Disclaimer: the stories shared on this blog are mine, they aren’t financial advice, endorsement, counseling of any kind. Cryptocurrencies are highly volatile and speculative assets plagued by gambling addiction and fraud. Do your own research, never EVER take loans to acquire crypto, never communicate your private keys or mnemonic seed words to anyone, and never invest what you can’t afford to loose.
By the design of Satoshi Nakamoto and fiercely defended by developers since, Bitcoin is of deflationary nature: the total amount of bitcoins that will ever exist is 21 million. The issuance of Bitcoin is algorithmic and decreases over time (during so-called “halving” events), the final new bitcoins being minted around 2140. From there on, the sole rewards received by miners for securing the blockchain will be transaction fees alone.
Medically speaking, it is still rather safe to assume few current Bitcoin holders will live to see the turning point. Only one thing is certain: Bitcoin’s code.
Due to the deflationary nature of Bitcoin, holders are incentivized to hold onto them instead of spending them, in the hope their bigger share of the available supply will increase the scarcity of bitcoins, and thus their relative value.
Bitcoin was already known by many IT specialists and self-described “crypto-anarchists” before the general public, and the latter often times in the media with news headlines like MtGox hacks, busting of drug traffickers, warning financial regulators, or more recently cryptolocker attacks on companies and institutions. Nevertheless, more and more people, companies and institutional investors started investing in Bitcoin, logically driving up it’s price, further creating headlines and boosting interest in a positive exponential feedback loop. Up until a point an event, sometimes as small as a tweet by Elon Musk, causes a halt and pullback with investors taking profit quickly before the price decreases further, and by this intensifying the “crash”.
The resulting huge price swings are of course in the interest of traders, who usually resort to technical analysis and/or fundamental analysis to “buy low & sell high”.
But trading activities come with the risk of misjudging the market, leading to potential (huge) losses. That’s why many people rather resort to “hodling”: holding onto their bitcoins and waiting out for the price to reach a certain threshold (or none), perhaps to use their holdings for a big purchase (like real estate).
Bitcoin has often been described as “anonymous”: fundamentally nothing could be more wrong, as the transaction ledger is public, every move is traceable, and the possession of the private key of a wallet is an cryptographic indisputable proof of knowledge and control over holdings and transfers. Taking this into account, it’s actually amazing criminals used Bitcoin for their mischief instead of cash, much for the benefit of police criminal investigators. This fact makes me believe even the current cryptolocker trend will eventually pass, with individuals identified and brought to justice.
Some investors might hold onto their bitcoins for more political reasons: Bitcoin serves as reserve of value and global transaction network, which can be important for people living in under-banked countries experiencing high inflation rates or dependence on the US Dollar. Bitcoin has been historically sensitive to events such as Cyprus crisis in 2012–2013, Venezuela’s hyper-inflation, Salvador’s dependence on abroad money inflow…
Yet, Bitcoin remains unsuitable for direct purchases: Bitcoin’s ~10 minute block time makes transactions definitively confirmed by the blockchain only after ~60 minutes or more, and small sum transactions require hefty fees to find a spot in a busy block. As such, Bitcoin won’t replace fiat money. However, it can replace savings and “sock stash”.
While generally safe with a properly secured and backuped software wallet or hardware wallet such as Ledger, and highly likely to yield a significant increase in capital over time, Bitcoin holding nowadays comes with cons:
- nothing guarantees the price of Bitcoin, only supply/demand balance
- practical challenges of safe wealth redistribution means (events such as divorce, inheritance, debt liquidation..)
- “cashing out” often depends on centralized exchanges managed by companies, who don’t operate in all countries of the world
- Bitcoin mining’s impact on electricity supply and carbon gas emissions is a serious concern, which can motivate regulators to outright ban all “proof-of-work” cryptocurrency transactions (even if right now the impact of Bitcoin mining on climate change is far minor than transportation and industry)
All in all, Bitcoin “hodling” can be a relevant strategy for who enjoys a stable situation (a job income to cover housing and living expenses, plus an excess for rainy days without having to tap into the stashed Bitcoin, being rather immune to huge market swings, not having to monitor the market trends on the daily…)
The final word: as with all digital files, it is absolutely crucial to make backups (including off-site backups) of Bitcoin wallets, especially for significant Bitcoin holdings.