer Bitcoin cryptocurrency that allows you to send and receive it. It may sound a little complicated, but thanks to cryptocurrency exchanges that provide easy-to-use investment platforms, trading bitcoin is not much different from, for example, trading the stock market.
It is important to note that the Bitcoin network is not under the control of any institution, so no one can, for example, increase the supply of BTC or reverse or block a transaction made on the network. The operation of the platform is possible thanks to the computers of users who provide their computing power to perform complex mathematical operations. This is necessary because cryptography is used to perform, validate, and encrypt network operations.
It is worth adding that the Bitcoin network is public, but the transactions concluded in it are pseudonymous. This means that no one can know the identity of network users, but everyone has access to the operations carried out in it or the balances of individual wallets (addresses).
One of the biggest mysteries surrounding Bitcoin is the identity of its creator. Until now, all that is known is that it was a very talented programmer or a group of programmers nicknamed Satoshi Nakamoto. We will probably not know the identity of the real inventor of the cryptocurrency, but it is worth noting that there are many interesting conspiracy theories around this issue. In their opinion, the creation of Bitcoin is the work of American intelligence, the Bildberger group, the Chinese government or artificial intelligence.
What is the BTC cryptocurrency for?
Bitcoin was supposed to become a global digital currency that would allow fast, convenient, secure and cheap payments. However, various factors have meant that its payment function is not currently the most important. Although some companies accept payments in BTC, and El Salvador has granted Bitcoin the status of an official currency, the cryptocurrency is currently seen primarily as a speculative tool and a way to store the value of money over time. (this is how Bitcoin is perceived by the so-called hodlers, i.e. long-term crypto investors).
It is worth adding that, unlike many other cryptocurrency projects, such as Ethereum, cardano or eos, Bitcoin is not a platform for creating decentralized applications. It uses only one application of blockchain technology, which is the aforementioned electronic system for digital payments. Does that mean it’s a worse investment than them? Not necessarily, because, firstly, many different factors influence the valuation of a cryptocurrency, and secondly, Bitcoin still has many advantages that are important for investors, for example, high recognition or a low and limited supply.
Bitcoin was first used to pay for goods on May 22, 2010. On that day, 10,000 BTC were paid for two pizzas, which is currently equivalent to several hundred million US dollars. Over time, cryptocurrency lovers began to celebrate the anniversary of this event, known as Bitcoin Pizza Day.
How does Bitcoin work?
You know what cryptocurrencies are and how they work, so in the following we will limit ourselves to only the most important technical issues related to bitcoins. It is worth familiarizing yourself with them, because this will allow you to better understand its specifics, and this, in turn, will allow you to make more informed investment decisions.
Deprecated, but still the most important
To begin with, Bitcoin is one of the first cryptocurrencies in history (in fact, the first, given the modern understanding of cryptography), so it is necessarily a little outdated. The biggest downside is the fact that using its network is neither fast nor cheap. Currently, it takes an average of several minutes to wait for a transaction to be approved, and the commission for transferring Bitcoins can reach several tens of dollars.
There are already many other digital currencies on the market that allow for much cheaper and faster payments. However, their rates are less stable, and their popularity is much lower, so if an organization decides to accept payments in crypto, then most often in BTC. We add that the capitalization of bitcoin still makes up 40 to 60% of the entire cryptocurrency market, so we are talking about absolute dominance. Therefore, the behavior of the BTC rate affects the general mood of crypto investors and the current assessment of other crypto projects.
Technology, mining and other technical aspects
Bitcoin uses blockchain technology, which prevents counterfeiting of cryptocurrencies, as well as transactions in which they are used. Its blockchain uses the Proof of Work consensus, which means that there is a cryptocurrency mining process on the network, which is supported by the so-called miner, equipped with computers with high computing power.
The task of miners is to mine new Bitcoins, as well as approve transactions and thus create so-called blocks, in which information about the operation is stored. For each block mined, miners are rewarded in bitcoins, and the amount of their reward gradually decreases. The reward for a mined block is halved every 210 thousand blocks, that is, approximately every 4 years. Initially, it was 50 BTC, from May 2020 it reaches 6.25 BTC, and in 2024 it will drop to 3.125 BTC. The fall in the rate of Bitcoin mining means that while almost 19 of the 21 million of them have already been mined, the last Bitcoin will not appear until 100 years from now.
The inflation rate in the Bitcoin network is low and will be even lower, which is certainly a positive signal for investors. Cryptocurrency supporters believe that this will further strengthen the BTC rate in the long term.
How to make money on Bitcoins and what profit can you expect?
As you can see, there are at least two ways to make money with bitcoins. You can not only invest in it, hoping to increase the price, but also buy specialized equipment and act as a miner managing the network. If you want to get serious about the last option, first carefully calculate the costs of the entire operation, taking into account possible energy costs and side costs.
Compare the figures obtained with the income that mining can bring, and evaluate the profitability of the entire enterprise. The profit here is quite limited, but you might still find it useful. Also remember that you can mine other cryptocurrencies, for some of them a regular computer is enough.
Bitcoin mining is very energy intensive. In September 2021, The New York Times published a report showing that it accounts for about 0.5% of global electricity demand! Therefore, the operation of bitcoin takes more energy than the annual electricity demand of many countries, including, for example, Denmark or Finland.
Trading and earning on Bitcoin
Most investors see bitcoin as a high-risk financial instrument, but at the same time with much greater reward potential than other asset classes such as stocks or commodities. We add that they are divided into two groups: merchants and the so-called Hodlers.
Traders or speculators usually approach Bitcoin like any other investment. They most often use technical analysis tools (fundamental analysis is usually less important for them) and suggest a short-term or possibly medium-term investment horizon. In their case, finding the best time to enter and exit investments is the key to success. It is important to note that some of them are not limited to playing against BTC appreciation. Some take a short position using futures or perhaps options and also try to profit from the fall in the price of the cryptocurrency.
The second group are hodlers, that is, long-term investors who often view Bitcoin as something more than just a speculative instrument. Usually these are fans of cryptocurrencies who are close to the ideas behind them (decentralization, independence, lack of censorship, etc.), and who are optimistic about the future of bitcoin, and most often the entire crypto market.
It is worth noting that a large number of investors, especially hodlers, attach great importance to the theory of the 4-year cycle of bitcoin or the stock to flow model, which predicts the growth of its price in the long term.
The highest bitcoin rate and potential profit
If you bought Bitcoin in the early months of its existence and held it for about 10 years, your ROI would be several million percent. Never before has any instrument in history recorded such an impressive increase in value in such a short time. It is worth adding that, at the time of this writing, Bitcoin’s highest price is the peak in April 2021, set at $65,000.
A 13x increase in value in such a short amount of time should be considered impressive, even though Bitcoin has had stronger upswings in the past. In 2017 alone, the price of BTC increased by 20 times, and in 2013 by as much as 70 times (these are approximate values, because each exchange has its own crypto-quotes). Based on these results, we can conclude that along with the growth in popularity and liquidity of bitcoin trading, a slower price growth should be expected. However, as long as the mood in the markets favors it, Bitcoin can still prove to be a very profitable investment.
Bitcoin lowest price and investment risk
In mid-August 2010, 1 BTC was worth only a few cents (on the Mt. Gox exchange), and a year later they paid several tens of dollars for it. Since then, the price of bitcoin has been growing dynamically, although it should not be forgotten that many impressive drops have been recorded during this time.
There have been cases in the past when Bitcoin depreciated by more than 50% in just a few days. During periods of the so-called “bear market” lasting several months, the decline reached 90% (counting from the price peak to the end of the boom). Over time, it turned out that even investors who buy Bitcoin at its peak (for example, in December 2013 or 2017) can expect to be reimbursed for losses with an explicit percentage. However, earlier, many of them became disillusioned with the cryptocurrency and sold it at a big loss.
Today, the Bitcoin market is more mature and much more capitalized than it was a few years ago, so sharp selloffs are less frequent and a bit more fluid. On the other hand, there are still single drops of 20 or even 30%. It is undeniable that for many investors such rate fluctuations are simply unacceptable.
The Gox exchange was one of the first and for several years the largest cryptocurrency exchange in the world. It is also the first crypto exchange in history to lose the funds of its clients under unclear circumstances and, as a result, declare itself bankrupt. In 2014, 850,000 BTC evaporated from its servers, which at that time was equivalent to 450 million US dollars.
Will Bitcoin be worth a million dollars? Price forecasts and popular theories
People considering investing in Bitcoin often check their future price predictions first. However, you should be careful with these predictions. Why? First, markets are inherently unpredictable and no one knows what the future holds for them. Secondly, many forecasts come from analysts and investors who have a clearly positive or negative attitude towards cryptocurrencies and therefore one should be wary of their objectivity.
Bitcoin lovers assume that it is the currency of the future and at the same time digital gold, the value of which will only grow in the long term. They believe that sooner or later you will have to pay several hundred thousand dollars for 1 BTC, and sometimes even several million dollars. They base their specific price predictions on stock-to-flow models, as well as other bitcoin-related tools and theories (such as the 4-year cycle theory).
There are also diehard opponents of bitcoin, who, in turn, argue that this is one huge speculative bubble. In their opinion, this is a worthless, power-hungry tool, whose best years are behind. Some of them are of the opinion that bitcoin will eventually be tightly regulated, and in many countries will be completely banned, which will lead to a permanent collapse of its exchange rate. We add that the realization of such a negative scenario, although it seems unlikely, is not completely excluded.
Bitcoin stock-to-flow model
The stock-to-flow model (SF or S2F for short) is a way of measuring the abundance of specific resources (such as natural resources like gold). It indicates the ratio of the amount of resources in stock, which we can call the total supply or reserves, to the amount of resources mined/produced (flow). According to this model, the smaller the number of given assets, the more favorable their assessment.
If you already understand how Bitcoin works, then you probably see the point of using the S2F model in its context. The “king of cryptocurrencies”, like gold or silver, is a rare commodity that additionally has a well-defined total supply (stock) and mining rate (flow).
In the world of cryptocurrencies, the most popular model is S2F, created by an investor under the pseudonym “Plan B”. He took some input data (BTC supply, halving schedule and historical estimates) and then used linear regression to model the price of Bitcoin.
Supporters of the S2F model assume that the price of BTC will follow the same trajectory as in previous years. Its growth will take place in a way that will correlate with the reduction of the newly emerging supply of Bitcoins. According to the forecast, in 2025 Bitcoin will reach the price of 1 million US dollars.
It is worth adding that some investors use the S2F model to make decisions about entering or exiting Bitcoin. According to his assumptions, if the actual price clearly exceeds the predicted price, this may be the right time to sell the cryptocurrency. On the other hand, when the current BTC price is lower than the model predicts, it can be expected to increase.
The disadvantage of the described model is, among other things, the fact that it does not take into account the macroeconomic environment at all. Importantly, the cryptocurrency market has been dependent on global sentiment for some time and shows some correlation with traditional financial markets, especially stock markets.
Theory of the 4-year cycle of Bitcoin and the cryptocurrency market
Some crypto investors, especially those who have been in the crypto market for several years, believe that Bitcoin goes through 4-year market cycles. This theory is the basis for determining, in particular, the time of the next bull market, its duration or potential price peak. Based on this, you can find a good moment to enter or exit an investment. We add that we are talking not only about bitcoins, but also about the entire cryptocurrency market – now we will explain why this is so.
This theory is based on the fact that the aforementioned halving occurs on the Bitcoin network once every four years. There have been three splits of the BTC mining reward so far (in 2012, 2016 and 2020) and they have all had a similar effect. Simply put, a few months after each of these events, a “bull market” began that lasted for several months. Then the bubble burst and a long “bear market” began, which greatly broke the rates of almost all cryptocurrencies.
The 4-year cycle theory applies to bitcoin, but in practice it applies to the entire cryptocurrency market as well. This is because it is the most popular and capitalized cryptocurrency to date, and its behavior determines the sentiment in the broader cryptocurrency market. If the price of BTC rises, then the prices of most other cryptocurrencies will rise, sometimes immediately, and sometimes after some time.
Keep in mind that bitcoin cycles have not followed the same course so far, and related theory such as the S2F model does not take into account what is happening in other markets and the global economy. Moreover, it was only after the boom ended in 2018 that we could see that the previous two halvings actually marked similar cycles in the Bitcoin market. However, on this basis, many investors began to believe that after the next halving (May 2020), another big bull rally will begin.
The predicted growth did take place, but it should be emphasized that it coincided perfectly with the massive reprinting of money, the introduction of near-zero interest rates and very positive sentiment in the financial and commodity markets. All this undoubtedly contributed to the rise in prices for the cryptocurrency.
How to buy Bitcoin and is it worth it at all?
The long-term uptrend that has continued for Bitcoin since its inception, as well as price forecasts based, among other things, on the stock-to-flow model or the 4-year cycle theory, can stimulate investment. A positive signal is also the growing interest in cryptocurrency, including from institutional investors. This is facilitated by strong price growth, as well as well-known figures and events that contribute to the increase in awareness of Bitcoin and other cryptocurrencies – we are talking here, among others, Elon Musk, Tesla or El Salvador, where BTC became the official state currency.
It is worth adding that the great strength of bitcoin, and indeed the entire cryptocurrency market, lies in its community. An important part is made up of youtubers and twitterers with a large reach, the vast majority of which are big crypto enthusiasts. They popularize growth theories and predictions regarding the valuation of cryptocurrencies, which also inevitably has a certain, obviously positive, impact on cryptocurrencies.
You can also easily find negative information and opinions about bitcoin and the cryptocurrency market on the internet. Instead of duplicating them here, we will mention a question that is rarely raised by analysts and investors, and which can be of great importance for the future of the cryptocurrency market and related price predictions. What is it about?
Well, you should know that the impressive, long-term boom of Bitcoin coincides perfectly with the longest boom in the history of the stock markets (compare the chart of the price of BTC and, for example, the S & P500 stock index), which began in 2009 and continues to this day. (as of December 2021). We won’t speculate on how long this will last (or if it will end at all), but you should be aware that the change in sentiment and the stock markets entering a multi-month bear market could shock the cryptocurrency and the market too. In this situation, existing models and theories (eg S2F, 4-year cycle) can simply be invalidated.
