The bitcoin phenomenon has been through a rollercoaster ride of media buzz, hyper speculation and polarized opinions. Although they have slowly become more accepted on main street, the volatility of their values has left many businesses feeling anxious about offering their goods or services in exchange for bitcoins. Starting off around 1 cent per bitcoin back in early 2010, the crytpocurrency hit peaks of over $1,200 in 2013 before settling down to the present day range of $200-$300 per coin.
One of the first purchases made using bitcoins is attributed to online user ‘laszlo’, who famously offered 10,000 BTC for a couple of pizzas in 2010. At the time, his bitcoins were worth about $40, which seemed like a reasonable transaction. However, had he opted to wait a few years, he would have been sitting on a stash worth more than $12,000,000! Even with the subsequent drops in value, his two pizza order would have been worth nearly $3 million today. It’s no surprise that this kind of volatility has merchants and consumers on edge about adopting the cryptocurrency in their daily lives.
These types of stories are really a consequence of a couple key factors. First, since bitcoins were a new, unknown currency when they were introduced, the market for their exchange was extremely limited. This resulted in an unusually low conversion value relative to the number of bitcoins that were in circulation at the time. Secondly, when Wall Street began to speculate on its future value and treated it like a commodity, the ensuing frenzy drove the conversion rate up astronomically, again disregarding the context of how many were in circulation. Lastly, as the hype subsided and bitcoin use became more mainstream, their value began to reflect the rate merchants were willing to accept them at.
What does the future hold for bitcoin? Is the current exchange rate a long term, stable number? To understand where things are heading, it’s important to know how bitcoins are created and how many are out in circulation. There are currently around 14 million bitcoins around, which were created in a process known as ‘mining’ where people around the world use their computers to solve math problems and validate the record of bitcoin transactions. When a miner finds a new block, they are awarded some freshly minted bitcoins for their troubles, which increases the supply. The calculations become exponentially more difficult as each new block is discovered, so the number of bitcoins inserted into circulation through mining slows down significantly over time. We are starting to see the curve plateau as we speak since the technology required to successfully mine new blocks has reached a point where only massive groups or farms of computers are able to solve the equations with enough efficiency to make it worthwhile.
So what does all this mean for bitcoin values? Well, applying our well known principle of supply and demand in an elastic economy, you can expect to see values go up with time. The cryptocurrency has an upper limit of 21 million coins, which is expected to be reached around the year 2140, so the last 7 million or so coins left to be mined will take something like another 125 years to complete. Consider a scenario where bitcoins have become as commonplace as regular cash currency. In a world where there are only 21 million of these things, the exchange rate would have to be astronomical for it to represent the production of a global economy. To put it another way, if there were only $21 million dollars in the world, you can imagine how much each dollar would have to be worth to replace all of the other currency on the planet. Even one cent would represent a ridiculously large value, making it an impractical currency. Fortunately, bitcoins can be divided into tiny subunits all the way down to one hundred millionth of a bitcoin. This smallest unit has been named a Satoshi, in reference to Satoshi Nakamoto, which is believed to be a pseudonym of the mysterious creator of the cryptocurrency, who’s true identity has never been discovered.
