This may not be how Bitcoin was meant to be used, but that doesn’t change the fact that this is how investors see it now.
In early 2011, the then-obscure cryptocurrency Bitcoin (CRYPTO:BTC) hit $1 per coin for the first time. It was a milestone celebrated by the few crypto enthusiasts at the time. This may interest you: Shiba Inu Coin: Opinion and technical analysis of the crypto SHIB and its current price. The rest of the world was either oblivious or left confused as to what Bitcoin even was.
Everyone has heard of Bitcoin by now. As of this writing, the price per coin is over $57,000, representing a total market capitalization of nearly $1.1 trillion, according to CoinMarketCap. Therefore, owning 100 bitcoins – an investment of just $100 at the start of 2011 – would be worth $5.7 million today.
Of course, this hypothetical bargain ignores a very important point: you probably couldn’t have invested $100 in Bitcoin at the time. At least not as easily as today. Here’s why, why it matters, and what it could mean for the price of Bitcoin in the future.
Why it was hard to buy Bitcoin in 2011
Bitcoin was created in 2009. Related: Odet opinion: The company still has a long way to go before becoming a multi-baggage company.. If you want to own bitcoin today, you can simply deposit money into an app like Coinbase, Square, or Robinhood and click “buy.” But in the beginning, there were no reliable third-party methods to exchange dollars for coins.
Bitcoin Market was an early attempt at a cryptocurrency exchange. He used PayPal as a way to exchange money, but PayPal eventually stopped allowing Bitcoin Market transactions due to allegations of fraud.
The bitcoin market and other early exchanges were unreliable, making it difficult to invest $100 in bitcoin in 2011. Chances are, if you owned bitcoin in the beginning, you got it by mining it yourself. Either that or you were a restaurant in Jacksonville, Florida where a customer bought two pizzas for 10,000 bitcoins in 2010.
Bitcoin was not meant to be an investment
The early struggle to convert dollars to bitcoin reminds us that bitcoin was not necessarily designed as something to invest in, hoping its value would rise. Bitcoin was designed to be a digital currency used to buy and sell goods and services. See also: Is Shiba Inu (SHIB) a good cryptocurrency investment? We tell you everything!. We can joke that these two pizzas cost $500 million at today’s prices, but buying pizza was, in fact, precisely how Bitcoin was meant to be used.
Although Bitcoin was designed to serve as a currency, critics point out that Bitcoin would struggle to handle the financial transactions of the world. Consider that there are relatively few transactions on Bitcoin’s blockchain compared to the global financial system. With its current infrastructure, Bitcoin is prone to bog down and as a result, transaction fees soar to outrageous heights from time to time.
Bitcoin transactions per day given by YCharts
Bitcoin is due for an upgrade called Taproot, which should help alleviate its scalability bottleneck. But I think the most important point is that Bitcoin is not being used as intended. People don’t buy and sell with bitcoin as much as they hold bitcoin.
For example, consider the societys cryptocurrency mining. Two of the biggest are Marathon Digital Holdings and Riot Blockchain. Marathon Digital and Riot Blockchain have mined 2,098 and 2,457 bitcoins, respectively, so far in 2021. Neither company has sold any, meaning Marathon Digital now has 7,035 coins while Riot Blockchain has 3,534.
Many investors do the exact same thing. They buy bitcoins and hold them, expecting them to increase in value over time.
What this means for Bitcoin prices
For me, a conversation about cryptocurrency always comes down to supply and demand. Think of mining as the process of unlocking new bitcoins and releasing them into the global supply. However, as the miners mostly hold, the supply available for trade does not increase as it would otherwise. And investors are holding bitcoins instead of spending them, which has the same effect of reducing bitcoin’s float.
Consequently, the supply of Bitcoin is tightening but the demand seems to be increasing. This demand isn’t just coming from investors – global businesses and governments are also buyers. MicroStrategy is a business intelligence software company that holds over 100,000 bitcoins. But companies like MercadoLibre, the Latin American e-commerce and payments giant, have also been quietly adding bitcoin to the balance sheet in recent months.
El Salvador, meanwhile, recently made bitcoin legal tender alongside the US dollar. But to effect this monumental change, the central government of El Salvador purchased bitcoins. By holding Bitcoin, he hopes to reduce the volatility of the coin for local traders. Brazil’s legislature is expected to hold a vote to make Bitcoin legal tender as well. Like El Salvador, would Brazil buy and hold bitcoins to reduce volatility risks for businesses? Time will tell us.
In short, Bitcoin is largely held rather than spent, which limits supply. Meanwhile, demand from investors, businesses and governments is growing. If this continues, it will come as no surprise to see the price of Bitcoin rise in 2021 and beyond.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.