About Bitcoin
If you are here, it is because you have heard about Bitcoin in the news, on social media or perhaps in conversations with friends. You know it is an interesting and important subject, but you do not know it well or want to understand it better. Bitcoin has interested me from the beginning. During its early years, my interest was technical: the characteristics and attributes of this new technology fascinated me, and I studied how it worked in considerable depth. In recent years, I have developed a new interest in the cryptocurrency—not only in its technical operation, but as a possible opportunity for saving and investment. Over the years, Bitcoin has become a vehicle for value that companies, investors and even central banks are taking seriously. In discussing it with other people, I have noticed many doubts and misconceptions about what this asset is, how it works and what it is for. The subject is fascinating, broad and complex, both technically and economically or financially. My way of helping anyone who wants to know more is therefore to present it here in the most concise, simple and clearly structured form I can. One note before I begin: I sometimes write Bitcoin with an uppercase B when referring to the technology or protocol, and bitcoin with a lowercase b when referring to the monetary unit.
What is Bitcoin, and how did it arise?
Bitcoin is many things—a cryptocurrency, a protocol, a network and a monetary system. Perhaps the easiest way to approach the subject is to describe briefly how it began and what purpose it was intended to serve. In October 2008, a short white paper was published describing a new kind of digital currency called Bitcoin. Its author used the pseudonym Satoshi Nakamoto and remains anonymous to this day. Some even speculate that Bitcoin may not have had a single creator, but that a group of people used the pseudonym to preserve their anonymity. In January 2009, Satoshi Nakamoto released the first version of the software required to operate the Bitcoin network as free and open-source software, and continued to work with many other developers who contributed to its development and evolution. Nakamoto stopped participating in the project in mid-2010 and has not been heard from since. Because the software that operates the network is free and open source, a large community of developers has continued to maintain and improve it, while the protocol and algorithms governing Bitcoin’s overall operation have remained unchanged. The basic concept behind this cryptocurrency was to create a decentralised, secure and censorship-resistant digital currency that would allow anyone to transact over the internet without depending on governments or financial institutions. This is achieved through a technology called blockchain, whose operation I will describe very briefly and simply below.
Blockchain
Imagine that several people want to transact using a digital currency. The first problem would be ensuring that nobody could spend the same money twice, since digital things can be copied infinitely. Take an example involving three people: Ana, Beto and Carlos. Imagine that each keeps a ledger recording every transaction among them. All three record exactly the same transactions, so each knows what has happened. Suppose Ana has five coins, Beto three and Carlos one; all three ledgers record those balances. Ana gives two coins to Beto and one to Carlos, Beto gives one to Carlos, and Carlos gives two to Ana. The three ledgers record each transaction simultaneously and now show the new balances: Ana four, Beto four, Carlos one. Since all three ledgers contain identical records, if Carlos now tells Beto that he will pay him two coins, Beto knows this is impossible because Carlos has only one. Likewise, if Ana wants to pay Carlos five, the transaction cannot happen because Carlos knows she has only four. This system, in which everyone holds a record of all the transactions among them, allows those transactions to take place with complete confidence and security. Even if one of the three disappears, the other two still have the records, so the system is unaffected because every participant has a complete copy. That is blockchain: a system that allows participants in a network—in this case, the Bitcoin network—to keep the record of every transaction, preventing anyone from double-spending or spending more than they have. It is called blockchain because a given number of transactions among users are combined into a block, and these blocks are then recorded one after another in a chain. Any user on the network can review that chain to verify the transactions taking place, so there is no need to trust the other participants: everyone can check the evidence for themselves. This technology replaces trust with proof. One way to think about the blockchain is simply as a database made up of blocks of information in chronological order. Here is a video that explains the technology very clearly: https://youtu.be/bBC-nXj3Ng4
Mining
Now that we understand the basic operation of the blockchain, the backbone of the system, we need to understand how bitcoins are generated. This is a highly technical and complex subject, so I will try to explain it as simply and concisely as possible. Someone has to maintain the blockchain—that is, create blocks of transactions and add them to the chain. Remember the software I mentioned earlier, created by Satoshi Nakamoto in 2009? That software receives the users’ various transactions and combines them into a block. To generate a block, it must solve a mathematical problem requiring enormous computing power: in simplified terms, a cryptographic process for finding a number with a certain quantity of zeroes at the beginning. This is not something an ordinary computer can do competitively; specialised equipment exists with processors designed specifically for this kind of task. Once the solution has been “found”, the block can be generated. The process is called mining by analogy with miners who must work to find a precious stone. Bitcoin miners similarly put their processors to work finding the solution to the mathematical problem that allows them to generate a new block. When a miner generates one, they receive a reward and the fees paid for the transactions.
Before continuing with mining, we need to discuss transaction fees. When Ana sends Beto one bitcoin, she must pay a transaction fee, much as a bank or payment system such as PayPal charges a fee for processing a transaction. In that case, the bank or payment platform earns money from those transactions; that is its business model. With Bitcoin, miners earn money from transaction fees. It is a mutually beneficial relationship: users obtain a blockchain that lets them transact, while miners receive bitcoin from the fees users pay.
Returning to mining, the miner who succeeds in generating a new block receives the transaction fees from the transactions included in that block, as well as a reward. That reward consists of new bitcoins created as part of the block-mining process. There are, naturally, thousands of miners, all of whom want the fee income and the reward, so they are constantly competing to produce the next block. How do they compete? By increasing their computing power with more processors. When the system began, anyone could mine on their own computer. As the number of miners grew, competition increased until winning the next block with an ordinary computer became impossible. That is why I mentioned the specialised equipment used to solve these problems: miners operate processor “farms” with thousands of these machines working to win the next block.
This is how new bitcoins are created; without miners, no more could be generated. Miners therefore both maintain the blockchain and produce bitcoins. An essential feature of the Bitcoin protocol is that bitcoins cannot be created without limit: no more than 21 million can ever exist. Later, we will see why this matters. That limit raises two questions: what will happen to miners after no more bitcoins can be created, and why have all 21 million not yet been generated? Answering them requires two concepts.
The Bitcoin protocol includes a mechanism known as mining difficulty. Simply put, the more miners participate in the network, the harder the mathematical problems required to produce new blocks become. The difficulty adjusts automatically: it rises when the number of miners increases and falls when that number decreases. This preserves the competition among miners described above and regulates the process so that blocks are generated approximately every ten minutes. If I am a miner and win the block I was working on—meaning I am the first to generate it—I know that roughly ten minutes later another will be generated, which either I or any other miner might win. The other miners must verify that the block occupies the correct place in the chain. If I tried to commit fraud by including a false transaction or altering one of the blocks, the other miners would detect the discrepancy and reject it. Because of the financial incentive, miners’ strongest interest is in producing valid blocks that will not be rejected.
The second concept is the Bitcoin halving. Every 210,000 blocks—approximately once every four years, since blocks are generated about every ten minutes—the reward received by miners is cut in half. When the system began, miners received 50 bitcoins for every block they generated. Four years later, in 2012, the reward fell to 25. In 2016, it fell to 12.5 bitcoins per block. The most recent reduction occurred on 11 May 2020, after which miners began receiving 6.25 bitcoins for each block. As you can see, fewer and fewer bitcoins are being generated, making them progressively scarcer. This scarcity is part of what has made them increasingly valuable, a subject we will discuss later. It is therefore estimated that the final bitcoins will be generated around the year 2140. Once block rewards cease, miners will continue to earn transaction fees; because Bitcoin is designed to become more valuable over time, those fees should provide enough incentive for mining to remain profitable. The following short article offers a more technical explanation of how mining works: https://medium.com/@blairlmarshall/how-do-miners-validate-transactions-c01b05f36231
One last important point is that, besides miners, the system includes other participants that make it even more decentralised and secure: nodes. A Bitcoin node is software that anyone can run on a computer or even in the cloud, whose function is to verify network transactions. Miners produce blocks that other miners can accept or reject, but those blocks must also be accepted by the nodes. There are estimated to be about 100,000 nodes geographically distributed around the world, each holding a backup of the complete blockchain. Now that we have a general idea of what Bitcoin is and how it works, it is useful to define its characteristics more precisely.
Digital
Bitcoin is a 100 per cent digital currency; it is not printed. It is software, and transactions are simply records stored on the blockchain. If Ana sends Beto one bitcoin, she is not actually sending him an object; she is registering a transaction in the public record to which everyone has access. Because it is digital, it can be transmitted directly over the internet without passing through a bank or any other institution. Network participants need a tool with which to consult the record of how many bitcoins they hold. This tool is known as a wallet. If Ana sends Beto one bitcoin, both can check their wallets and confirm that the transaction took place, but in reality there is no digital file travelling from one wallet to another. Here is a highly simplified explanation of what happens. Every wallet has an address. When Ana sends Beto one bitcoin, the blockchain records that Ana’s address now has one bitcoin less and Beto’s one bitcoin more. Everybody can see that the transaction occurred because the blockchain is public. We do not know who Ana and Beto are, but we know that address A sent one bitcoin to address B.
As a digital currency, bitcoin can be divided according to the user’s needs into units called satoshis. One bitcoin contains 100,000,000 satoshis, more commonly called sats. Among people who buy bitcoin, phrases such as “stack sats”—accumulate sats—are common. You therefore do not need to buy a whole bitcoin; you can buy a fraction of one in sats. An easy way to understand sats is to compare them with cents in a dollar. 1 satoshi = 0.00000001 bitcoins
Another advantage of being digital is that the currency inherits the capabilities of software. It can be programmed through smart contracts, converted into other cryptocurrencies or “wrapped” in tokens that move it across different networks. Additional layers can also be developed on top of the Bitcoin network to process different kinds of transactions. Since this post is intended as a general overview, I will not explain those technical subjects here. It is enough to know that this new kind of currency is a technology enabling countless applications, with the capacity to evolve in response to market needs.
Decentralised
Bitcoin is a system or network that allows all these transactions to take place in a decentralised way. No company controls it; it belongs to no bank or government; and the network is geographically distributed around the world. There are estimated to be more than 10,000 miners worldwide, each operating as a network node. So far, we have spoken of miners as though they were individuals, but in practice they are companies investing enormous amounts of capital to build the required processor farms, buy equipment, upgrade or replace it constantly, and pay for the electricity needed to run it. There are also mining pools: groups of miners that combine their processors in an attempt to win blocks, then divide the rewards and fee income. Mining is a highly lucrative and rapidly growing business in which millions of dollars are invested.
Having more than 10,000 miners distributed around the world, a large proportion of them anonymous, makes the network robust against attacks by malicious actors, governments and corporations. There is no single point at which the network can be attacked and no single entity controlling it. In fact, part of what makes it unique is that we do not even know the true identity of its creator or creators. It is therefore agnostic towards political interests and built with free and open-source software maintained by hundreds of contributing developers. From technical, economic and geopolitical perspectives, Bitcoin is a completely decentralised network.
Secure
Bitcoin is a secure protocol because of both the encryption it uses and its decentralisation. Remember that the people who developed it—not only Satoshi Nakamoto, but the many developers who worked with Nakamoto and those who continue to contribute—are security experts. For more than a decade, thousands of security professionals and hackers have tried and failed to find security flaws. The financial incentive to hack the network is enormous, yet neither armies of hackers nor governments have succeeded.
Remember, too, that when a new block is generated, it must be confirmed by the other miners. If somebody tried to create a false transaction with an altered block, the block would simply be rejected. Only one theoretical attack on the network exists, known as a 51% attack. I will explain it below. Since a majority of miners and nodes must reach consensus to accept a new block, the only way for a fraudulent block to be accepted would be to control at least 51 per cent of them. The attacker’s first problem would be locating and taking control of at least 51 per cent of the companies, mining pools and nodes. Controlling that proportion of miners and nodes—distributed around the world, most of them anonymous—becomes impossible. The only other option would be to create new miners outnumbering all the miners and nodes currently in operation, which would require buying more equipment and processors than the total already active worldwide. That too is impossible. As we can see, the only theoretical attack is impossible to carry out, even for governments.
As a thought experiment, however, imagine that an entity did manage to mount an attack and create a malicious block with a fraudulent transaction. By controlling more than half of the network’s computing capacity, that entity would have a greater financial incentive to earn rewards and fees than to execute the attack. Moreover, any successful attack would cause Bitcoin’s value to fall automatically, destroying the value of the bitcoins stolen.
Censorship-resistant
Because it is decentralised and secure, Bitcoin is a censorship-resistant network and currency: a government or organisation cannot ban, seize or freeze it. They can certainly try, but the only way to succeed completely would be to shut down the internet. Since each user has their own wallet, each can hold custody of their bitcoins. A government that wants to freeze your assets can do so through your bank, but Bitcoin has no bank.
Consider a theoretical scenario in which a government wants to prohibit Bitcoin within its country. Its only comprehensive option would be to disable the internet, which is neither productive nor economically viable for any nation. If it cannot do that, the other option is to pursue miners operating within its territory. Removing them would not interrupt the use of Bitcoin in the country. Even finding them is difficult because a large proportion are anonymous. The only possible method would be to trace electricity consumption to detect mining operations, yet the mining pools described earlier allow many people using separate electrical connections to combine their processing power over the internet. The following excellent article discusses how difficult it would be—and has been—for governments to ban or discourage Bitcoin use: https://quillette.com/2021/02/21/can-governments-stop-bitcoin/
Scarce
Scarcity is one of Bitcoin’s most interesting characteristics. As mentioned earlier, the total number of bitcoins that can be produced is limited to 21 million, and their rate of production falls over time, making the currency increasingly scarce. I will discuss Bitcoin’s economic and financial properties later, but to clarify this characteristic, consider the law of supply and demand. As a good becomes scarcer, it becomes more valuable provided there is demand; when demand exceeds supply, the price rises. At the time of writing, in February 2021, more than 18.6 million bitcoins had been generated—about 88.7 per cent of the total possible supply. For the first time, we have a currency that becomes scarcer as time passes, and this property brings me to the next subject.
Bitcoin’s economic and financial properties
If I told you that you could hold a form of money that is digital, requires no bank, is controlled by no institution or government other than the network of people using it, operates through the most secure network ever created by humanity, cannot be frozen, confiscated, censored or stolen, and increases in value over time… why would you not want that money? That is precisely what Bitcoin is: a currency whose value has risen by an average of 200 per cent a year; which governments have unsuccessfully tried to ban and censor; which can move at internet speed from anywhere in the world to anywhere else, 24 hours a day, 365 days a year; and which is backed not by oil production or wars, but simply by mathematics and the collective incentive to keep the system running because every participant benefits from it.
Money
How can Bitcoin be money if no government prints it? To answer that question, let us first define money. Money is simply a vehicle for value that allows people to transact. As an object, money has no value in itself; the participants in a monetary network collectively agree to assign it value. A five-dollar note is only a piece of paper, but everyone using dollars agrees that it represents the value of, say, a cup of coffee. Anything can be money as long as the parties using it agree on its value. Cigarettes, for example, might serve as money in a prison. The chips used to gamble inside a casino are money: they represent value. They are money only within that casino, but for practical purposes, that is what they are. You cannot arrive at a blackjack table and place a gold ring on the table as your bet; you need the casino’s chips, the protocol its players have agreed to use.
The point of these examples is that governments do not invent money; people—markets—do. Governments currently control money through their various currencies because that was the safest and most efficient monetary system available. Money must possess three characteristics to qualify as money rather than merely as a tradable good:
- Store of value: money must represent a value shared and respected by every participant in the network.
- Medium of exchange: money must be accepted as a means of exchange by every participant in the network.
- Unit of account: prices, transactions, profits and losses must all be recorded in the same unit.
Using dollars as an example, if you perform a job for someone, you can receive dollars in exchange. Those dollars are merely pieces of paper, but they represent the value of your work—a store of value. You can use them to buy food: you ask somebody for a hamburger and give them your dollars in exchange—a medium of exchange. The number of dollars you give them represents the price of the hamburger, itself stated in dollars—a unit of account.
As I said earlier, having governments manage money was the safest and most efficient system available because we lacked the technology to establish a truly free, self-regulating and decentralised market in which the market itself could determine the value of money. Bitcoin can change this. It is a new currency still in a stage of evolution. It currently functions as a store of value because people and institutions use it for savings or treasury reserves. It functions to a limited extent as a medium of exchange because goods can be purchased with bitcoins or sats; some cities even have projects allowing people to pay taxes and services with them. Adoption, however, remains very low compared with currencies issued by central banks. Bitcoin has yet to reach the stage at which it becomes a unit of account, allowing the value of goods to be stated in bitcoin or sats. You could do so now, but that unit would need widespread adoption to be functional.
One of the most interesting things about Bitcoin, to me, is precisely that it represents a new form of money with characteristics previously unavailable to us, whose evolution will bring major changes to the global monetary, economic and financial systems. Many people do not understand this because, unfamiliar with Bitcoin’s characteristics, they assume it is merely a digital representation of money like the digital balances used for bank transfers or card payments. As I said, this currency is still evolving and is gradually finding spaces in which to perform the three basic functions of money.
The store-of-value thesis
As noted above, people and institutions currently use Bitcoin to hold their savings or treasury reserves—that is, as a store of value. This is presently its largest use case. To understand why they choose Bitcoin for that purpose instead of their national currency, such as the dollar, euro or peso, we need to explain the devaluation problem affecting central-bank currencies and discuss some of the history of money.
Money was invented to facilitate economic transactions because barter was extremely inefficient. Throughout history, many cultures in many parts of the world have used different materials and objects as money, from precious stones to seeds. The first form of money to gain global acceptance and persist over time was gold. Gold is good money because it is scarce—money has no value if its supply is infinite—difficult to counterfeit, since methods exist to verify its authenticity, transportable and malleable, allowing it to be made into coins, ingots and bars and moved from place to place, and durable because it is a chemically stable metal. Gold has therefore served as a globally accepted store of value, medium of exchange and unit of account from antiquity to the present.
Despite these characteristics, gold is not the most efficient form of money. Although divisible, a gold bar cannot easily be cut into fractions when you reach a shop to pay. Transporting large quantities requires considerable effort and security; even storing it demands substantial space and work. Banknotes therefore began to be used as coupons representing the value printed on them in gold. Instead of carrying a sack of gold coins, a person could carry notes representing that gold. Look at the following photograph of a 1928 twenty-dollar note and notice the wording at the bottom: “Twenty dollars in gold payable to the bearer on demand.” Money issued by governments was backed by gold.
Under that monetary system, which used gold as the standard and store of value, a government wishing to issue more notes had to obtain more gold for its vaults because the notes represented gold held in reserve. As we know, gold is scarce and therefore difficult to obtain. Its use as a store of value worked until governments, seeking to meet their countries’ economic needs, began printing more money than the gold held to back it and eventually abandoned the gold standard altogether. This is a complex and interesting subject; if you want to learn more, research the Bretton Woods agreements.
Today, currencies are no longer backed by gold or any other concrete asset; one might say they are backed by debt. I will use a very simple example. The subject is obviously complex and technical, but the example is intended only to simplify the basic idea. Suppose I eat at a restaurant and, when the bill arrives, realise that I have forgotten my wallet. I explain the situation to the manager, who agrees to accept an IOU for the meal in which I promise to pay later. It is as though I have created money from nothing at that moment because I was able to pay with the note. There is no problem, however, because I know that I have money at home to back it. I then stop at a shop to buy several things and use the same technique, signing another IOU. I can continue doing this throughout the day, only to return home that evening, compare the notes I signed with the money I have, and discover that I owe more than I can pay. We could imagine a cycle in which I repay some debt but continue issuing notes and spending more until the debt becomes impossible to clear and my only option is to issue still more notes.
Many argue that the present international monetary system operates in exactly this way, keeping countries constantly indebted to other nations or to themselves. Moreover, continually printing money creates inflation: the more money exists, the less it is worth. Inflation is not really the price of things rising—the things have not become more valuable—but the currency’s purchasing power falling as it loses value. Countless macroeconomic specialists debate this subject, but inflation undeniably exists and money constantly loses value. Keeping your savings in cash is therefore unproductive because inflation erodes their value. Investing that money in public or private debt is not productive either, because in recent years central banks have kept interest rates close to zero and sometimes negative, making the return on debt equal to or lower than inflation. Some European banks no longer pay interest for holding your money; they charge you instead.
This is where Bitcoin’s use as a store of value comes in. Unlike central-bank currencies, it does not suffer from inflation because it becomes scarcer while the others become more abundant. It is also a digital currency that cannot be counterfeited, can be transported anywhere in the world over the internet, and is durable: as long as a single node containing the blockchain exists somewhere in the world, the historical record of every transaction survives. Because of this store-of-value use case, Bitcoin is commonly called digital gold or gold 2.0—a new asset that will gradually replace gold as a store of value for individuals and institutions. Some even speculate that central banks may eventually adopt it, although I personally find that theory unlikely. The following short interview with Michael Saylor is highly interesting because it explains the Bitcoin characteristics attracting investors seeking to preserve value: https://youtu.be/6RuQhsNAYh8.
This podcast contains another very interesting interview with Michael Saylor in which he discusses his view of Bitcoin as a store-of-value asset in greater depth. The interview begins at 14 minutes 50 seconds: https://podcasts.apple.com/us/podcast/state-of-play-bitcoin-and-cryptocurrencies/id1498802610?i=1000502684709
Metcalfe’s Law
One reason Bitcoin appears increasingly often in the news is its extraordinary upward price trend: its value rose 500 per cent in the last year, from early 2020 to early 2021. Most finance and market experts find this trend difficult to explain, but that difficulty arises because they compare Bitcoin with exchange-traded financial assets such as shares, ETFs, futures and derivatives. The crucial difference is that ordinary market-traded assets rise and fall according to performance, future prospects, market sentiment and macroeconomic trends. Bitcoin’s value, by contrast, is connected to market adoption.
This is where Metcalfe’s Law applies. The law explains many technological network effects and states that the value of a communication network grows in proportion to the square of the number of users in the system (n²). Just as networks such as Google and Facebook become more valuable as more people use them, the same happens with Bitcoin. We could call it a money network: greater adoption leads more people to trust and join it; as more people join, demand for Bitcoin rises while supply continually falls, and the price therefore increases.
Bitcoin’s intrinsic value
I have heard people call Bitcoin a pyramid scheme because it has no intrinsic value. I would ask them: what is the intrinsic value of the banknotes in your wallet? They have none. They are valuable only because we have all agreed to assign them value, and Bitcoin works in exactly the same way. It is currently a market worth more than one trillion dollars. If we ranked the market capitalisation of every currency in the world, Bitcoin would currently—February 2021—rank fourteenth; for reference, the Mexican peso ranks seventeenth. If Bitcoin were a company, it would be the world’s sixth most valuable, immediately below Google. It is impossible to say that this asset has no value.
Some people argue that gold is a better store of value because it has intrinsic value. I disagree. Gold is a mineral, a simple rock whose value exists only because we choose to assign it value. It is certainly a chemically stable and malleable metal and a good conductor of electricity, but that should not be enough to make it a store of value. Some argue that gold’s intrinsic value lies in its industrial applications in chips, wiring and dentistry. If industrial use were the source of gold’s value, however, copper or steel should cost far more because they are used much more extensively in industry. Others say gold’s advantage over industrial metals is its scarcity, but it seems to me that this same scarcity hinders its widespread adoption as an industrial material.
The intrinsic-value argument against Bitcoin therefore seems weak. Things have value because we assign it to them, and it is easier to make the irrefutable case that things are worth their market price, whether or not they have an industrial use. We value many things with no industrial or productive application. The most important point is that Bitcoin does have intrinsic value: truth and trust. Bitcoin is the most secure network currently available to us, a monetary network allowing everyone to know what is happening with every account at all times and preserving an eternal historical archive of its transactions. The fidelity of transactions recorded on the blockchain is extraordinarily valuable, far more so than gold’s industrial properties or expectations about companies’ future performance in the stock market.
We possess the most secure network for transactions: decentralised, agnostic towards political interests, geographically distributed, dependent on neither governments nor financial institutions, with more than 100,000 backups and a permanent historical record, capable of moving value anywhere in the world at internet speed, 24 hours a day, 365 days a year… and some argue that it has no intrinsic value? That a rock has more? A network such as Bitcoin clearly also has industrial, productive and financial applications. The conclusion is therefore that Bitcoin possesses intrinsic value in addition to its market price.
Bitcoin as an investment
Any asset whose price rises by an average of 200 per cent annually and 500 per cent in the latest year is perceived as a good investment opportunity: the expectation is that you can buy it now and sell it at a higher price in the future. I do not want to advise or persuade anyone to invest in Bitcoin, but understanding why its price continues to rise requires knowing what is happening in the market. The more people adopt Bitcoin as a place to hold savings or as an investment, the higher its price climbs. A significant turning point arrived in 2020, when companies, investment funds and highly respected major investors began adopting it. The retail market—you and me—therefore gained more confidence in the system and adopted it on a larger scale, which in turn raised the price and prompted still more institutions to adopt it. This has created a cycle in which demand for Bitcoin increasingly exceeds supply and its price keeps rising.
The great question everyone asks is how high Bitcoin’s price will go. There are hundreds of theories, but almost all investors in this market agree that holding the asset over the long term is the strategy that will make it more valuable. How will it evolve? Nobody knows for certain; we must remember that this is a new kind of asset. Many specialists agree, however, that the price should eventually stabilise, at which point Bitcoin could be used more widely as a medium of exchange and a unit of account.
If you are considering buying Bitcoin as an investment or form of saving, your first and most important investment should be in knowledge. Do not begin by buying Bitcoin; begin by spending time properly understanding the technology, how and where to buy it, how and where to store your tokens securely, and what commissions and fees are involved in buying, selling and transferring the cryptocurrency.
Legal and tax treatment of Bitcoin in Mexico
Cryptocurrencies are gaining increasing adoption in Mexico. The following article is interesting because it shows precisely how this market has grown in the country: https://www.coindesk.com/mexicos-quiet-crypto-boom
Another relevant issue for those of us living in Mexico is the tax treatment of cryptocurrencies such as Bitcoin. For the time being, cryptocurrency transactions may be regarded as in-kind transactions, although their tax treatment depends on the kind of transaction involved. I found a document from the Colegio de Contadores Públicos de México (https://www.ccpm.org.mx/avisos/2018-2020/tratamiento-fiscal-de-las-criptomonedas-cofi.pdf) and an article in its journal (https://veritasonline.com.mx/el-complejo-tratamiento-fiscal-de-los-criptoactivos/) explaining in detail the legal nature and tax provisions applicable to cryptocurrencies in our country. More and more countries are adopting measures to regulate cryptocurrencies and establish clear tax treatment. We may assume that, in a few years, after developed countries adopt measures of this kind, Mexico will have to create clearer legislation.
How and where can Bitcoin be bought in Mexico and other Latin American countries?
The usual way to buy Bitcoin is through an exchange. I have used two platforms to buy Bitcoin, and both have worked well for me. One is Coinbase and the other is Bitso. With Coinbase, you can register a credit or debit card and use it as the payment method for whatever amount of Bitcoin you wish to buy. With Bitso, you can make a bank transfer from your bank to your Bitso account and use those funds to buy Bitcoin.
How and where should Bitcoin be stored?
There are many methods and even philosophies concerning how to store Bitcoin. Ultimately, it is a completely personal decision requiring consideration of your own objectives, degree of technical understanding, confidence in institutions or in your own ability to keep tokens secure, and the potential risks and benefits of each available method.
We have discussed wallets in the abstract, but several concrete types exist. Mobile and desktop applications can function as wallets, as can physical devices. Exchanges and the custody services offered by many companies can also perform this function. Personally, I believe the safest way to store Bitcoin is in a personal wallet rather than on an exchange or with a crypto custodian. Why? Because using an exchange or custody service means accepting the risk of depending on those companies’ security and honesty. Unlike banks, such companies are subject to little or no regulation; if they are hacked or otherwise lose your funds, there may be no way to recover them. Moreover, Bitcoin was founded on the idea of no longer depending on a financial system controlled by companies, allowing everyone to become their own bank. It is important to understand, however, that when you decide to keep Bitcoin in your own wallet, the responsibility and security rest entirely with you. If you lose your wallet or access to it, there is no way to recover your funds.
Note: The information published here is provided solely for entertainment and informational purposes and does not constitute investment or personal-finance advice of any kind. Every investment, including buying Bitcoin, carries inherent risk. If you want advice about investments or personal finance, consult a professional adviser; I am not a professional adviser.
Last updated: 20 February 2021.