Bitcoin: The Rise of a Decentralized Digital Currency
Bitcoin, the original cryptocurrency, was introduced in 2009 as an alternative to cash payments and an investment opportunity for those looking to avoid the banking system in the wake of the 2008 global financial collapse. While adoption was slow in the early years, its popularity has boomed in the last seven years. In March 2015, there were just over three million Bitcoin wallets; by November 2022, there were more than 85 million worldwide — an increase of nearly 30x.
Despite its popularity, Bitcoin can be a polarizing topic for financial experts and novices alike. Many still believe in the traditional legacy financial system of stocks and bonds, but Bitcoin has grown to a point where some professional athletes are taking multi-million-dollar contracts in Bitcoin instead of a check. In short, Bitcoin has become much more than its original intent in Satoshi’s 2008 whitepaper.
Bitcoin’s core value and most significant characteristic are that no person can control it independently. Because the rules of the original Bitcoin whitepaper written in 2008 cannot be edited, it is considered the most decentralized digital currency. Users and developers can propose changes but cannot force the nodes that run the software to adopt them. Also written into the Bitcoin code as a distinctive characteristic is a “hard cap” — or limit — on the number of Bitcoins that can ever exist, which is 21 million.
Bitcoin can also never be controlled by one single entity, unlike fiat currencies in developed countries where the government can control the amount distributed to the open market. This lends a tremendous “store of value” for Bitcoin, defined as “an asset, commodity, or currency that can be saved, retrieved and exchanged in the future without deteriorating in value.”
In underdeveloped countries, where currency volatility is higher than in developed economies, Bitcoin has a much more significant impact than a typical store of value. For example, Bitcoin is considered legal tender in El Salvador and the Central African Republic. Bitcoin’s unique decentralized nature could help preserve its value even in the future. Because of that core value, Bitcoin may become more utilized than a store of value in many different areas.
For the near future, Bitcoin will likely co-exist, as it has for years, with traditional financial systems to help offset the pain points of fiat currencies. While fiat currencies offer economic stability, growth potential and ubiquity in international trade, they are rife with issues. Fiat currencies are susceptible to inflation, reliant on government stability and have significant fees for withdrawals and transfers.
This is where Bitcoin offers an attractive alternative because no one entity can control its characteristics. At the same time, a double-edged sword exists: governments are more likely to intervene to suppress Bitcoin activity to support traditional financial markets and control the number of currencies in circulation. Since there is no central governing authority for Bitcoin, it is much more susceptible to the whims of financial regulators in some jurisdictions.
As Bitcoin continues to exist alongside traditional currencies and attempts to operate within the legacy financial system, it will be affected by market factors and competition. For example, the crypto winter of 2022 significantly impacted Bitcoin prices, as its value dropped 65% from November 2021 to September 2022. One of the disadvantages of Bitcoin, as opposed to more modern blockchain-based currencies, is its slower rate of technical growth and processing speeds. As the original cryptocurrency with such massive global usage, the system lacks scalability.
Another issue that Bitcoin faces is that competitors continue to expand their use cases. Ethereum continues to grow its impact beyond strict cryptocurrency transactions via its ability to enable smart contracts. Government regulation can also serve as a roadblock, slowing down speeds and limiting the reach of rapidly growing industries.
Governments are stuck in the middle of wanting to curb the illegal use of Bitcoin and other cryptocurrencies while not completely halting the growth of a lucrative industry that has positively impacted countless lives. Georgetown University professor Linda Jeng recently told the U.S. Senate Committee on Banking, Housing and Urban Affairs that a lack of a digital asset regulatory foundation puts American businesses, consumers and the economy as a whole at a “competitive disadvantage” relative to other nations. This is a problem that doesn’t only face the United States.
Despite its faults and the threat of regulation, Bitcoin remains as a worthy option for a potential investment. While the crypto winter caused many people to shy away, it’s not apparent that there is a direct correlation between the selloff and Bitcoin’s long-term viability. Rather, Bitcoin offers a trustless alternative to the moral hazard and eroding trust surrounding traditional banking.
Since its introduction in 2009, Bitcoin has produced fairly consistent profits for mid- to long-term investment. This shows little signs of changing. As investment in and popularity of decentralized technologies continues to grow, Bitcoin could continue to exceed the original scope and expectations outlined by Satoshi Nakamoto 15 years ago.
In conclusion, Bitcoin has become much more than its original intent. Its unique decentralized nature offers a tremendous “store of value” for individuals and institutions alike. While it faces competition and regulatory challenges, Bitcoin remains a worthy option for a potential investment. As with any investment, it is important to consult with a licensed professional for advice concerning your specific situation.