Bitcoin: Like it or not…

It is one of the most controversial topics (if not the topic) of recent decades when it comes to investing. Some love it, some hate it.

But the fact is that Bitcoin can no longer be ignored.

If you don’t have a property opinion, I’ll help you create one today! I’ll try to be as impartial as possible, I promise.

At the end of this text, I want you to just answer this question: what do you think about bitcoin?

To begin with, let’s start with the basics, because some people may not know.

What is Bitcoin?

Bitcoin is the first coin to be created in some way 100% digital and decentralized.

It was created – that is, presented to the world – during the 2008 crisis that took place in the USA with global consequences.

If you don’t remember or have never delved deeper into this crisis, here’s a movie suggestion for the weekend: “The Big Bet.” The film explains in a clear and relaxed way what happened on that occasion!

The date BTC was created is extremely relevant, because the practices and issues surrounding such a crisis and mitigating (or compensating for) some of the issues are fundamental to how bitcoin works.

I explain.

At the time (and giving a small spoiler of the movie), there was a big crisis, in which several banks that were extremely indebted went bankrupt due to bad market practices.

The US central bank injected about 675 billion dollars to save some of the country’s leading banks from bankruptcy. If not, an even stronger crisis could follow in the US.

“But what does that have to do with Bitcoin?”

All. Bitcoin was created to be a decentralized currency, that is, without the interference of any central bank in the way it is issued!

Bitcoin economic features

Issuance of bitcoins is pre-programmed, decreasing over time with a maximum to be reached.

Translated into numbers: the largest number of bitcoins that will be in circulation, in all history, will be 21 million BTC.

It is worth remembering that bitcoin is 100% digital, so all these features are written in the program code and are immutable! It will be like this forever, and if it has more than 21 million, it is not original BTC, but fake.

The process of issuing bitcoins takes place through the validation of blocks of bitcoin transactions. Roughly speaking, a few people, with computers all over the planet, can download a program to their computer and try to confirm blocks of transactions by solving very complex equations.

Those who succeed register a block of transactions in a chain of pre-confirmed blocks called the Blockchain. This process takes about 10 minutes.

The computer that succeeds in doing so receives the reward of that block, which is new bitcoins, created precisely to fulfill this rewarding function.

Bitcoins are issued as a way of rewarding those people who use computers to confirm transactions.

So there is predictability in issuing.

Initially, in 2009, 50 bitcoins were issued for each block of transactions that was registered on the bitcoin blockchain.

This number is programmed to decrease by half for every 210,000 confirmed blocks. As the block time of bitcoin is about 10 minutes, it is about 4 years.

As you can see in the chart below, May 2020 saw the third cut in bitcoin issuance.

This event is known as halving. Currently, for each block validated and inserted into the blockchain, 6.25 new bitcoins are issued and attributed to those who have performed the validation.

Source: TradingView

With these characteristics, bitcoin becomes a disinflationary asset, i.e. its inflation is falling, predictable and known over time!

Usefulness and adoption

Let’s leave the economics of bitcoin for a bit and get down to the nitty-gritty utilityBTC is a currency that can transactions on a global scale without direct state intervention in its validity. That is, it is an alternative to the traditional system that can provide great value to its users. The transaction fee ignores geographic issues. It doesn’t matter if you’re sending it to a neighbor or a friend in Japan.

In addition, bitcoin provides its users pseudo-anonymity, this is, each person can have as many addresses as they want on the bitcoin blockchain. You can store, send and/or receive bitcoins at this address. But Your name will not be associated with any of these addresses. It’s a set of numbers and letters called a public key, which is your “identity” on the blockchain.

Despite sounding dangerous, everything that happens on the blockchain is transparent and can be verified at any time. There are no exposed names, but everything is verifiable with addresses!

Bitcoin is not so good for instant transactions, at least not in the way it was designed. On the bitcoin blockchain, each transaction takes 10 minutes to be confirmed and irreversibly recorded. It’s time to confirm the block.

However, there are several efforts and technologies that attempt to make BTC transactions instantaneous, such as the Lightning Network, a parallel network to bitcoin that manages to create payment channels between people to generate instant and cheaper BTC transactions.

This technology is widely used, especially in El Salvador, the first country to accept Bitcoin as legal tender, as an alternative for international remittances and as a tool to democratize access to the financial system, given that it is a highly casual banking system and dependent on remittances from the USA.

Apart from El Salvador, today we already have 2 other countries with bitcoin as a legal tender: the Central African Republic and Panama.

However, despite so many interesting and positive features, bitcoin is still a very controversial topic. Let’s understand why.

Bitcoin and its controversies

The main point against bitcoin to date is its volatility. Being a thinly capitalized asset compared to other currencies, precious metals and mediums of exchange in general, and being much younger and speculative in nature, bitcoin is highly volatile.

Faced with these fluctuations, the possibility of using it as a means of exchange is very questionable.

In addition, following the line of thinking that it is not an asset that has been in circulation for a long time, and because it is something completely new, many countries still do not have very clear regulations on how to make a profit in Bitcoin, or how much one can use it as an asset exchange or means of payment such currency.

Finally, we can mention another, deeper questioning of the real decentralization of Bitcoin, mainly through the asset validation process: the so-called mining.

As we explained earlier, this process is performed by computers. In the beginning, any computer could mine bitcoin. However, the weight of the equation is adjusted every 2016 confirmed blocks (about 2 weeks), so you don’t have too much difference in computing power on the network.

With the passage of time and the evolution of mining, computers appeared specifically for this activity and became more and more expensive. As a result, mining became increasingly finicky, for those who had a lot of money to build a repository with several of these machines, called ASICs. This is the scenario we live in today, with some mining pools dominating a large portion of mined blocks.

In the image above we see a bitcoin mining farm with several ASICs running simultaneously.

Briefly

Bitcoin is a purely digital, disinflationary, low-friction currency for international transactions, which, however, is still very thinly capitalized and experiences high volatility, which greatly affects its acceptance and market outlook.

With these points in mind, I ask you: What is your opinion on bitcoin?

I hope I’ve presented this tool in an unbiased and detailed enough way to help you form your own opinion!

In case you’re interested, I want to point out that bitcoin was just the first of the cryptoassets and introduced blockchain to so many other assets and so many uses.

Hug,

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