Whether you’re a die-hard Bitcoin fan or you can’t stop screaming mania, it’s hard to ignore how monumental the Bitcoin surge has been. Bitcoin gained over 300% last year and has already increased over 10% this year.

Here are five hard-to-believe facts about Bitcoin and cryptocurrency that can be helpful for your own investment purposes, to impress your friends, or just to better understand what Bitcoin is and why it’s soaring.

Image source: Getty Images.

1. It is the third generation of currencies

People have always bought, sold and traded things, but currency is a very different concept. Currency is essentially a store of value. The earliest currencies had an intrinsic value that could range from yams in Chinua Achebes Things Fall Apart to precious metals. Under the mercantilist economic system, gold buying and trading became an obsession that sparked widespread colonization, imperialism, and war. A gold standard meant that money was tied to how much gold a country had, not to a nation’s wealth.

Adam Smith criticized this policy in his book The Wealth of Nations, published in 1776. One of his main arguments was that economies should grow based on incentives, productivity, technology and industrialization, not how much gold you have. The result was capitalism and the popularization of the fiat currency. Fiat currencies, like the US dollar, are easily transferable stores of value that are intended to represent the wealth of a country or a collection of countries, even though they are worthless in and of themselves. (And we should note that China found this out long before Smith, after introducing the fiat currency around AD 1000.)

Bitcoin is the third generation of currencies. It has no intrinsic value like gold or silver or a representative value like the US dollar. But it has limited supply, it’s hard to counterfeit, and it can be transferred without a third party. (That’s not to say it was successful as a currency – more on that later.)

Image source: Getty Images.

2. It has a clear purpose

Bitcoin was developed during the global financial crisis and opened to the public in early 2009. It is not known whether the crisis affected the development of Bitcoin. But context is key. The widespread distrust of banks and a crippled economy paved the way for new ideas. Cryptocurrency was a natural fit as it offered a way to conduct private transactions without going through a bank. Bitcoin was the first established cryptocurrency, combining the ease of a credit card with the privacy of cash, regardless of institution or government.

Bitcoin was designed for a clear purpose, the details of which are described in “Bitcoin: A Peer-to-Peer E-Cash System”, now commonly referred to as the “Bitcoin Whitepaper”. Released in 2008, it explained the shortcomings of existing currencies as well as the benefits of a decentralized peer-to-peer network that eliminated the need for a third-party provider such as a financial institution.

The problem and solution that the founders of Bitcoin identified can best be summed up by the following excerpt from the whitepaper: “What is needed is an electronic payment system based on cryptographic evidence instead of trust and it has two willing parties enables one to trade directly with one another without the need for a trusted third party. Transactions that are computationally impractical to undo would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. “

The takeaway here is that Bitcoin was not created to make money like a business. It was never intended as an investment. Rather, their purpose was to transform commerce itself by protecting consumers from corruption, be it by a government or an institution.

3. Mine isn’t always harder to break down

It is common knowledge that any consecutive bitcoin is harder to mine than the last. While this is generally true, there are many times that it is not. Just a few weeks ago, Bitcoin was easier to mine – that is, less computing power was required. The explanation is simple.

Leave me behind While bitcoins can be bought or received for goods or services, they are also found (mined) using computing power to solve a puzzle. These puzzles are random and require a lot of guesswork, so it is easier to solve them by increasing your computing power. But there is a catch. The puzzle will find it difficult to increase due to the total computing power used in the network. This is because the founders of Bitcoin wanted to limit the supply by ensuring that, on average, a block of Bitcoin is mined every 10 minutes. To counteract increasing computing power, the difficulty is adjusted every two weeks based on the average computing power of the previous period.

The bitcoin reward per block also decreases. In fact, it halves after all 210,000 blocks are mined. It started at 50 in 2009. And since May 11, 2020 it has been 6.25 coins per block. Despite a surge in computing power (the cost of mine) and puzzles that are literally trillions of times more difficult today than it was 10 years ago, Bitcoin’s price hike has helped keep mining profitable.

Mining will continue to be profitable as long as the cost of mining is less than the reward of mining. With demining now requires so much more computing power and electricity than it did before, investing in a mining rig only makes sense if you believe Bitcoin can stay above a certain price. It’s like drilling for oil. If the fixed and variable cost of drilling an oil well can result in a breakeven price of $ 50 a barrel and the price of oil is at $ 52 a barrel, it would be a bad idea to invest in this well, considering that They only make a 4% return and could actually lose money if oil prices fall.

With electricity costs of a conservative $ 0.07 per kWh, even the most sophisticated mining equipment can break even at around $ 7,070 Bitcoin. But her profit is only $ 17.70 per day on $ 30,000 bitcoin. With start-up costs of $ 3,000 per rig, it would take half a year to amortize your upfront costs. And that requires $ 30,000 bitcoin. Just like with oil, there is no point in mining Bitcoin – even with the best technology available – unless the price stays above a certain point.

A volatility chart is designed to illustrate the unstable price of Bitcoin.

Image source: Getty Images.

4. It failed as a currency, even though it succeeded as an investment

Bitcoin was a great investment, but a terrible currency. As mentioned earlier, fiat currencies like the US dollar cannot compete with the security or flexibility of Bitcoin. However, the rise in Bitcoin prices is having an impact similar to that of hyperinflation. Currencies should be stable. Recently, the value of the US dollar has declined less than 2% a year (known as inflation), which is offset by savings and wage increases. However, Bitcoin can never be stable if the price routinely increases or decreases by 1% in a day, let alone 5% or more in a day. Just last week, Bitcoin fell 13% on Tuesday and rose 7% on Wednesday. Imagine buying a car for 2,000 bitcoins in 2016 and then selling it for two bitcoins in 2021. Or try buying a gallon of milk for 0.0001 bitcoin. Volatility was Bitcoin’s fatal flaw as a currency.

It is difficult to know what percentage of Bitcoin transactions are from trading versus legitimate payments for goods and services. However, there is a good chance that its use as a currency will generally decrease with increasing volatility. This is because the volume of Bitcoin transactions (likely from trading) increases with volatility. As a result, transaction fees also increase. Bitcoin’s metrics for the first week of the year illustrate this relationship well.

Bitcoin price table

Bitcoin price data from YCharts

Bitcoin’s price rose above $ 40,000 for the first time in history, transactions topped $ 400,000 per day, and the average fee per transaction rose to over $ 12 by the end of the week. Bitcoin’s transaction fees can be $ 1 or less during periods of low volatility. So if you pay $ 12 for a transaction, it signals desperation. Again, the irony is that the “success” of Bitcoin as an investment counteracts its effectiveness as a currency.

5. Bitcoin’s biggest fan is its worst enemy

On Friday, January 15, the cumulative value of all bitcoin just behind it was $ 678 billion Alibaba Group and before Taiwan semiconductor manufacturing. If it were a company, it would have been the ninth most important company to be listed on a US stock exchange. We can verify this bill by taking the supply of roughly 18.6 million and multiplying it by the value of each coin, roughly $ 36,500.

Bitcoin’s rise in value is due in part to Wall Street interest. Jamie Dimon, the CEO of JPMorgan ChaseI assumed I was calling it a scam and thought it had benefits. PayPal and square have allowed their users to buy and sell cryptocurrency. And hedge fund managers are even launching cryptocurrency funds to get involved in the action. The irony is strong and painful – the very institutions and founders of Bitcoin who tried to avoid it are now its biggest fans. As mentioned earlier, increased trading creates volatility which increases transaction fees and makes Bitcoin an ineffective currency. Bitcoin could still be successful as an investment. But it has to be boring to be successful as a currency.