Why is Bitcoin resilient ?

When bitcoin launched in 2009, it was largely a hobby pursued by early adopters in the tech scene intrigued by what Satoshi Nakamoto, the pseudonymous founder, called ‘a peer-to-peer electronic cash system.’ As the years passed, recognition of bitcoin grew, both as an asset and a medium of exchange, until being acknowledged as a potential rival to gold by major financial players including Federal Reserve chair Jerome Powell and leading investment bank Goldman Sachs. This article explains why people are willing to trust the original cryptocurrency.   

Bitcoin Architecture

In contrast to traditional financial institutions like a bank, Satoshi designed bitcoin as a decentralised network that isn’t controlled by a single entity. Instead, it relies on a consensus mechanism known as ‘proof of work’ to validate transactions and maintain records.

Nodes, which are computers located around the world, run the software that supports the blockchain underpinning bitcoin. Miners compete to solve complex mathematical problems, requiring vast amounts of computing power, for the right to process transactions and add new blocks to the chain. In return, they receive rewards in the form of freshly minted bitcoin. Following the latest halving in April 2024, these block rewards are worth 3.125 btc ($314,000 as of December 2024). A separate set of participants called full nodes store the entire blockchain and are responsible for preventing the double spending of bitcoins.

The consensus mechanism secures the network. If a malicious party wanted to adjust a transaction already recorded on the blockchain, it would need to control 51% of the network’s computing power, commonly referred to as a ‘51% attack’. However, the cost- nearly $2 million per hour as of December 2024- makes an attack highly unlikely.   

Even a nation state would struggle to undermine bitcoin. Researchers conducted a thought experiment exploring how a country could attack the network by building its own application-specific integrated circuit (ASIC) mining rigs. Their findings, published in February 2024, concluded it would be economically unfeasible. The researchers estimated that manufacturing enough rigs (if sufficient chips were available) would cost more than $20 billion, based on 40 million units at $500 each. Furthermore, the attack would cost nearly $8 million per hour because of the amount of computing power the new rigs would introduce to the network.   

Bitcoin Scarcity

One of bitcoin’s key features is scarcity, unlike fiat currencies, which central banks can print at will. Satoshi capped the maximum supply at 21 million to make bitcoin anti-inflationary, which seems to have worked- bitcoin’s inflation rate stood at 1.7% in December 2024. As of the same date, 19.79 million btc are in circulation, 94% of the total.

Satoshi designed two mechanisms to preserve this scarcity. The first was drip-feeding new coins into circulation through block rewards. The other was reducing these rewards by 50% every time the protocol produces 210,000 blocks, which takes roughly four years. The crypto community refers to these events as ‘halvings’, and they’re keenly anticipated due to the historical impact on bitcoin’s price. The first halving took place in November 2012 when bitcoin was worth around $12, and the block reward fell from 50 btc to 25 btc. The halving that occurred in April 2024 was the fourth, while the last coin should be mined in 2140.

The scale of the global currency market puts bitcoin’s scarcity into perspective. Research by CoinShares, conducted to predict bitcoin’s future value based on adoption as a medium of exchange, suggests that it will most likely achieve a 3.5% share of the market by 2039. If correct, this outcome would represent remarkable progress in a relatively short span of time and have a corresponding impact on bitcoin’s price. But fiat currencies would still dominate by a considerable distance.  

Bitcoin Provides Trust

Gold has played a major role in the global financial system, perhaps most notably when countries, including the US and UK, tied the value of their currency to it, a mechanism known as the gold standard. The yellow metal has also traditionally served as a store of value that investors hold during periods of market fluctuations caused by geopolitical uncertainty or economic instability because it tends to hold its purchasing power.

Bitcoin’s scarcity has led to comparisons with gold and fuelled the digital gold narrative because the two assets share several characteristics:    

• Durability- the bitcoin network has an uptime (it has remained online without interruption) of 99.98% since Satoshi mined the first block

• Divisibility- bitcoin’s smallest denomination is a satoshi, worth one hundred millionth of a bitcoin

• Portability- bitcoin is easy to carry around as it’s stored in a digital wallet 

In terms of divisibility and portability, it could even be argued that bitcoin is a more effective store of value than gold.

Stores of value also serve as a hedge against inflation, both for investors and individuals. It’s no coincidence that inflation in Nigeria, ranked second in the latest bitcoin adoption index published by Chainalysis, has hovered around 30% for most of 2024. Other countries that experienced elevated inflation, including Turkey, Argentina and Venezuela, featured in the top 20.

Finally, bitcoin offers an unprecedented degree of transparency compared with traditional financial institutions. The blockchain is publicly visible, which means anyone can view the entire ledger. Explorers like Blockchain.com show live transactions and a record of the latest blocks added to the chain. The blockchain also provides an audit trail. For instance, when a hack occurs, investigators can track the movement of coins between wallets, although they can’t directly identify the perpetrator due to bitcoin’s pseudo-anonymity, another unique feature. 

In Summary

Bitcoin is resilient for several reasons.

Firstly, it’s decentralised. Multiple nodes located around the world run the blockchain software. It relies on a consensus mechanism called proof of work to validate transactions, which involves miners consuming large amounts of computer power to solve complex equations. The cost of this power makes hacking the network prohibitive. 

Bitcoin is also scarce. Satoshi capped the total supply at 21 million and designed two mechanisms, block rewards and regular ‘halvings’, to preserve its scarcity.

Trust is built into bitcoin. Investors and citizens treat it as a store of value, given its similarities with gold, while the blockchain provides unprecedented transparency, allowing anyone to view a record of every transaction.