Bitcoin is “the father” of all cryptocurrencies, emerged from the first Blockchain created by Satoshi Nakamoto, and became extremely popular during the recent economic booms. Bitcoin price fluctuations are massively influencing the rest of the cryptocurrency market – and along with Ethereum is considered the most secure and reliable cryptocurrency due to the fact that it always recovers more aggressively than its last market cycle. People worldwide have adopted cryptocurrencies as a way of living or payment method for various reasons, such as protecting economies from hyperinflation (in vulnerable countries).
Furthermore, people chose cryptocurrencies to invest in developing products, and innovative envisions based on Blockchain technology. At the same time, many believe its value is not based on anything tangible and will not last over time.
How did the Bitcoin journey begin?
Satoshi Nakamoto, the mysterious person who has not revealed his true identity until now, mined the first Bitcoin block in January 2009, after a lot of hard work during the previous years – a period that overlapped with the tremendous economic decline we’re all aware of (the 2008 financial crisis). Rumors of the existence of cryptocurrencies have been around since 2008, paving the way to what would be one of the most revolutionary ideas of today. Bitcoin’s Blockchain is open-source and has its source code public and visible. The technology is meant to work independently, far from the financial regulators or manipulable financial markets.
More about the economic context during the last financial crisis
People’s confidence in the banking system significantly plummeted during the 2008 financial crisis, when Lehman Brothers declared bankruptcy in September 2008. After spectacular price increases due to significant leveraging events, acquiring 2004 five mortgage lenders, including BNC Mortgage, when loans were granted without proper risk management and limits. Miscalculations continued to show tremendous profits and growth, while the reality indicated a future collapse.
The public would have no way to imagine all of this because the banks’ transparency was missing – and the declared figures were made based on the calculations of some information to which only authorized personnel had access. The lack of transparency in today’s economy is still a problem for banks, mutual funds, institutional investors, and other financial institutions.
What are the reasons why Bitcoin was created?
The distribution of the informative guide related to the creation and use of the cryptocurrency – or the so-called Whitepaper – took place at the same time as the 2008 financial crisis, so besides the obvious reasons, it is considered that it can fight or avoid another recession.
The goal of the cryptocurrency market is transparency, as distributed ledgers are immutable and keep the information of every transaction public and visible (in a public Blockchain). The cryptocurrency system was created to give people alternative options when it comes to finances, so they don’t have to rely only on centralized ones. It is the first financial system where transactions are direct, without an intermediary, and where initially there was no leverage (later, where leverage was introduced, it became risky only to the detriment of the participant and its risk appetite).
Although it was not a reason in itself, Satoshi maybe did not know that a recession was coming when he started working on Bitcoin. It is believed that Blockchain technology can save the world from a potential recession. Given that the public ledgers are immutable, central banks would have a fair overview of the figures and reports of the general population or large investment firms. They would know precisely how the market liquidity is doing, and they could calculate possible risks in advance, to act appropriately.
Although the decentralized nature of this technology does not require verification of transactions, and it’s designed to avoid regulations from financial institutions, the fact that central banks would have such good visibility into the overall markets provides a lot of stability and security.
How can Bitcoin be a Store of Value if its price fluctuates?
However, Bitcoin remains a volatile asset that relies on the market’s support for its value, coin scarcity, the overall development of the Blockchain, and its utility, among other things. The fact that many precious financial assets are not based on something tangible (like gold, for example)should not surprise investors. Since the 1970s, the US American Dollar has been deepened from the Gold Standard, meaning that it became no longer dependent on gold’s value – but has remained the most important currency to date as the United States has continued to develop tremendously. Likewise, it was discovered that diamonds are actually “just carbon”, and the value of many markets can often be artificially inflated for many reasons.
For many, Bitcoin is still a Store of Value, an anti-inflationary asset, given that there can only be a limited number of coins in circulation, unlike US Dollars or other traditional fiat currencies – which governments can unlimitedly print, thus driving inflation as high as possible. Incidentally, once every four years, the block reward (that miners receive for confirming transactions and including them in the next block) is reduced to half – leaving a significant amount in circulation but limiting the future issuance, so coins become more valuable as time passes.
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