“A Little Bit about Bitcoin” by Nadir Rahman
As El Salvador adopts Bitcoin, and Venezuela seems set to follow, Nadir Rahman provides an excellent summary of the Bitcoin journey to date.
Ask any adolescent or young adult what they would invest in and the majority may return the short answer: “Bitcoin”. With cryptocurrencies around the world gaining traction amongst investors and the general population alike, they are also gaining their fair share of criticism from all demographics. Whether it be parents who think of them as a passing craze (much like the waves of Yeezy’s that have graced the market with their pompous price tags) or seasoned investors who consider them a grave threat to the sophistication of their meticulously constructed portfolios, there is much debate as to whether cryptocurrencies are a viable currency going forward. But before going forward, let’s go back. Back to January 2009 in particular.
*It is also worth stating at this point that “Satoshi Nakamoto” is presumed to be a pseudonym for the person or people who developed the original bitcoin in 2008 and launched the network in 2009, but throughout this piece I’ve imagined them to be an individual*
Whilst the financial crisis caused by the collapse of the subprime mortgage lending raged on throughout economies worldwide, Satoshi Nakamoto was busy realising their dream of what they described as “a system for electronic transactions without relying on trust”. On the 3rd of January 2009, they mined the first 50 bitcoins and, with that, the first cryptocurrency came into existence. Nakamoto then sold 10 of these bitcoins in the first bitcoin transaction ever on the 12th of January that same month. Although things moved slowly, it is believed that Nakamoto had mined 1,000,000 bitcoins in the early stages of its existence, which would be worth nearly $50 billion today!
As the decade progressed, bitcoin grew in popularity; initially valued at $0.08 per coin at its launch, it was valued at $22 by bitcoin-based payment-processor Coinbase in February 2013. Whilst criticism grew from the likes of American economist Alan Greenspan who labelled it as “a bubble”, its value grew exponentially and, by the 17th of December 2017, had reached a new all-time high of $19,783.06. This, however, was not without its hiccups; bitcoin is known for its major fluctuations and there have been cases where bitcoin had lost a third of its value within a single day.
During the pandemic, Elon Musk and Tesla’s announcements of bitcoin investments and its acceptance as a payment method caused it to reach new peaks. In combination with Coinbase preparing to go public in the stock market in April 2021, bitcoin rose meteorically to an all-time high of $60,000 per coin before crashing down to half of this following the Chinese government’s new cryptocurrency regulations. Which brings us neatly to our next focus on why bitcoin has the negative reputation it does.
Firstly, its volatility as an asset is incredible as demonstrated by some of the figures above. Many investment advisors consider this too extreme to recommend bitcoin as a legitimate investment opportunity for the portfolios of their clients. Secondly, many governments and organisations across the world, such as the Financial Conduct Authority (FCA) of the UK, have explicitly expressed their inability to support the cryptocurrency and have warned investors of the risks caused by a lack of regulation.
In addition, the concern of many financial experts is that there is no tangible asset actually backing the currency. To explain this, commodities such as gold and oil are traded in the financial markets. Whilst their physical manifestations are not actually traded between investors (i.e. you don’t see gold bars or barrels of oil being hurled across the trading floor), investors know that there are actual resources that back the asset because gold and oil quite simply exist albeit in varying quantities. Hence they may feel more secure trading options, futures and other financial instruments linked to these commodities. The concern with bitcoin is that it has no physical form and its value is hence derived primarily from speculative interest, which concerns many and in particular more prudent investors.
Things may not be as gloomy for bitcoin as one may anticipate having read the above, though. In recent weeks, legislation has been developed to facilitate bitcoin as legal tender in the capital of Venezuela, El Salvador. Furthermore, the bulge bracket Goldman Sachs executed its first bitcoin derivative trades in May 2021 having set up a dedicated trading desk for this purpose.
With an understanding of bitcoin’s history and the concerns relating to it, we are now able to look forward and anticipate, to some extent, what its future may look like. It is very probable that cryptocurrencies in general will be with us into the foreseeable future. Whether they, and in particular bitcoin, are accepted as a legitimate means of transaction is yet to be seen, but with growing interest evidenced by the developments within countries such as Venezuela and financial institutions such as Goldman Sachs, there is the prospect that financial regulators such as the FCA will have to stop abstaining from the regulation of this unique means of transaction.
There are many possibilities surrounding bitcoin, but one thing is for certain; I should’ve sold my stake when the value of bitcoin was $60,000.
