Bitcoin or the most popular cryptocurrency available today has been having a great bull-ish run in the recent past. Bitcoin crossed the long-awaited USD 20,000 threshold in December 2020. In fact, the Bitcoin value has almost increased 6x during 2020, despite the global COVID-19 pandemic still underway. With Bitcoin sitting at its highest value right now and has been climbing non-stop, it certainly seems like a good time to get into this cryptocurrency. Should you?

How Does Bitcoin Work?

Bitcoin is the first-ever purest digital currency created by an unknown person or a group of people back in 2009. The person/group of people was known as Satoshi Nakamoto. The currency is decentralized, meaning there is no owner or governing body for it, and is open-source, meaning anyone can participate in creating and trading this currency.

The first Bitcoin miner was Satoshi Nakamoto. Some analysts assume he has mined about 1 million Bitcoins before disappearing from the ‘action’ in 2010. His/their identity remains secret to-date.

Bitcoins are generated on its blockchain. A blockchain is a public ledger of cryptocurrency transactions. This list of transactions can be digitally traced back to the original Bitcoin mined by Satoshi himself. So, a blockchain grows exponentially as the cryptocurrency gets mined and traded more and more.

Bitcoins are created by a process called ‘mining.’ Mining is a process of record-keeping done on the blockchain. When a person or a group of people successfully contribute towards creating one block in the blockchain, they are rewarded with Bitcoins.

In essence, Bitcoins, and by extension, all other cryptocurrencies, are built on a platform of their own and supported by the same platform. There is little to none support from the physical world around us for cryptocurrencies.

Why is Bitcoin Worth So Much?

CoinDesk director Noelle Acheson says; “One of the most fascinating things about bitcoin is that it doesn’t conform to standard valuation techniques. There’s no cash flow to discount and no physical assets that back it up.”

She also adds; “Like gold, it is worth what someone else is willing to pay for it, and that is impacted by overall market sentiment, inflation expectations and technological trends. Unlike gold, though, bitcoin’s supply is not at all impacted by its price, which is one of the reasons it will always be more volatile: There will never be an increase of new supply to meet increased demand.”

The value of Bitcoin comes down to a culmination of few factors. First, perceived value by all the participants in the cryptocurrency. The value of Bitcoin largely relies on the demand and supply for the currency. Also, the fact that there is only a limited supply of Bitcoin and it is growingly difficult to create new Bitcoins, helps maintain and even increase this perceived value.

It is estimated that there will only be 21 million Bitcoins ever to be created, and every four years the number of Bitcoins rewarded/issued decreases by half. This restriction has created an artificial scarcity for Bitcoins. It is estimated that at current levels all of these 21 million Bitcoins will be mined by the year 2140. As of December 2020, there are approximately 18.58 million Bitcoins mined already.

This is somewhat similar to a commodity such as gold or diamonds. The rarity of the material has helped increase our perceived value of the material even though they have no real utility for human existence. The major contrasting feature between such a commodity and cryptocurrency is that the latter has no physical form.

Also, the fact that some retailers have started accepting Bitcoin and other cryptocurrencies as payments for real-world services, enables cryptocurrency to be integrated into the real-world around us. This, too, helps in enhancing its value.

In a world where the Internet goes down, cryptocurrency will lose all its value.

These are the same reasons why some traditional investors such as Warren Buffet has stayed away and even spoken against cryptocurrencies.

But, we humans have unique behaviors, and as long as there is demand, crypto values will go up.

Bitcoin Broke $20,000, Now What?

Estimating the price of Bitcoin is similar to a test in human psychology. There have been several peaks and drops in Bitcoin price in the market since its inception. A majority stares at them waiting for the BIG crash. But there have been many minor crashes–but never one so big to write Bitcoin off of investment portfolios. It is almost as if we have created digital gold.

In 2020, stock markets around the world were bleeding red due to the COVID-19 pandemic. This might have been one reason why some people pulled off their investments in companies and dumped them on cryptocurrency. Why? Because cryptocurrency is unaffected by the real-world around us. This rapid demand might have helped Bitcoin price rally up to a record-high.

Bitcoin still maybe a feasible investment in the long run. With its price breaking the $20,000 mark (sitting at $26,915 on December 29, 2020), it has already made headlines around the world. This does signal that there will be more interest in the cryptocurrency and consequently more demand for it. But as we mentioned above, the supply does not go up to match demand. In a free market, this only means that the price of the product goes up, which in this case is Bitcoin.

It might not be too late to get onboard the Bitcoin hype train still. But you might be better off looking for hints of this recent hype slowing down so that the price might go down a bit.

2021 is going to be, hopefully, a better year for stock markets around the world as pandemic fears lift off thanks to the few vaccines that are being tested out. So, in turn, there might be a new surge of interest in investing in shares rather than cryptocurrency. This, in turn, might impact its price to go down and might be a better time to get on the cryptocurrency train.

But you should always do your own research before making any form of investment, let alone something as volatile as cryptocurrency.

Let us know what you think about Bitcoin in 2020 and your expectations for 2021 in the comments below.