Bitcoin Back in the Headlines: Decoding the Hype & Unveiling the Power of Blockchain
Why Now Is the Best Time To Start Understanding Bitcoin and Blockchain Technology
As I write this article the price of Bitcoin (BTC) hovers above the all-time high of $69k. The highest it’s ever been since its inception in 2009.
That’s why you see it everywhere at the moment. Mainstream news, Twitter feeds, randoms in cafes talking about it.…..even your Uber driver is telling you to ape in….
In investment land, the pundits say that once something hits the mainstream you’re too late to invest. But that’s not the case with Bitcoin. Whether you decide to invest in it, work in it or simply expand your awareness of it, everyone needs to understand the fundamentals of it.
And what better time to start doing that than right now, when the chances of BTC going to zero no longer pose a threat?
Why Is Bitcoin Back in Fashion Now?
Over the last month alone (Feb to March 2024) BTC has risen a whopping 50%. This is mostly driven by institutional demand for the Spot Bitcoin ETFs.
But what exactly is a Spot BTC ETF and why is it driving the price up?
A spot ETF, also known as an Exchange Traded Fund, trades like a stock and is backed by the asset whose price it’s designed to mirror. This means that every time someone buys a share in the spot Bitcoin ETF, actual BTC is bought and the practical effect is that BTC’s price goes up.
BTC is back in fashion now since the SEC removed investing limitations earlier this year and approved all spot BTC ETFs. This gave the go-ahead for institutions to start investing funds in BTC on behalf of their clients. It also indicates that the SEC no longer considers BTC to be a risky asset as it once did.
Why is the price going up?
Put simply, price is going up due to supply/demand dynamics playing out in the market.
There will only ever be a maximum of 21 million Bitcoins created. At present, approximately 1000 BTC are entering circulation per day, yet the ETFs are gobbling up approximately 10K BTC, hence demand is outpacing supply which is driving the price up.
Approving the spot BTC ETFs sends a message to the industry that BTC is no longer considered a risky asset or a ponzi scheme. Even the ‘bad for the environment’ narrative has died down. This means that institutions, pensions and sovereign wealth funds are all starting to warm up to the idea of Bitcoin.
But What Exactly Is Bitcoin and Its Underlying Blockchain Technology?
Essentially Bitcoin is an online software program that enables value to be transferred across the internet without the need for an intermediary. This software has a built-in currency — Bitcoin and value is transferred via the BTC Blockchain network.
Its core purpose is to allow seamless global transactions, permitting individuals to send and receive value across borders. Its significance lies in its revolutionary characteristic — operating without the necessity of intermediaries for trust.
How is this achieved?
- Imagine a public ledger: Not a dusty old book, but a digital record of all Bitcoin transactions, accessible to everyone. This is akin to blockchain, the backbone of Bitcoin’s magic. Think of it as a giant, transparent spreadsheet everyone can see, but no one can tamper with.
- Building trust without a bank: How do we know these transactions are legit? Enter Proof of Work, the security mechanism of the network. Imagine miners, like digital gold diggers, solving complex puzzles to earn the right to add new transactions to the blockchain. It’s like solving a million CAPTCHAs but with fancy math and rewards in Bitcoin.
- Mining for rewards: Each solved puzzle earns the miner a Bitcoin. This process verifies transactions, secures the network, and creates new Bitcoins at a controlled rate. Think of it as minting new money, but instead of a central bank, everyone with a computer can participate.
- No central control: No need for Banks or Bankers having control of your money. Everyone on the network has a copy of the blockchain, making it decentralized and resistant to manipulation. Imagine a democracy of money, where everyone has a say and no single entity controls the system.
Could Bitcoin replace money as a medium of exchange or will it simply be a store of value like Gold? Only time will tell. But once you begin to learn the fundamentals you begin to see its unlimited potential.
Why the Party Is Just Getting Started
After spending the last 5 years learning the ins and outs of Crypto I’ll never forget my lightbulb moment after hearing this quote by macroeconomist Raoul Pal:
“We’ve never been given the opportunity to own the infrastructure layer, and own it before the institutions…..we’re front-running the institutions, and it’s not like it’s some mass illusion or delusion, I know it because I speak to them all day, they’re all coming, all the investors are coming and we get the privilege for the first time in our lives to own this….”
This is the first time in history that retail investors (you and I) have access to a new asset class (Crypto) before VC firms and institutions do. Usually, you need to be an accredited investor and have a certain amount of capital to invest but that’s not the case with crypto. Anyone can go on an exchange and buy crypto with cash.
Even with the launch of Spot BTC ETFs by the likes of Blackrock and ARK Invest, we’re yet to see their full impact as it takes time for accredited investors to do their due diligence and begin offering it to their clients.
Can you now see how this party is just kicking off and how the price may still have a long way to go?
There’s another reason too….
The BTC Halving Takes Place in April’24
Bitcoin halving is a pre-programmed event within the Bitcoin network that cuts the reward given to miners in half roughly every four years. This directly impacts the supply of new bitcoins entering circulation.
Here’s a breakdown:
- Limited Supply: Only 21 million bitcoins will ever exist.
- Miner Rewards: Miners are incentivised to validate transactions and secure the network by receiving new bitcoins as a reward.
- Halving Effect: Currently, miners receive 6.25 BTC per block, but this will drop to 3.125 BTC after the next halving.
Since the reward will be halved, significantly fewer new bitcoins enter circulation. In theory, if less supply enters the market with the continued ETF demand this may lead to a supply shock, further increasing prices.
But don’t let Unit Bias catch you by surprise!
Unit bias is a cognitive bias whereby people favour owning whole units of something rather than fractions, even if the total value is the same and plays a significant role in hindering Bitcoin accumulation for some individuals.
People walk away from buying any amount of BTC due to ‘whole coin mentality’. Who has a spare $70k lying around anyway and what’s the point of buying a fraction of a Bitcoin (0.001 BTC)?
The high price per one whole Bitcoin might discourage people, making them hesitant to enter the market due to the perceived lack of “ownership” of a full unit.
How to overcome unit bias?
One Bitcoin is broken down into 100 million Satoshis (sats). Framing purchases in sats instead of whole Bitcoins makes smaller investments seem more appealing.
Adopt a strategy of regularly buying smaller amounts (e.g., weekly/monthly) to gradually accumulate sats over time. This approach emphasizes the “stacking sats” mentality, focusing on acquiring smaller fractions consistently.
Closing Thoughts
Whether you like it or not Bitcoin and Blockchain technology is here to stay.
It’s not going to zero nor is it going to disappear anytime soon.
You may believe it’s a good investment, you may want to trade it, or you may quit your day job and become a developer in it. Either way make it your mission to start understanding it now as one day, maybe sooner rather than later, it’s going to revolutionise the world we live in.
