The most expensive pizza in the world.

A history of Bitcoin.

In this post, we’ll take the opportunity to talk about Bitcoin, a topic that has generated a lot of interest recently. We’ve made an effort to explain it in the simplest way possible, without getting into too many technical details, and we hope it will be helpful.

In 2010, Laszlo Hanyecz, a programmer from Florida, decided to demonstrate that Bitcoin could be used as a real currency. On an online forum, he posted an offer: 10,000 bitcoins in exchange for two pizzas. A volunteer accepted, and the pizzas were delivered to his door. At that time, 10,000 bitcoins were worth just $41, but today, those same pizzas would be worth almost a billion dollars (that is, $1,000,000,000).

Origins of Bitcoin and its history.

Bitcoin is a digital currency created in 2008, following the financial crisis, by Satoshi Nakamoto (a pseudonym). The main purpose of Bitcoin is to enable direct transactions between individuals, eliminating intermediaries such as banks or governments, hence the fact that it is considered a “decentralized” payment mechanism.

The mystery surrounding Satoshi Nakamoto has generated numerous theories about their identity. Some speculate that it is an individual, while others believe it is a group of developers. Nakamoto presented their vision in the document “Bitcoin: A Peer-to-Peer Electronic Cash System,”published in 2008. In 2009, they launched the initial version and then disappeared in 2010.

How it works (in very general terms).

Perhaps one of the most interesting aspects of Bitcoin is its scarcity. This cryptocurrency has a limit of 21 million units, which makes it a scarce resource, and it is produced each time a block of transactions is confirmed within what is known as the Blockchain. Currently, there are 19.8 million in circulation, and it is estimated that the remaining amount will be mined in approximately 100 years. Some question the claim of “scarcity” because, although there is a limit of 21 million, Bitcoin is divisible.

For the rest to happen, Bitcoin mining machines are responsible for approving transactions and validating them on the blockchain, receiving a bonus for their services, just as happens in gold mining, where miners are incentivized to mine gold due to the reward behind this activity.

Source: Global X ETF’s

Myths and realities.

• Will Bitcoin replace traditional currencies and central banks? Unlikely. Although Bitcoin is a popular investment option, central banks will do everything possible to avoid losing control of their economies so easily. Additionally, a new ecosystem of digital currencies backed by governments (CBDCs) is emerging. Bitcoin faces significant challenges in being considered an efficient method of payment, such as volatility, transaction costs, and the time it takes to confirm transactions.

• Is it truly decentralized? Bitcoin is praised for its decentralization, but in practice, large mining groups control a significant portion of the network’s computing power, which is responsible for approving transactions, as we mentioned earlier.

• The myth of anonymity: A common mistake is to associate Bitcoin with complete anonymity. In reality, as we have discussed in this article, transactions are completely traceable on the “blockchain,” which could potentially allow authorities to track and disrupt criminal operations. In fact, it can be argued that Bitcoin is more traceable than cash.

• Use in criminal activities: This is one of the topics that has generated the most controversy surrounding Bitcoin, and contrary to popular belief, its use for illicit activities currently represents a limited fraction of the total number of transactions. According to the latest report from Chainalysis, the first company dedicated to tracking the Blockchain, 0.34% of all crypto transactions in 2023 were illicit, according to their estimates, and most of these come from entities sanctioned by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), which are located in sanctioned countries.

Source: Chainalysis, The 2024 Crypto Crime Report.

Ratings and volatility.

Bitcoin is known for its extreme volatility, with fluctuations that have defined its history, which its followers refer to as “cycles” or “bull runs.” In its early days, its price was only a few cents, but in 2017 it reached $19,641 before falling sharply in 2018, while in 2021 it reached another peak of $69,010 before falling again. More recently, in 2024, Bitcoin surpassed $100,000, driven by increasing institutional adoption and a favorable political environment for cryptocurrencies.

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Current environment

In recent years, Bitcoin has evolved from a decentralized experiment into an asset accepted by institutions. Companies like Tesla and BlackRock have recognized its potential as a store of value, and in January 2024, the Securities and Exchange Commission (SEC) approved applications from several financial institutions to offer funds (ETFs) that invest in Bitcoin, making it available to millions of investors through traditional investment accounts. As of this writing, these ETFs have received nearly $35 billion, which has boosted the price of the cryptocurrency.

Additionally, the global political environment has been a key factor in the adoption of Bitcoin. The first Trump administration was not particularly enthusiastic about cryptocurrencies, prioritizing regulations to prevent fraud and illicit uses. However, during the last election, the crypto industry financially supported candidates who are now influencing government policies. In fact, President Trump nominated a “crypto enthusiast,” Paul Atkins, to head the SEC, which could potentially represent a paradigm shift in this relationship between regulators and cryptocurrencies. This narrative has increased Bitcoin’s legitimacy in traditional financial markets.

Conclusions

Bitcoin critics argue that the lack of intrinsic value poses a significant challenge to its acceptance as a reliable store of value. Unlike traditional assets that have tangible use or are backed by an economic authority, Bitcoin relies heavily on market perception and the trust of its users. For Bitcoin enthusiasts, its value does not necessarily come from physical backing or daily utility in the tangible world, but from a combination of unique features, such as its scarcity, decentralization, security, growing adoption, and trust in the technology.

In our opinion, cryptocurrencies have a promising future, but we should not let ourselves be carried away by enthusiasm. Even with their growth, they are not close to replacing traditional currencies or becoming safe havens against inflation. Despite their extreme volatility, Bitcoin has proven to generate extraordinary cumulative returns over time, with increasing adoption and an increasingly favorable regulatory environment.

For more aggressive investment profiles, cryptocurrencies can represent an interesting opportunity due to their high potential for appreciation (understanding their high risks). However, for more conservative investors, their volatility remains a significant barrier. Therefore, it is crucial to evaluate the role of cryptocurrencies within a diversified portfolio, always based on the investor’s risk profile.

Article written by Michael Marciano and Miguel Orozco. Edited by Roberto Vainrub.

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