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Chapter 2: The Monetary Properties of Cryptocurrency

Now you know the transaction properties of cryptocurrency you need to understand the monetary properties. These are:

There is a Controlled Supply

Most cryptocurrencies have a limit on the number of tokens supplied. Taking Bitcoin as an example there will be a decrease of supply over time and experts estimate that the final number of Bitcoin tokens will happen around 2140. Experts say that only 21 million Bitcoins will be the limit.

To control the supply of cryptocurrency tokens a schedule is written in the underlying code. Using this code you can approximately calculate today the monetary supply of a cryptocurrency for any given future date.

Bearer not Debt

With conventional or “fiat” money underwritten by a government, the bank account you hold is created by debt. All of the entries in your account are debts. It is really an IOU system. A cryptocurrency is not a debt.

There has been a lot of controversy over the launch of cryptocurrencies because they are a direct attack on the monetary policy of most nations. Governments or central banks cannot change cryptocurrencies. Therefore they are immune to inflation and deflation caused by the manipulation of the monetary supply.

What is Bitcoin?

Bitcoin is a cryptocurrency and a virtual type of money. It’s really like having an online version of money or cash. You can use Bitcoin to purchase products and services and more and more vendors are accepting Bitcoin as a form of payment these days. Some countries feel very threatened by Bitcoin and have banned it completely.

There are no physical Bitcoin tokens. You may have seen pictures of Bitcoins but these are fabrications.

The worth of a Bitcoin resides in the private codes they have imprinted inside them.

Every Bitcoin is just a computer file stored in what’s called a digital wallet. We will discuss digital wallets in more detail in a later chapter. If you have a digital wallet then other people can send you Bitcoins or fractions of them. You can also send Bitcoins or fractions to others using your digital wallet.

Every Bitcoin transaction is recorded publically using blockchain technology. This is a transparent network where anyone can trace the history of Bitcoin transactions. All records in the blockchain are immutable meaning that you cannot copy transactions, change the amount of Bitcoins owned or use Bitcoins that you don’t own.

There are several ways that you can purchase Bitcoins including:

• You can purchase them using your native currency through a cryptocurrency exchange

• You can sell products and services in exchange for Bitcoins

• You can use a Bitcoin ATM

• You can “mine” Bitcoins

The practice of mining Bitcoins has been going on for a while. In order to do this you will need high end computer equipment and lots of it. These computers perform complex algorithms to guess secret codes. If your computers guess right you get Bitcoins as a reward.

We will not be recommending mining as a way of obtaining Bitcoins in this guide. There are only a limited number of Bitcoins so the process of mining is now incredibly complex. You could spend years mining for Bitcoin and spend a great deal of money on computer equipment and electricity costs without earning any Bitcoins.

You may be wondering why Bitcoins are so valuable. When Bitcoin first started it had no value but in five years a single Bitcoin was worth around $1,000. At the time of writing a Bitcoin is worth around $8,000.

Why this jump? Well there are a number of other things in life that have value. Diamonds and gold are a good example. Bitcoins have value because people are willing to trade them for real products and services and also buy them for cash.

People like the idea that any governments or central banks do not control Bitcoins. They also like the fact that Bitcoin transactions are pretty anonymous. Yes there is a record of all Bitcoin transactions but very few include real world identities.

The first thing that you need to know is that Bitcoin is volatile. The value of a single Bitcoin has gone up and down over the years. This is not particularly a bad thing as other investments go up and down too. You need to be a smart investor with Bitcoin.

Why does Bitcoin enjoy Value Jumps?

So many people are reliant on the Internet these days. People get very frustrated if they are out and about and cannot find a WiFi connection to use the Internet with their mobile devices. Whether this is a good or bad thing is of no consequence when it comes to Bitcoin investing. The important thing is that growing use of the Internet is good for Bitcoin.

Over the years since the launch of Bitcoin it has attracted investors from all corners of the world. Being a true global digital currency that is available to all (in theory) it is no surprise that it has generated a lot of excitement.

Another good reason why the value of Bitcoin has risen so rapidly is because it is a scarce resource that is actually useful. Most people know that there is only so much gold that we can mine. Each year there is less and less gold left in the Earth. Therefore it has great value.

You can apply the same logic to Bitcoin. There will only ever be 21 million Bitcoin. As time passes this number will dwindle and the value increases. It is now very hard to mine Bitcoin and this is only going to get tougher.

Investors really like the fact that Bitcoin represents predictable and sound monetary policy that all can verify. At any time you can see how many Bitcoins are in circulation and how many new ones have been created.

You can easily trade Bitcoin for some products and services. If you have a gold investment then this is not a liquid asset. You would have to sell some of your gold stock for cash before you could purchase anything.

It is very easy to make cross border transactions using Bitcoin. There are no governments or banks involved. You can send Bitcoin securely in minutes to anywhere in the world. Transaction fees are very low compared to fiat currency transactions.

We really have the Internet to thank for the rise in popularity and value of Bitcoin. The Internet has made the sharing of information easy wherever you are and this concept will underpin the success of Bitcoin as a global and verifiable currency.

The Price of Bitcoin

You will not find an official price for Bitcoin anywhere. It is not the same as fiat currencies. It is all about how much someone is willing to pay for a Bitcoin or fraction of a Bitcoin. A good reference for this price is the Bitcoin Price Index provided by Coin Desk which you can find here.

You will usually see the price as the estimate of the value of one Bitcoin. Most cryptocurrency exchanges will let you buy as many Bitcoins as you want and even offer fractions of Bitcoins for sale.

When should you buy Bitcoins?

There are no guarantees with any investments. The history of Bitcoin shows that it tends to increase in value really fast and then slow down and fall until it is stable. This is a cycle that you need to learn and understand.

There are some great tools available that you can use to analyze the price history of Bitcoin. Probably the best two are:

 Cryptowatch

 Bitcoin Wisdom

One thing about Bitcoin that is really attractive to investors is that it is never affected by the financial stability of a country. So if there is speculation that a major currency will fall, such as the UK Pound with all of the Brexit issues, then if the currency devalues this will have an impact on other world currencies.

So you need to think globally with Bitcoin. Don’t just look at what is happening in the United States, or Europe or China. How is the economy of the world changing?

Go for Long Term Bitcoin Investment

You may have read that there are people making excellent short term gains trading Bitcoin. While this may be true you need expert knowledge and it is a risky strategy. We strongly recommend that you go for a long term Bitcoin investment strategy.

Here is why. If you invested $1000 in Bitcoin in October 2017, two years later in October 2019 you would have made a profit of more than $700 providing you with a return on investment of over 70%. That is a staggering return.

Despite these kinds of returns being possible you should still treat Bitcoin as a risky asset to invest in. If you are not prepared to make high risk investments then maybe Bitcoin is not for you. You have seen an example of the kind of rewards that are possible so you need to decide if it is right for you.