Magic Internet Money
What it is and why it matters.
The spotlight has been on bitcoin over the past few weeks. Turns out a 34% gain in a month will get people excited… Who would’ve thought?
Fun fact: You use a lowercase ‘b’ when talking about the actual coins, similar to how we use a lowercase ‘d’ when talking about dollars. When talking about the network we use a capital ‘B’. For example, you could say, “The Bitcoin blockchain.”
To learn more about blockchains, check this Investodpedia article out. Blockchains are decentralized public ledgers that are kind of like the accounting software behind cryptocurrency. You can see every Bitcoin transaction in real-time. You can check that out here.
Like Pavlov’s dogs salivating at the sound of a bell, bitcoin’s new all-time highs have retail investors running to learn more about this digital currency and they are plowing cash into it. Except this time it isn’t just retail. The institutions are here…, and so are a few governments. This is the euphoria the few bitcoiners who have been able to weather the severe volatility have been waiting for.
I’ve been following the crypto space since the summer of 2018. I was about 19 when I first became aware of the technology and ever since, it has always fascinated me.
What is a bitcoin?
So, after 2008 happened and the Great Financial Crisis, people became pretty keen on having some type of financial instrument that was not necessarily intermediated by big banks. Thus Bitcoin was created, by who, we still don’t know. The anonymous person or organization goes by Satoshi Nakamoto. The smallest increment of a bitcoin, .00000001, has been named after Satoshi. This is also referred to as a “Sat.” The community refers to buying bitcoin as “stacking sats” here and there.
In its simplest form, Bitcoin is a peer-to-peer electronic cash system. There is no need for any third parties when you transact in bitcoin. You have the freedom to send to whom you want, when you want, for whatever amount you want.
Bitcoin is mined with the help of computers that solve complex algorithms. When they have solved the algorithm, they are awarded bitcoin. The mining rate is cut in half every 4 years, making it increasingly harder to mine.
It is finite, only 21,000,000 can be in existence. Most of them are already in existence, there is only a little over 1,000,000 left to be mined.
You transact with bitcoin using digital wallets and it can be purchased through an exchange such as Coinbase or Gemini. You have the option to hold your bitcoin on a hot wallet, a wallet that is connected to your computer, or a cold wallet, a wallet with a key that has never existed digitally, only on paper. People who are looking for a more secure wallet will choose a cold wallet.
You don’t need a PhD in economics or finance to understand the value proposition… A finite supply with an increased demand can drive prices up. Some have made the comparison to gold, although true maximalists would be offended by this gesture.
As bitcoin enthusiast and billionaire Michael Saylor says, “Bitcoin is the hardest money in the world.”
Why does it matter?
As of recently, the idea of a Strategic US Bitcoin Reserve has sparked crypto-mania. If you’ve been in the space long enough, you’ve seen this before. Everyone wants a piece of it. Hell, even NFTs are making a comeback.
You know what they say right? “It’s not a bull market until a JPEG of a pixelated character sells for 7 figures.” Just kidding, no one ever said that.
So back to why it matters. A Strategic Bitcoin Reserve would, in the eyes of the crypto-community, bring an incredible amount of legitimacy to the asset class. However, the real Bitcoin maximalists don’t care. They are entirely indifferent as their belief in the technology is not reliant on an institution or government. However, I am sure they are not surprised about the current headlines.
Fundstrat’s Tom Lee even believes the asset could assist in the rising deficit. The basis for this is that the asset will continue to rise in price and negate the growing deficit, which has become increasingly discussed.
What does it mean for you?
Honestly, it might not mean anything to you and that’s totally fine. Gen Z seems to be much more tech-forward and accepting of the idea of a cryptocurrency.
If you are going to move forward with any digital assets, understand the amount of volatility you are going to assume.
Bitcoin has a long history of 50% drawdowns. Owning crypto sure does seem fun when it goes parabolic, but the drawdown from $69,000 to $16,000 in 2021 probably did not feel so great.
Learning how to transact and interact with cryptocurrency using a very nominal amount of money can be advantageous if you are curious. Sending crypto, converting fiat to crypto, and swapping one crypto for another using a few bucks can allow you to gain a much better understanding of what this magic internet money is all about.
*Please be aware that this is not a recommendation to buy, sell, or maintain positions in cryptocurrency. Sending, converting, and swapping cryptocurrency may be subject to taxation, please consult a tax professional for more details.*