Bitcoin (BTC), nowadays famously known as an easy way to become quick rich, is a Peer to peer (P2P)cryptocurrency that was introduced in 2009 to achieve a decentralized system of transacting across the globe. The Decentralized system, herein, refers to the system wherein there is no involvement of any regulatory body to transfer money and look after the transactions going on, how much money is being spent by whom, where the money is going, etc.
How it works
The block-chain is the concept underlying wherein a universal decentralized ledger is maintained that records all the transactions through various blocks connected in a chain.
Just to illustrate how it works, If Payer A sends few bitcoins to B, this transaction is broadcasted to the entire ledger which is to be recorded in it, and miners solve complex mathematical computations to feed this transaction in their respective ledgers and broadcast the same universally to be verified.
When a number of miners successfully record verified transactions, a block is created connected to other blocks similarly made, forming a chain of all the transactions. In an hour, approximately 6 such blocks are created of numerous transactions and Bitcoins are awarded to the respective block as a reward for recording, and corresponding block miners distribute the subsequent reward of the block among themselves.
Recent Price Rising in Bitcoin
Price of a security in an open market system rises when demand for the security exceeds supply and buyers are willing to pay higher prices for the same.
In the last year, Bitcoin has grown from $1,000 to $14,000 per BTC, which translates to an annualized return of 1300%.
Following are the key reasons for bitcoin’s price rise in the last year
Limited Supply: Bitcoin is supposed to have a supply of 21 million in number which is being released at a rate of 12.5 per 10 minutes for the time being and is expected to last till The Year 2140. Keeping this in mind, most of the price rise is driven on the basis of demand of this golden egg laying goose.
Hoarding and Speculation: Most of the investors who have accumulated bitcoins over a period of time aren’t willing to sell and speculating a higher price for the same which in turn is restricting supply
Herd Behaviour: Today, everyone wants to own a share of this pie because someone they know has made a fortune by investing in Bitcoins, leading BTC up, up and up. In economics, we call this “bandwagon effect”
Future of Bitcoin as a medium of exchange
Bitcoin as a concept is a means to an end, i.e., unregulated transactional medium. A currency’s acceptance to be valid is derived by the quantum of its acceptance as a medium of exchange. Even after The Year 2140, which is supposed to be the time when all the bitcoins will be out there in the market, Bitcoin can be accepted as an official intra-globe medium of exchange without a regulatory framework, if it fulfils two main structural requirements:
Distribution of Bitcoins: If the majority of bitcoins are to be held with a limited number of people (say 10,000 worldwide only), it narrows down the reach of transaction reducing the utility of the currency. It has to be held by a large number of people willing to transact in the same. (Barter System 101)
Transaction Costs: Currently, miners get block rewards in the lieu of carrying out transactions which are to stop once all bitcoins come out on the open market. If a system of rewarding miners with some form of transaction charges comes out which is lower than official transaction charges offered by currency exchanges, it can sail pretty well.
Just like Gold, Bitcoin is a currency with limited supply, only digital, after the big day (The Year 2140), when all the bitcoins will be in circulation, prices can be expected to stabilize over a period of time unless further bitcoins are discovered or some of the available are demolished/lost.
Bitcoins, unlike currencies, aren’t subjected to fluctuate as currencies move by the pressure of deficit of the corresponding country, while Bitcoin being a global currency isn’t dependent upon anything but transaction, thus capital gains are supposed to stop, and Bitcoin will be treated just as a stabilized currency for a transaction to take place.
For example, If a buyer in the US wants to import Tea from India, and seller agrees to a payment in Bitcoin, the price point to settle for the Bitcoin, is going to be stabilized price of bitcoins in the market and payment can be made accordingly in BTCs
However, for this to happen, Bitcoin has to crash first to come to a level at which transaction costs (as %age of BTC), to be paid to the miners for their services, become bearable.