Bitcoin: A Comprehensive Overview

Bitcoin, the first and most well-known cryptocurrency, has captured the attention of the financial world since its inception. In this extended article, we'll explore what Bitcoin is and delve into various aspects surrounding it.

What Is Bitcoin?

Bitcoin, often abbreviated as BTC, is a decentralized digital currency that enables peer-to-peer transactions without the need for intermediaries like banks. It was introduced in 2009 by an unknown person or group using the pseudonym Satoshi Nakamoto.

Figure 1: Bitcoin (source: Craiyon)

How It Works

Bitcoin, like other cryptocurrencies, operates on a technology called blockchain, which is a distributed ledger that records all transactions across a network of computers. Each transaction is added to a block, and these blocks are linked together, forming a chain.

Technology around Bitcoin

Blockchain, the underlying technology of Bitcoin, ensures transparency, security, and immutability of the transaction history. Miners use powerful computers to solve complex mathematical problems, validating transactions and adding them to the blockchain.

Creation

Bitcoin is created through a process called mining. Miners compete to solve mathematical puzzles, and the first one to solve it gets the right to add a new block to the blockchain. As a reward, the miner receives newly created bitcoins.

Burnt Energy

Mining, while essential for maintaining the integrity of the Bitcoin network, has drawn criticism for its energy consumption. The process requires significant computational power, leading to concerns about its environmental impact and carbon footprint.

Safety

Bitcoin transactions are secured through cryptographic techniques. Users have a private key to sign transactions, and the public key serves as an address visible to others. The decentralized nature of the network enhances security, making it resistant to fraud.

Buying and Storing Bitcoin

Buying Bitcoin typically involves using cryptocurrency exchanges where users can purchase it using traditional currencies. Once acquired, Bitcoin needs to be stored in a digital wallet. Wallets can be online, offline (hardware wallets), or even paper wallets, each with its own security considerations.

Loss and Recovery

Loss of bitcoins can occur through various means, including forgetting wallet passwords or losing access to the storage medium. It's crucial to keep backups and recovery phrases secure. Despite its decentralized nature, recovery options can be limited, emphasizing the importance of responsible ownership.

Investing in Bitcoin

Initially envisioned as a replacement for traditional currency, Bitcoin has evolved into a unique asset class that functions more as a speculative investment than a medium of exchange. Its value is often closely correlated with the movements of the technology-heavy Nasdaq index, reflecting its integration into the broader tech landscape.

Unlike traditional investments in technology companies that possess tangible assets, a workforce, and established know-how, Bitcoin stands as a digital entity devoid of physical presence. Its allure lies in the decentralized nature and limited supply, yet these very features contribute to its inherent risk.

Investing in Bitcoin entails navigating uncharted territory, where volatility is the norm, and price fluctuations can be swift and severe. While traditional technology companies may have underlying assets and revenue streams, Bitcoin's valuation is driven largely by market sentiment and demand.

It's crucial for investors to recognize that Bitcoin's risk profile surpasses that of established technology companies. The absence of corporate fundamentals, coupled with its relatively short history, makes Bitcoin a speculative asset that demands careful consideration and risk management.

As with any investment, thorough research, a diversified portfolio, and a clear understanding of risk tolerance are essential when considering Bitcoin as part of an investment strategy. While some view it as a revolutionary force, others caution that its speculative nature requires a prudent approach in the ever-changing landscape of digital assets.

Figure 2: Graph of Bitcoin Price Development 2014–2023

From the graph of the Bitcoin price development, it is evident that it is highly volatile. It reached its peaks sometime in July 2021, with a price exceeding $64,000 per 1 BTC. By the end of 2022, the price had dropped to the level of $16,000 per BTC, and today (at the end of 2023), the price fluctuates around $43,000 per BTC. You can find the current price of Bitcoin and an interactive chart on the website https://finance.yahoo.com/quote/BTC-USD/chart?p=BTC-USD.

Supporters and Opponents

Bitcoin has garnered both fervent supporters and vocal opponents in the financial world. Some see it as a revolutionary form of currency, while others remain skeptical.

Warren Buffett and Charlie Munger

Renowned investors Warren Buffett and the late Charlie Munger (2023) have expressed reservations about Bitcoin. They argue that it lacks intrinsic value and is prone to extreme volatility, making it a speculative investment rather than a stable store of value.

Decentralization

One of Bitcoin's key features is decentralization. Unlike traditional currencies that are controlled by governments and central banks, Bitcoin operates on a peer-to-peer network. This decentralization reduces the risk of government interference, censorship, or manipulation of the currency.

Capped Supply and Divisibility

The statement that the amount of bitcoins is limited refers to the total supply cap defined in the Bitcoin protocol. There will only ever be 21 million bitcoins in existence, making it a finite and capped supply. This scarcity is often compared to precious metals like gold, contributing to Bitcoin's value proposition.

Each bitcoin is divisible into smaller units, and the smallest unit is called a satoshi. One bitcoin is equivalent to 100 million satoshis. This divisibility does not negate the limited supply; rather, it enhances the practicality of using Bitcoin for transactions of varying sizes.

Comparison to Fiat Currencies

Bitcoin's appeal extends to individuals seeking protection from devaluation and inflation of fiat currencies. With a fixed supply of 21 million coins, Bitcoin is designed to be deflationary, contrasting with the inflationary nature of many fiat currencies. This scarcity is attractive to those looking for a store of value and a potential hedge against economic uncertainties.

Advocates highlight its potential as a hedge against inflation and its borderless, digital nature. Critics, however, point to its price volatility, missing intrinsic value and regulatory uncertainties.

Comparison to Gold

Bitcoin is often likened to gold, and indeed, the symbolism goes beyond mere comparison; BTC is often visually represented with a golden hue. However, the analogy only goes skin-deep, as the differences between the two assets run deep.

Gold, with its intrinsic value and storied history as a form of real money for thousands of years, stands as a tangible asset with intrinsic worth. The precious metal has been a reliable store of value and a medium of exchange since ancient civilizations. Its appeal lies in its scarcity, durability, and the trust it has garnered over millennia.

Figure 3: Gold Nugget (source: Craiyon)

Bitcoin, while often dubbed digital gold, lacks the intrinsic value that physical commodities like gold or silver possess. While both assets share a limited supply, gold's intrinsic value is rooted in its various industrial applications, its use in jewelry, and its historical role as a monetary metal. Bitcoin, being a purely digital entity, relies on the perception of value within the cryptocurrency ecosystem.

Critics argue that Bitcoin's value is more susceptible to market sentiment and speculative dynamics, making it potentially more volatile and subject to sudden collapses. Unlike gold, which has stood the test of time, the relatively short history of Bitcoin introduces an element of uncertainty regarding its long-term stability.

Peter Schiff's Perspective

Economist, investor, and gold enthusiast Peter Schiff gained recognition for accurately forecasting the 2008 financial crisis. Schiff is known for his warnings about economic bubbles and the consequences of excessive debt. Drawing parallels between his past predictions and current economic trends, Schiff has expressed concerns about the potential for much larger crises due to soaring levels of global indebtedness.

While Schiff has a track record of anticipating economic downturns, he remains highly skeptical of Bitcoin, often referring to it as fool's gold. In his view, Bitcoin lacks the historical significance and tangible value that precious metals like gold possess. Schiff believes that the traditional safe-haven assets, particularly gold, offer a more reliable store of value and protection against economic uncertainties.

While opinions on Bitcoin vary widely, Peter Schiff's perspective adds a layer of historical context and economic forecasting to the ongoing debate surrounding the role of cryptocurrencies in an ever-evolving financial landscape.

Illicit Use and Tracking

While Bitcoin transactions are pseudonymous, meaning they are not directly tied to individuals, concerns about criminal use persist. Law enforcement agencies have developed tools to trace and analyze blockchain transactions, making it possible to identify those involved in illicit activities. However, privacy-focused cryptocurrencies also exist.

Regulatory Concerns

Bitcoin's regulatory status varies globally. Some countries embrace it, while others impose restrictions or outright bans. Regulatory uncertainties can impact the acceptance and use of Bitcoin in different regions, influencing its overall market dynamics. It is clear that Bitcoin regulation or even prohibition may influence its market price very negatively.

You Might Be Also Interested

• Cryptocurrencies: All You Need to Know;
• Investment vs Speculation;
• Investment Triangle Golden Rule;
• Stocks: Basics You Need to Know;
• Is Buying Stocks a Game of Chance?
• Gold as a Safe Haven: Navigating Turbulence;
• Price of Gold Surpassed the Historic Record from August 2020 (2023-12-04);
• Silver in Modern Society;
• Copper as a Barometer of the State of the Economy;
• Dividend: What It Is and How to Get Them;
• Inflation: How to Protect Against It.

Based on the original Czech article: Bitcoin: komplexní průvodce přední kryptoměnou.