Bitcoin 102: Answering Questions You Might Have

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Bitcoin 102: Answering Questions You Might Have

The world of crypto-currency is a fascinating one. The topic is often more or less a headline depending on the price of Bitcoin. If you don’t know what crypto currency is, I’ll try to give you an overview. I did this a few years ago in an episode titled, “Bitcoin 101,” but in light of Bitcoin’s price recently setting a new high, I thought it was time to revisit the topic by answering a few questions you may be asking about Bitcoin.

What is bitcoin?  Every day, you and I decide where we are going to put our money. We do this by deciding what assets we are going to hold. We put assets in the bank in the form of dollars, but we also put it in houses, cars, smaller possessions, and maybe even gold or silver. Some of these assets will depreciate in value, while others will hold their value. A place that some people are storing their assets now is in cryptocurrency. And whether it will hold its value in the future remains to be seen.

Cryptocurrency is a digital asset. Much like a baseball card, or a work of art, its price is determined by the demand for that digital asset. If lots of people want to own it, the price generally goes up. If very few people care anything about it, the price goes down. So I could, theoretically create my own cryptocurrency. I could ask a programmer to write computer code to give that cryptocurrency rules under which to operate, and I could offer it to the public. Now, no one would buy it, but I could still spend a lot of money to create one. 

How is Bitcoin accounted for? The way you track how much of a digital asset that you own is not like tracking how much is in your checking account. When you want to know how much is in your checking account, you look to a custodian who is holding your funds on your behalf. This is generally a bank. Banks are centralized custodians that track the value of your assets and validate that value. Technology has evolved to the point where we can now eliminate the need for a custodian if you are holding digital assets. The internet enables the concept of a shared ledger to validate ownership. Here is an overly simplified explanation – but it’s like there’s one massive Excel spreadsheet that everyone in the world has the ability to see. Everyone is singing from the same sheet of music – everyone sees the ledger and agrees that it is accurate. If any changes are being made to the ledger, in other words, if I want to make any transfers of my cryptocurrency to someone else, there are members of the public called miners who are incentivized to validate that the transfer is legitimate, and they are paid in the form of that cryptocurrency for doing that. They then update the ledger. But this ledger is bigger than an excel spreadsheet. It’s actually a chain of transactions that show every transfer since the beginning of that cryptocurrency. You might have heard this referred to as block chain. Theoretically, the block chain could last into infinity, adding more and more links to the chain as transactions are performed.  You have to have extremely high powered and unbelievably expensive computers to perform complex mathematical equations in order to add transactions to the blockchain – so not just anyone can do it. It requires a huge investment. So in essence, a cryptocurrency is decentralized, rather than centralized, because it doesn’t rely on one party to validate its value and to make its transfers.  It removes a bank from being the central source of truth to validate how much many you have.

What makes Bitcoin different from other cryptocurrencies? There is a limited supply. The way the code was written for Bitcoin, the total number of Bitcoin that could be mined was 21 million Bitcoin. Most other cryptocurrencies have an unlimited amount that can be created. Bitcoin enthusiasts claim that the limited supply of Bitcoin is the reason it is going to increase in the future. Unlike gold or silver, which can be mined in increased supply when the price goes up, Bitcoin can only be mined until it reaches the cap of 21 million.

Why has Bitcoin been going up recently? There may be many reasons, but I’ll share a few potential ones. Bitcoin ownership has become easier through the approval of Bitcoin ETF’s. There are custodians who are buying Bitcoin, and then offering ownership of that Bitcoin through Exchange Traded Funds. This creates more demand for Bitcoin and more availability for it as well. A second reason is that the mining of Bitcoin is slowing. The incentive of Bitcoin that miners are given is about to be cut in half. Because the incentive for mining Bitcoin is going down, the supply growth will begin to slow. This next halving of the incentive will likely take place in April. Because of this slowing of supply creation, it is not expected that the cap of 21 million Bitcoin will be reached until 2140 – so none of us will see it.

What has the price done in the past? It’s been everywhere. In 2015 it was worth a little over $300 per Bitcoin. It got as high as $20,000 in 2017 and then went all the way back down in the $3,000 range. That’s a move downward of 85%. Unbelievable. In 2021 it set a new high at $60,000 before dropping back to the $16,000 range when other Cryptocurrencies were imploding and disappearing. It recently set a new high of over $70,000, but as of today sits at $62,000. Volatile is an understatement.

Is there anything that could go wrong with Bitcoin? There are a few things, but I’ll share one in today’s episode and it’s quite simple – people no longer want to own it. Unlike a currency, whose value is backed by a government, Bitcoin’s value is completely dependent on the demand of the global public to buy it. As such, it is highly speculative. If that demand is high and remains high, the value will continue to go up over time. But if people decide there are better places to put their money, better stores of value that they want to hold, and the demand craters, it could end up being worthless.

Will Bitcoin be worth more in the future? No one can answer that question with certainty. That’s why we call this highly speculative. What we do know is that the world of technology continues to shape the way we do life. Could Bitcoin be a new asset we integrate into everyday life? It’s certainly possible. Or will it be a flash in the pan and we joke about all the people who drank the Kool-Aid a decade from now. This is also possible. It feels like the early days of the .com era. There was a ton of speculation around tech companies that were going to change the world back in 1998, 1999 and 2000. Most of those companies ended up being worthless. But there were some that really did change the way we do life: Apple, Google, and Facebook being just a few examples. I believe that some form of cryptocurrency will come alongside the other assets we hold as a legitimate store of value in the future. But whether that cryptocurrency is Bitcoin or one that has yet to be invented remains to be seen.

Have you appreciated the insights that we share on this Podcast? Insight for our clients is one of our stated goals at MBC and Foundation Bank. We want to offer you more than a loan, more than a checking account. We want to offer you financial insight to help you make better financial decisions, and we can do that on a one-on-one basis for those who do business with us. Explore our website and start a conversation with us today. We hope you’ll subscribe to this podcast in your favorite podcast app and share it on social media. To be clear, this episode is not a recommendation that you should buy Bitcoin. As always, please consult your own personal advisor for individual advice. Until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on March 19, 2024. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.