Perhaps it should come as no surprise that the digital revolution is now disrupting the monopoly power of central banks and nation-states. Bitcoin, in its short history, has been in the vanguard of this disruption.

A Wild Ride

In 2009, Satoshi Nakamoto (may not be his real name) launched bitcoin, the first peer-to-peer, decentralized digital currency system.

Bitcoin had zero value when it was first introduced and trading was limited to very early adopters. In 2010, when more formalized trading began, it ended that year with a value of just $0.28. Its value grew to over $60,000 in 2021.¹

The path bitcoin’s price has traveled over this time period has not been a smooth one. Amid its climb, there have been a number of nausea-inducing falls, including a 68% decline over a five-day period in June 2011; a 51% implosion over three days in August 2012; and a 61% crash in one day in April 2013.²

The Properties of Digital Currency

Digital currency is generally defined by meeting six conditions:

1. The system does not require a central authority and is maintained through a distributed ledger system—the same technology used in blockchain.
2. Ownership is tracked by the system.
3. New coins may only be created if the cryptocurrency system permits and, if new coins can be created, then the system defines the nature of their origin and determines the ownership of these newly-created coins.
4. Proof of ownership is proved only cryptographically.
5. All transactions must occur within the system and a transaction statement can only be issued by an entity that can prove current ownership.
6. If multiple instructions are received regarding a change in ownership, the system will perform only one of them.

Why Bitcoin Has Value

Bitcoin has no intrinsic value, like gold or silver. Instead, its value stems from the simple fact that people believe it has value—perhaps not much different than the U.S. dollar.

That said, there are a number of characteristics that support its value, including:

• A limited supply. No more than 21 million bitcoins will ever be produced. This scarcity contributes to its value.
• It cannot be copied, protecting it against counterfeiting.
• It is easily transportable. Moving it from one exchange or wallet to another is much easier than moving paper money or gold.
• It is easily transferable. Gold, or even paper currency, cannot fly so easily around the world to make payments to suppliers, family or cyber-criminals.
• Its blockchain technology makes cryptocurrency especially valuable in laying the groundwork for a revolution in how contracts are enforced, how property is transferred and how identities are verified.

In just a little over a decade, Bitcoin has launched the cryptocurrency landscape into one that is commonly referenced. It will be interesting to watch how it evolves on an ongoing basis in the years to come.

Sources:

1. https://knoema.com/infographics/nmyfsf/bitcoin-price-from-2009-to-2021
2. https://www.forbes.com/sites/timothylee/2013/04/11/an-illustrated-history-of-bitcoin-crashes/#5fd2e26e4039

Please reference disclosures: https://blog-dev.americanportfolios.com/disclosures/