On January 8, the price of one Bitcoin surpassed 40,000 USD, the highest price in history. In comparison to the price in December 2020, the price has already doubled. The first real price increase occurred in July 2010 when the valuation was less than 0.1 USD. To understand the causes for this dramatic increase in value, it is important to understand what bitcoins and blockchains are first.

What are Bitcoins and Blockchains?
Bitcoin is the first blockchain-based cryptocurrency in the world. It was invented by Satoshi Nakamoto in 2009. Bitcoin runs through an autonomous software program that is 'mined' by people seeking bitcoin in a lottery-based system. To make this easier to understand, assume that bitcoin is the currency in a village. All transactions among every individual in the village are recorded by the accountant. By the end of the day, everyone needs to visit the accountant’s place and copy all transactions. To avoid congestion, they can also copy from each other. When all transaction records are connected, they create a chain, the blockchain.

In addition, some reward is paid to accountants to ensure that they have the incentive to continue their work. Due to decent pay, many people want to be accountants.The person who is able to calculate the hash first has the eligibility to create a block. This process is also called “mining”. Further enhancing the security of Bitcoin, each account has a public key and a private key. Only the divulging of a private key can lead to the loss of money.

What are the Causes of the Intense Growth in Value?
A Decrease in Supply
To prevent inflation, the supply of Bitcoins is decreasing. The supply has decreased by half this year. While more people are positive about the future of Bitcoin, the supply decreases. This leads to the appreciation of Bitcoin.

Unstable Global Politics
Modern day currencies are backed up by the credit of the government. Once politics in a nation becomes unstable, the demand for the country’s currency will decrease while the demand for gold and Bitcoins will increase. Due to the political instability caused by COVID-19, Bitcoin has had a significant growth in value.

What are the Defects of Bitcoin?
Deflation Spiral
Due to the limited quantity of Bitcoins, some people save Bitcoins. When this happens, the liquidity of the currency decreases. As a result, the transactions of goods and services will decrease, which leads to a decrease in GDP. The sticky prices prevent the price level from adjusting in a timely manner to deal with the deviation from the market equilibrium. This might bring about an economic depression.

Failure of Decentralization
The original purpose of Bitcoin was to establish an interdependent system that would prevent a similar event like the 2008 economic crisis from occurring again. However, as the process of mining* became more difficult, better computers were needed to make profit out of mining. As a result, corporations arose to commercialize the mining process.. Once the process of mining is controlled by an authority, the decentralization will become a mirage.

*mining: making new bitcoin by solving a mathematical puzzle.