Bitcoin has taken investors and the world by storm since its humble beginnings in 2008. Bitcoin’s price has risen, plummeted, and rebounded within the span of a little over a decade. At its peak, Bitcoin reached the price of $68, 521 on November 5, 2021.

While skeptics say that Bitcoin is a temporary bubble, others who are bullish predict its value will multiply exponentially within the next decade. According to a June 2020 Cryptocurrency Research Report, Bitcoin could be worth more than $397,000 by 2030. In 2020, the return on Bitcoin exceeded returns on both gold and the S&P 500.

So, what has caused the value of Bitcoin to increase so dramatically, and is it sustainable?

Historical Background         

Bitcoin was first created on October 31, 2008, amid a financial crisis that caused the stock market to plummet, wiping out trillions of dollars in value. Behind the pseudonym of Satoshi Nakamoto, a white paper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” was published online. At a time when the public’s trust in financial institutions was at an all-time-low, Bitcoin promised a transaction [1] system that eliminated intermediaries [2] like banks.   

The central purpose of creating Bitcoin, as laid out in Nakamoto’s white paper [3], is: 

“We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power.” 

Essentially, instead of relying on intermediaries, Bitcoin uses a public ledger to verify its transactions. Everyone collectively vets all transactions without the knowledge of who is making or receiving the transaction.

What has caused the demand for Bitcoin to rise?

Reflecting hopes that Bitcoin can reduce the inefficiencies in the current financial system, demand for Bitcoin skyrocketed. Some commonly cited benefits include the possible elimination of a central controlling authority, the minimization of fraudulent transactions, and the ability to guard against rising inflation. 

What has caused the price of Bitcoin to increase?

Bitcoin’s supply has a hard limit of about 2 million coins–which has led to a supply crunch, a phenomenon that happens when demand exceeds supply for a given product, causing the price of the product to increase. However, Bitcoin’s price is volatile because it fluctuates depending on demand, which is partially driven by investor sentiments, media hype, and government regulations. Experts suggest that Bitcoin’s rapid rise has paved the way for [4] thousands of other cryptocurrencies in the market.