Understanding The Underlying Economics of Bitcoin

Beginner’s Guide / 07.12.2020

Out of the existing 7000+ cryptocurrencies, Bitcoin stands as the dominant coin in the market. The peer-to-peer digital currency is the first crypto coin to be introduced in 2008 and has grown to be the most profitable virtual currency today. 

Despite the rush to invest and earn some Bitcoin (BTC), most users still don’t understand bitcoin basics. Perhaps users may not find it important as they are on board for profits, but with fewer insights, chances are you might make the wrong decisions in the future that will directly affect your earnings. 

Numerous operations happen in between from the initial stages of mining to the last stages of consumption. This guide takes us through some of the basic economics that ensures Bitcoin remains valuable and sustainable. 

Bitcoin Mining

After the coin’s launch, Satoshi Nakamoto, the anonymous Bitcoin creator, came up with a genius approach to produce bitcoins. The P2P platform utilizes the Proof of Work consensus as to its mining technique. We can view miners as part of the governance team since they safeguard the platform from attacks and suggest various network implements. 

However, becoming a miner is something you need to plan for because it is quite expensive and runs on super costly hardware. Proof of Work mechanisms occurs when verifying transactions on the blockchain network. 

To complete transaction operations, miners have to solve complex algorithms as the block difficulty changes after the 2016 blocks. After that, miners receive rewards for taking part in the verification process, making it the perfect place to secure a passive income. 

During its first days after the launch, the block rewards were 50BTC, split into the half after 210,000 blocks(roughly after four years). Hence, the current block reward now is at 6.25 coins per block at the time of writing. Moreover, generating a block takes close to ten minutes while creating 144 blocks daily. 

Price Volatility

Through everyone’s participation in the Bitcoin network, the community itself controls the coin’s distribution globally. The platform plans to roll out exactly 21,000,000 bitcoins to the market to make them scarce. BTC’s price fluctuations normally have triggers that cause either a surge or a down surge. The momentum portrays today started way back, more so, in 2013 when it began thriving well. 

At the time, BTC prices traded at $13.50 in the first quarter of 2013. When the year was finally coming to an end, the prices surpassed the $1000 mark. The surge was contributed by mainstream miners joining the ecosystem and the fact that bitcoin attained new exchanges.

Mid-July of 2014 also seemed fair enough as the prices stood at $600 but drastically flopped to $315 in early 2015. Thereafter, the coin showed good signs of stability throughout 2016 and got even better in the last quarter of 2017 when it traded at nearly $20,000. 

The value dropped again to almost $3500 in mid-2018. Come 2019, the coin shot up again, attaining a value worth $10,000. The rise and fall of bitcoin’s value still occur, especially now that it goes for $18,847 at the time of writing. Among other determinants that can affect bitcoin’s fluctuation behavior include:

Supply

Bitcoin emulates the features that gold carries in that both of these asset prices depend on the supply levels and remain a store of value. The fixed supply of 21 million BTCs further implies that the coin is a rare, valuable gem that can be profitable in the long run.

Demand

The demand for bitcoin is well displayed on Google Trends, which translates to a responsive public interest. Prices tend to elevate when public participation begins to emerge globally. Additionally, the gradual inflationary rates also affect price behavior. The demand will progressively increase because bitcoin will become a scarce investment opportunity.

Buying and Selling

Purchasing bitcoins is easier as users require to choose a payment option to exchange it for BTC coins. After buying, we’ll need a secure digital wallet to store the cryptocurrencies. On many occasions, users prefer holding their coins for a certain period of time as they mature and sell off at a higher price than its initial value. 

Holding provides a gateway to receiving a substantial amount of income as it leverages the forces of demand and supply to determine the coin’s price drop or surge. When it comes to selling digital coins, investors can utilize prominent exchanges in the market like Coinbase, Bitfinex, and many more. 

Transactional activities like buying or selling the Bitcoin (BTC) play a huge role in increasing trading volumes, as the current volumes inch closer to $40 billion.

Conclusion

The economic aspects of bitcoin mainly focus on its production and consumption rates in the marketplace. Due to its rigid supply, bitcoin operates as a promising digital asset investment that is highly unstable. 

On the other hand, price predictions are equally challenging to analyze and develop an accurate figure. Either way, the decision to trade with bitcoin is entirely yours as long as you understand the benefits and risks involved. 

All in all, the immutable digital currency works with transparency to ensure professionalism and a safer trading ecosystem.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.