Blog Investing Alternative investing with MyConstant ep.7: what made bitcoin a trillion dollar success story?

Alternative investing with MyConstant ep.7: what made bitcoin a trillion dollar success story?

date March 1, 2021 time 13 min read 122 views

If bitcoin wasn’t on your radar a year ago, it probably is now. Just last month the cryptocurrency hit a $50,000 milestone — making it the word’s most valuable digital asset.

On this episode of Alternative investing, we explore what bitcoin is, who started it, and why it’s an investor favorite. We cover mining, bitcoin economics, its energy requirements, and the forces that have made its value sore.

Please use the Spotify link below, or if you haven’t got time, check out the transcript.

You can also listen on Apple Podcast, Deezer, Spreker and Podcast Addict

Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.

CHRIS:

Hello and welcome to the seventh episode of Alternative Investing with MyConstant. My name’s Chris Roper, I’m head of communications at MyConstant and with me here today, I have Peter Upton.

PETER:

Hey, I’m Peter, community manager at MyConstant. 

CHIS:

And also with us today is another guest, it is Trevor Kraus.

TREVOR:

I’m a copywriter here at MyConstant and content manager. Unlike you and Peter, I’m not that familiar with bitcoin. So I have some questions about it. 

CHRIS:

That brings me onto the topic today, which is all about bitcoin. If you’ve seen it in the news, it’s been reaching all time highs. And people are talking about it on social media. Today we’ll go over a little bit about what bitcoin is, why people like it and is it a good investment?

PETER:

Want to talk about what bitcoin is first?

CHRIS:

I don’t think it was the first cryptocurrency invented, but it was certainly the first one that got people talking about cryptocurrencies. The reason that is — in my option — is because it launched at a time when people were sick of the traditional financial system. 

It caused a lot of losses. For example, back in 2008 / 2009 the financial crisis which we spoke about in the last episode. The subprime mortgage market collapsed and as a result, many US investors lost money and people lost jobs and it was just a really bad time for everyone. 

Governments had to bail out the banks because they were ‘too big to fail.’

Bitcoin came out around that time, there was a white paper published by an anonymous person or people going by the pseudonym, Satoshi Nakamoto. We still don’t know who this person is. The idea behind it was, it was designed to replace centralized financial systems with a more decentralized model. We talk about decentralization a lot. Want to tell us what it is Peter? 

PETER:

Sure, it’s basically a network that doesn’t have a single government entity. So, if you go through a bank, the bank is overseeing all the transactions. A centralized network is less of a pyramid shape — more of a spiderweb. More equal.

CHRIS:

So yea, that’s the infrastructure of a bitcoin network, but why does that make it better than a traditional financial system. 

PETER:

Because you don’t have to worry about a government body making financial decisions. You don’t have to worry about what they’re thinking about. No single party that’s acting in their best interest. 

At the end of the day, if a single party controls the network they need a cut because they run the network. So the idea in a decentralized network, everybody has an equal say in what happens on the network. The ultimate democratic process. 

CHRIS:

Okay, we’ve spoken a lot about the network, but what is Bitcoin? Can you touch it? Has it been created out of thin air? Well, no.

Bitcoin is made in a process called mining. It involves certain computers on a Bitcoin network which is called miners, and they compete to solve a cryptographic equation. And the miner who comes up with the answer fastest gets the bitcoin. So if you solve the cryptography quickly and if the answer is approved by the network, you get some Bitcoin.

PETER:

And you get a spot on the blockchain.

CHRIS:

So what Peter is referring to is the blockchain network which is a type of technology that Bitcoin was developed. But we won’t go into too much detail there. Trevor, any questions so far?

TREVOR:

You might answer this question later, but how do you acquire a bitcoin after it’s been mined and put out into the world? 

CHRIS:

That’s a good question. That goes back to the underlying technology that Bitcoin uses: Blockchain.

And blockchain is a database that’s very secure and any transaction that’s acted on that database is recorded. Let’s say you send Trevor some bitcoin. I’d first initiate a transaction, it then gets presented to the network as a puzzle. And then the minders on the network compete to solve that puzzle and then add a new block of transactions on the network. 

And it’s done on the computing power that the miners have. So if you have enough computing power, you can solve this puzzle fast and then you win the right to add the new transaction. 

So that’s a simplified version of what happens. I don’t think we should get too technical. But does that answer your question at all?

TREVOR:

Yes, it does. 

CHRIS:

I think we should get into why people like Bitcoin? People think Bitcoin is a good store of value. Because you can’t magically create it, there’s this mining process that goes behind it. And in the beginning, it was easy and cheap to mine. You could use a standard computer. 

Back in 2009, your computer cpu could mine 50 bitcoin per block (worth around 2.5 million USD today). 

But back then, it wasn’t the huge phenomenon it was today. It was only going for a few cents or a dollar. But if you held on to those bitcoin today, you’d be very rich. That’s where the term, bitcoin millionaire came from. 

However, today, mining is much more expensive. 

PETER:

Bitcoin is hard to mine, after a certain amount is mined. 

CHRIS:

Correct, and the bigger the network as well. More transactions, more people are buying and selling. It becomes more intensive to solve these network problems and receive rewards. The problems become harder to solve and the computing power you’d need is a lot more.

Today, you’d need hundreds and thousands of dollars of equipment to make it worth your while. 

PETER:

I got a little stat for you. The BBC said that in 2021, bitcoin mining consumes more electricity than the entire country of Argentina.   

CHRIS:

If bitcoin mining is consuming more energy from an entire country? The impact on the environment — climate change, coal and gas power plants, it could be an issue?

TREVOR:

Which country is doing the most mining? Where’s it more prevalent? 

PETER:

Any country with cheap electricity is doing mining the most.

The US is a country with relatively cheap electricity. China has at times at least been the top mining country, just because electricity is so cheap there. Even places like Iceland.

Places with cooler temperatures are good for mining because the computer can cool down with ease. 

TREVOR: 

Right, makes sense. A cooler environment would be beneficial. 

PETER: 

A lot of these mining operations take place underground because they need to cool.  

CHRIS:

Where is the bulk of miners?

PETER:

Yes, two things to look at: where are the most miners and where are the most active nodes?

CHRIS:

Before we go any further, what is a node?

PETER:

A node is a part of the network that approves transactions on the bitcoin network. 

And they’re what let you influence the network and earn bitcoin. Generally, countries with the lowest electricity costs with China being the most influential. 

I think in mining, China is somewhat close to the US, and in terms of approving transactions — they’re the top. 

CHRIS: 

Does that mean the decentralization of the Bitcoin network is at risk? Let’s say you have a bunch of nodes in one country and that country decides to do something nefarious and let’s say those nodes combined have over 50% share of the computing power, is there a possibility that there could be an attack on the network? 

PETER:

Yes. There’s a real possibility, especially if a country can get together 51% of the nodes, then there’s a possibility the network could be attacked. 

I don’t know if China owns 51% of the network, but if there was an effort by the government, there could be a real chance that Bitcoin gets influenced. 

CHRIS:

And this really is just an extension of the 51% attack. This means if a country has over 51% of the blockchain, it wouldn’t be as secure. And then there’s the worry that maybe a group of nodes get together. Maybe criminals or coordinated effort pushed by a country for example. 

And it has been reached a few times in the past and the people responsible, reduced their computing power so they don’t have any overarching effect on the network. 

Mining is interesting because if you don’t have all this money to buy the computers, you could invest in the miners themselves. These are some major companies.  

PETER: 

Yea, there are quite a few major companies. 

CHRIS:

Can you invest in them through trading apps?

PETER:

Yea, there are a couple you can invest in. For example, Hive blockchain technologies. There’s also investing in the hardware that’s done for mining. So there are many companies that benefit from mining because they make the equipment the miners need to use. 

There’s a couple you can get indirectly, but there are many blockchain mining companies in adjacent industries. Should you invest in one? From what I’ve seen, it’s almost a more risky investment than investing in crypto. 

CHRIS:

In what way is it more risky?

PETER:

With crypto, you’re investing in a price. But what makes a blockchain mining company profitable, especially with bitcoin where the energy is so high. If they can’t guarantee X-price on bitcoin, it starts to become very difficult for them to prove profitability, when they’re not making an ROI on what they’re mining. So it’s tough. 

CHRIS:

And of course, if we go back to another reason why people like bitcoin is that it’s deflationary currency. Only 21 million bitcoin will ever be made, so there’s a fixed supply and that means the prices rise over time. Rather than decreasing. 

This is the opposite of inflationary currency such as USD. If you held onto USD for 20 years, you’d find that it’s buying power would be reduced. 

So there are currently 18 million bitcoin in circulation so that leaves less than 3 million left to mine. And what happens when all the Bitcoin has been mined?

PETER: 

Good question.

CHRIS:

I have the answer. Would you like it?

PETER:

Yes I would. 

CHRIS:

When all the bitcoin has been mined, the miners will make money off of transaction fees. So that is the cost of approving new transactions. So they’ll get a fee whenever bitcoin is sent. A transaction fee. 

And I have an interesting statistic for you. So 18.5 million bitcoin in circulation. But 20% of that is already lost because of people losing their private keys — or forgetting them.

Whenever you buy bitcoin it gets put in a digital wallet specially for cryptocurrencies. Now you can have a wallet with a trading platform. MyConstant has a wallet for example. Or you can have your own wallet.

Some are only online, others are offline called ‘hardware wallets.’ We spoke a few episodes ago about a Welsh guy who put 7.5 thousand bitcoin on a hard drive and then lost the hard drive. Imagine — that’s worth millions of dollars today. 

I was reading a New York Times article and they were mentioning research from Chain Analysis and they help people track down lost keys. If you think about it, that’s billions of dollars lost over someone forgetting their key or misplacing the hard drive. 

TREVOR:

Is that one long key? Mix of letter and numbers?

CHRIS:

Your private key is a person key. It depends if you have a wallet then you will have a key to access that wallet. More like a password

PETER:

Some of these old wallets people were using back in the day. If you enter the password incorrectly 3 or 5 times, the wallet locks you out forever. So some people have this issue where they have the wallet but they can’t remember their password. 

CHRIS:

If you bought bitcoin when it was $10 and it’s now $50 thousand dollars. You’d have lost millions of dollars. 

I’m not sure if you watch it, but the Big Bang Theory did a good episode which sums up the private key issue quite succinctly. In it the main characters talk about bitcoin going up in price. And they say, oh, I think we mined some a few years ago and they don’t remember whose computer it’s on. So they start this treasure hunt trying to hunt down which computer it’s on. 

They find out that the computer they used was sold to the ex-boyfriend of one of their wives so they trace it down. And the very end *spoiler alert* Sheldon, one of the main characters, reveals he downloaded it onto a Batman key drive and that particular keydrive was lost a few years back. 

Bitcoins worth around $50 thousand dollars as we record this. What is driving the price Peter?

PETER:

Yea, so the big thing that’s driving the price now, institutions have decided that it’s a worthwhile thing to put a small amount of their investment money into bitcoin. Because deflationary and not influenced by outside forces like the government. And because it’s so popular, we’ve seen major universities put their money into Bitcoin. Tesla did a prolific buy.  

CHRIS:

That was a huge buy. How much exactly?

PETER:

It was about 1.5 billions worth. 

So yea, Square bought, Tesla bought and a growing number of stores long ago have started accepting Bitcoin as payment. There are ways to buy Starbucks with bitcoin. 

TREVOR:

That was actually going to lead me into a question I had. How do people pay for everyday items with bitcoin? Do they give you a card and you just swipe?

CHRIS:

Yes, in some cases there are cards that let you spend your cryptocurrency. The card is connected to that wallet. Then just use it like a Visa or debit card. 

Or some places will just let you use the wallet app on your phone. Scan a QR code and do it that way.

TREVOR:

So if something is $10, it will just convert it for you automatically?

CHRIS:

Yes. So there’s a bit of an exchange going on in the background. So yea, if it’s $10 a request will be sent.

PETER:

A Bitcoin transaction typically clears faster than a bank transaction.

TREVOR:

But because it’s going through a different currency, will there be a currency exchange? Like a fee?

CHRIS:

I’m not entirely sure. The store might absorb some of the fees. I think if you send a cryptocurrency through your wallet, you’ll pay a fee. There is a cost to move Bitcoin from one address to another and the sender is normally liable for that. 

So Peter, what’s driving the price of bitcoin at the moment? Is there an element of FOMO (fear of missing out)? 

PETER:

Absolutely. I think every institutional investor — anyone that has money in a hedge fund that did not buy bitcoin, has gotten on the phone and asked, why didn’t you buy Bitcoin? The growth has been insane. 

Even if you put a small percentage — the growth you would have gotten from two years ago. It’s a big FOMO. 

CHRIS:

So what about if you already own bitcoin? Should you sell it now that it’s at its all time high? Or hold onto it for a bit? Invest? Borrow against it?

PETER:

It’s tough. You have seen the institutions buy in large chunks. And you can see it because the blockchain is a public ledger. So, as far as anyone can tell, these giant institutions have not been selling. They thought it would be good for a long hold. 

Keep track of what will happen on our side. Will the US government want to regulate things more? Will they make it difficult to make withdrawals? The process of converting Bitcoin into USD is a multistep process that can be regulated. 

What I would say if you have bitcoin right now, I personally would take some profit. So maybe skim a little bit off the top. 

If you have a bit and it’s not money you’re afraid of losing, then keep it. And if you have a lot, Well, you decide the fate of the market. If you start selling then everyone will start selling and the price will go down. So if you’re a big Bitcoin holder, that’s whatever helps you sleep at night.  

CHRIS:

I think whenever you’re considering to sell an asset, be it bitcoin or anything else, you basically have two options. You can hold for the long term. In which case you will check in again in a year from now, or two years from now, or if there’s a bit of news about the asset. 

Or you say to yourself, what do I want? 10%, 15% etc. Then you can become more active in your investing. And once you hit that goal in mind, you sell. 

Unless you have a percentage in your head, your only other option is to hold for the long term.

When you say to yourself, I don’t have a goal here but I believe in bitcoin and I can see it being a good investment. And for your mental health, so you’re not always checking in every 5 minutes, just leave it for a year and see where you are at the end of it. 

Of course, if you see news which might affect the price, then rethink that strategy. But otherwise, I think it’s good to have a goal in mind. So if you hold bitcoin and you’re 10% up and you want to be 50% up, then you might stick it out, or take your 10% and wait for it to fall and buy in again and make a bigger return in the future. 

PETER:

Yea, if it’s money you need, you probably shouldn’t have it crypto. Crypto is very low liquidity. It’s hard to get your money out once it’s in. So if you have a small amount in crypto and you’re find with losing it then I see no reason why to take it out. 

CHRIS: 

Any questions Trevor? I think we’re nearing the end of the episode. 

TREVOR:

No. I think I asked all the questions that I wanted to ask. 

CHRIS:

Are you going to buy any bitcoin? 

TREVOR: 

Yes, I was thinking of buying a month ago when it was at $40,000. But what’s the saying? Buy low, sell high? I think I should just buy it at this point. 

CHRIS:

It’s timing right? 

So I just had a little idea that we’d do a little quiz with Trevor since he’s been listening very patiently and asking some penetrating questions about Bitcoin. So I’ll ask 5 questions about bitcoin and see if you can get them all right. 

TREVOR:

Shoot!

CHRIS:

Number one. Which country has the greatest share of mining power?

TREVOR:

China.

PETER:

How do you mine bitcoin?

TREVOR:

You need high-tech computers that use a lot of energy. And the computers answer mathematical equations to get one bitcoin. 

CHRIS:

That was pretty accurate. All the nodes on the platform are in a race to solve a mathematical problem. And the node that does it fastest gets to present the answer to the network and if the answer is correct, they get the right to add new transactions. Almost every 10 minutes at the moment, new blocks of transactions are added to the bitcoin network. 

Okay, question three. How many bitcoin will ever be mined? 

TREVOR:

Um, 121 million? 

CHRIS:

Think lower.

TREVOR:

112 million. 

CHRIS:

It’s the age you can start drinking in the US.

TREVOR:

Oh, 21 million. I don’t know why I thought it was more. I was right with the 21 though.  

PETER:

Yea, it seems like it would be higher. 

TREVOR:

How many do they have right now?

CHRIS:

18.5 million. 

That included the 20% that are missing.

Not missing in that they’ve been stolen. They exit but they’re locked away in a hard drive or on an online wallet. 

TREVOR:

So we should be reaching this cap quickly. 

CHRIS:

It slows down the closer to the cap you get. So it becomes harder and harder to mine and also, the rewards for mining new bitcoin blocks have caps every 4 years. 

They think it will be 2140 when they reach the cap. 

PETER:

Bitcoin currently uses more electricity than what country? 

TREVOR:

Argentina. 

CHRIS:

That’s right!  And for your final question, who developed bitcoin? 

TREVOR:

Sakamoto — sounds like a Japanese name.

I was close! 

4 out of 5. 

CHRIS:

Not bad! Okay, I think that’s the end of the episode. Peter, you usually have some final words. What do you have to say? 

PETER:

Whether you like crypto or your a USD investor, do what makes you happy. 

CHRIS:

There are many things you can do with your money nowadays so my advice would be — get out there. Read and learn as much as you can. The banks will not pay a decent rate of interest. 

Okay, well, that’s it from us. Thanks for listening. Please subscribe and keep an eye out for our next episode. 

PETER:

See ya! 

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