CapX does not offer investment advice. This article is for information only. You are not guaranteed to make money from buying cryptocurrency and you may lose your entire investment.
It is now almost 15 years since Satoshi Nakamoto announced his new invention, bitcoin, to the world. Since then, it has grown and grown. Following the election of Donald Trump as US President, its price soared by 40%, approaching $100,000 a bitcoin, reflecting Trump’s promises on the campaign trail, which include creating a national bitcoin reserve.
Like most things online, bitcoin has divided people. The admirers and detractors argue with as much vitriol as the political Left and Right. But the admirers have won: if bitcoin was going to die, it would have died by now. It hasn’t. It’s thriving. It has more than 100 million users and its market cap is roughly $1.5 trillion. If it was a company, it would be one of the ten most valuable companies in the world today: incredible for an open-source project that began from nothing.
So what is bitcoin?
It is a new system of digital money for the internet. You might call it cash for the internet.
Unlike pounds or dollars, this money is not issued by a government. Instead, it is issued by an international network of computers, according to a transparent, open-source protocol. There is no government involvement in bitcoin. It is apolitical money.
Its value is determined by the market: what people are prepared to buy it for.
Then people demand to know how it works. Fine. You explain the blockchain, decentralised ledgers, the problem of double spending, Byzantine generals, mining and all the rest of it, and a glazed look comes into their eyes. They go away shaking their heads and decide they don’t understand it.
Most people don’t know how the combustion engine works. They still use cars and buses. Most people don’t know how hypertext transfer protocol works. They still use the World Wide Web. Most people don’t understand what simple mail transfer protocol is. They still send and receive emails.
Almost everybody, including the Governor of the Bank of England, does not understand how our modern system of money, banking and credit works. I struggle to find a single politician who can explain how money is created. We all still use money. You do not need to understand how it works in order to use it. All you have to understand is that it does work.
To give you an idea just how robust bitcoin is, the network is more powerful than the world’s top 500 supercomputers combined.
The technological superiority of bitcoin
One thing that distinguishes this apolitical money from pounds or dollars or euros – money issued by government – is that there is a finite supply: 21m coins. Governments cannot tinker with bitcoin’s money supply with political objectives in mind and create more of it.
A finite and limited supply means bitcoin’s value is likely to increase, unlike the purchasing power of government money, which decreases as more and more of it gets created. (If you dispute this, ask yourself what a pound buys you today compared to ten, twenty or fifty years ago.)
Each coin is divisible to eight decimal places. The smallest denomination is the satoshi or sat. There are thus 100 million satoshis to a bitcoin. A penny is currently around 17 sats. This means you can send micropayments which amount to 1/17th of one penny. Try getting a bank to process a payment of that size.
Micropayments open up so many possibilities for economic growth.
Imagine if, instead of getting a like for your YouTube video or Twitter post, you got a sat. A meaningless amount to the person paying it. But a million sats instead of a million likes would be over £600. Not bad. Micropayments will dramatically enable the internet of things. It is a huge growth area.
The internet is, broadly speaking, a borderless medium. I can communicate with pretty much anyone in the world instantaneously, as long as they have an internet connection. But if I want to cross borders in the real world, this is a time-consuming process, requiring visas and passports and security checks and all the rest of it. If I want to send money to other parts of the world, this too can be a burdensome process, requiring forms, forex conversion, customs declarations, money laundering enquiries and goodness knows what else. If I wanted to send a payment to someone else in the world of 10p, it is just impossible. This limits the possibilities of government money.
Government currencies are limited by national borders, by population and economic size. Even the US dollar, which is the reserve currency of the world, is limited. Try opening a US dollar account outside of the US. It is problematic. If you are living in remote, rural Africa or Asia, it is well-nigh impossible. It is hard enough getting a bank account in your own currency. But with bitcoin, you can send to anyone, anywhere, whether huge value transactions or tiny value transactions, and the transfer is frictionless and almost instantaneous.
Technically, bitcoin is a superior form of money to government currency. It is backed, as I say, by a rigorous and powerful computing system and not by the whims of central bankers and politicians, who have other agendas in mind than maintaining the soundness of money (their careers not least).
So we are talking about a technically superior form of money, the purchasing power of which is likely to increase rather than decrease, and which has far greater scalability. Why use something like the pound as a savings vehicle, then? It has lost a fifth of its value to inflation just since 2020.
With the potential of bitcoin to become the default medium of exchange on the internet and in the internet of things, and with its potential for it also to become the default savings vehicle of the internet – both for individuals and for corporations, and even nations (if the US goes down the strategic bitcoin reserve route) – the potential of bitcoin is simply immense. Why would you not want to have some exposure to something with such extraordinary potential?
For me, the risk is not owning bitcoin.
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