Adriana Belotti is a “true believer” when it comes to bitcoin, and invests $100 into the volatile cryptocurrency each month .
The Sydney-based tech consultant says it’s mainly because of her painful experiences growing up in Brazil in the 1980s, as it transitioned from military dictatorship to democracy.
- Cryptocurrencies were created as an alternative payment method to remove the middleman (banks)
- The price of bitcoin hit a record high ($US64,900) in April 2021
- Many traders purchase bitcoin on expectations its price will continue rising
- The vast majority of the world’s bitcoin mining occurs in China
Hyperinflation was in full swing as food, electronics and all types of consumer goods shot up more than 2,000 per cent each year. Shopkeepers were lifting their prices every week (or even several times a week).
“I remember going to the supermarket with my dad, and having to run in front of the guy who was re-marking the prices in the supermarket because you could get it for a few dollars cheaper,” she said.
For that reason, Ms Belotti regards bitcoin as “digital gold” — or an asset to protect her from the debilitating experience of watching her hard-earned money lose all its value almost instantly.
Although Ms Belotti acknowledged this was a “very high risk strategy”, she has no regrets because her overall investment has tripled in value (since buying her first bitcoin years ago).
Despite its extreme price swings, she says bitcoin is a lot more stable compared to the Brazilian currency she used to be paid in.
Bitcoin’s wild ride
When you you look at a bitcoin price graph, stability is probably not the first thing that springs to mind.
Bitcoin was created in 2009, amid the global financial crisis, by mysterious coder under the alias “Satoshi Nakamoto” – whose identity remains unknown to this day.
Back then, it was worth practically zero. But in the last five years, its value has surged more than 5,700 per cent.
Its price has been on a rollercoaster ride, with several booms and crashes along the way – and many argue that it’s a massive bubble.
There are now more than 5,000 cryptocurrencies in the world – including ethereum, XRP, litecoin and “joke” currencies like dogecoin.
Most cryptos in that long list are considered highly speculative, and regulators have warned people not to put in more than they can afford to lose.
Bitcoin surged to its most expensive level ever ($US64,900) on April 14.
It certainly helped that trillions of dollars worth of COVID-19 stimulus was being pumped into the world economy — which boosted the price of cryptocurrencies, shares, property and even second-hand cars.
There was also the idea that bitcoin was increasingly becoming mainstream after payments giant PayPal announced, in October, that it would let users buy and sell cryptocurrency on its platform.
In early June, El Salvador became the first country to take bitcoin as legal tender, which has led to predictions that other nations (particularly with less stable economies) may follow suit.
As new investors saw the price of bitcoin climb to a then-record high ($US20,000) in December, and continued to watch it scale new record almost every week, FOMO (fear of missing out) spurred them to pile in.
The frenzy was also driven by optimistic forecasts from investment banks like Citi (which predicted it could hit $US318,000 by year end).
The Elon factor
Cryptocurrency analysts say a major force behind the bitcoin rally was electric carmaker Tesla – particularly its billionaire boss Elon Musk.
In early February, Tesla surprised the world by revealing that it had purchased $US1.5 billion worth of bitcoin, and planned to offer it as a payment method.
But three months later, the world’s second-richest man had a change of heart.
Mr Musk tweeted, in mid-May, that his company had “suspended vehicle purchases using bitcoin” due to environmental concerns (specifically, its carbon footprint) – which sparked rumours that Tesla had sold its bitcoin holdings.
The process of creating new bitcoin mining uses 96.6 terawatt-hours (TWh) of power annually, according to estimates by the Cambridge Centre for Alternative Finance.
That’s more energy than what countries like the Philippines and Finland consume each year.
It also didn’t help that, shortly after, China banned its banks and financial institutions from providing services related to cyrpto transactions.
This led to a massive correction as the volatile cryptocurrency lost half its value in just over a month. It crashed as low as $US30,000 on May 19.
Mr Musk’s latest backflip happened on June 14, when he tweeted that Tesla would take bitcoin as payment again if more miners used clean energy. He also confirmed that Tesla had sold about 10 per cent of its bitcoin holdings.
That sent its price back above $US39,000 (late on Wednesday evening).
How does it work?
The idea behind cryptocurrencies was to create an alternative payment method which cuts out the middleman.
In conventional finance, banks are the gatekeepers keeping track of when money leaves your account and reaches the other. So buyers and sellers are putting their trust in a single authority.
For those who value privacy — or have issues trusting the government, banks or other authorities — bitcoin is appealing because of its de-centralised system.
Basically, that means instead of one bank verifying the transfer, thousands of computers across the world are doing that same job.
All these computers are known as “miners”, who have access to the blockchain – which is a ledger or public record which lists all the transactions ever made using the cryptocurrency.
These miners are racing against each other to verify the purchase by solving a complex mathematical problem. The first of these miners to solve it gets rewarded with newly-minted cryptocurrencies like bitcoin.
At least half of this huge computer network needs to verify your transaction before it gets approved.
Much of the world’s bitcoin mining happens in China (65.1 per cent), the United States (7.2 per cent) and Russia (6.9 per cent), according to Cambridge’s analysis.
One advantage of bitcoin transactions is that they’re considered relatively anonymous – which has made it popular with organised crime.
More recently, hackers targeted Colonial Pipeline (which supplies nearly half of the US east coast’s fuel supply) and meat processing giant JBS Foods with ransomware.
All up, both companies paid their ransoms in bitcoin — about $20 million all up.
Energy intensive and too secure?
It’s a deliberately complex, inefficient process which consumes more power every year.
In the case of bitcoin, its blockchain is programmed in such a way that the problems get harder to solve every two weeks, while the reward for mining “halves” every four years.
On the plus side, that makes it practically impossible to hack. It would be insanely expensive to interfere with all those thousands of computers on the blockchain – worldwide, at the same time.
Another downside with bitcoin is they can actually be too secure in some cases.
It’s estimated that around 4 million bitcoin (worth $US160 billion) are lost forever.
Many people don’t have their private key anymore, or the secret code that gives them access to their digital wallet.
There are stories about people who wrote it down on a piece of paper and misplaced it, while others have thrown out the hard drive containing their private key – and there’s no way to recover it.
Meanwhile, not many businesses take bitcoin or cryptocurrency as payment given its extreme volatility.
Transaction fees and speed are other issues raised by bitcoin sceptics. Earlier this year, the average transaction cost surged as high as $81.42.
While bitcoin can only handle seven transactions per second, traditional systems like Visa can process thousands.
So instead of spending their bitcoin, most people are buying it to hold onto it like gold (hence it is often described as “digital gold”).
Some see it as a safe haven asset to protect their wealth in uncertain times. But unlike gold, it’s not such a reliable store of value given its price rises and falls by thousands of dollars each day.
Despite that, bitcoin supporters believe it has a bright future.
That’s particularly if record low interest rates persist for years – driving more people to take riskier bets to find a return (whether it be in stocks, property or less well-known cryptocurrencies).