A vast majority of the people have no understanding of the real spirit and more importantly, the technicalities of why Bitcoin actually came into existence. At least some of you who are technically-inclined may have read Satoshi’s original Bitcoin whitepaper.
And to be fair, there is definitely an enigma about Bitcoin. Not just because of its mysterious origin, but because it’s the first successful and now the leading implementation of the whole idea of having a decentralized currency.
The cryptocurrency was again in the mainstream news due to its 2024 Halving Event.
For the uninitiated, Bitcoin Halving is a built-in feature of the Bitcoin protocol. Bitcoin halving is a periodic event that occurs after every 210,000 BTC blocks are mined or roughly every 4 years. It reduces the reward that Bitcoin miners receive for finding a new block by half of what it was previously. This halving feature is designed to control inflation and ensure a steady, predictable supply of bitcoins.
As per Bitcoin enthusiasts, this is in stark contrast to the conventional fiat currencies, where many central banks can modify the money supply unpredictably and at their discretion.
The combination of Bitcoin’s fixed total supply of 21 Million and the decreasing creation rate creates scarcity, which many Bitcoin aficionado theorize could drive its value upwards over time.
There have been several Altcoins gaining popularity every now and then. The biggest being Ethereum. But as the Bitcoin network cements its position as the premier digital asset and further gains acceptance, it now confronts certain challenges that could dictate its future utility and adoption.
And that issue is regarding Scalability of the protocol. And this can be addressed if one devotes some time to understanding layer 2 solutions that are gradually gaining acceptance.
So, while BTC’s structural design is rightly focused mainly on security and decentralization, it unfortunately, as a side-effect, limits its transaction throughput and led to led to network congestion once in a while.
The network can process only a limited number of Bitcoin transactions per second, leading to slower transaction speeds and higher fees during peak times. Also, the Bitcoin network’s original framework does not inherently support the execution of complex smart contracts and decentralized applications like other blockchain projects, limiting its utility beyond a digital currency.
This limitation of scalability has paved the way for the development of Layer-2 solutions. These solutions, if implemented properly and widely, can enable faster and cheaper transactions, thereby enhancing the Bitcoin network’s scalability and functionality. They offer improved transaction speeds, lower fees, and the ability to support complex smart contract functionality and applications. Some of the notable Layer-2 projects include the Lightning Network, Rootstock (RSK), Stacks, Liquid Network, and the introduction of rollups
By enabling faster transactions, reducing transaction costs, and facilitating the development of smart contracts and decentralized applications (DApps) on the Bitcoin network, these secondary Layer-2 protocols are crucial for Bitcoin’s continued growth and adoption. As per the experts of the field, the layer-2 solutions will eventually become indispensable in the evolution of the Bitcoin network, offering the potential to surmount its inherent scalability challenges while introducing new functionalities.
However, navigating the complexities and potential trade-offs of these solutions requires ongoing effort, collaboration, and innovation from the Bitcoin community. By addressing the challenges of centralisation, integration, and balancing core principles, Layer-2 technologies can significantly contribute to shaping a resilient, efficient, and decentralized future for the Bitcoin network.
That said, I am often asked how much should one invest in Bitcoin?
There is no one right answer here. But assuming it is legal to invest in cryptocurrencies where you reside, it is said that one can consider having at least 1% exposure to Bitcoin.
But I must warn you, that do not invest too much in cryptocurrencies as this space is extremely volatile. And by volatile, I mean horribly volatile. If you look at the Bitcoin Price Crash History, you will find that the history is filled with reds. From small corrections to huge crashes. Up to 80% price correction in a matter of months! So even after more than 13 years into existence now, if you were to ask me whether it can once again fall that much, then I will say, Yes it can. When? Nobody can predict that.
Disclaimer – Investing in cryptocurrencies is highly risky and speculative. This article should not be considered a recommendation to invest in Bitcoin or any other cryptocurrencies.
Important – You shouldn’t invest in any cryptocurrency if you are still not properly handling important financial matters like having an emergency fund, paying off loans regularly, paying off credit cards in full each time, investing for financial goals, adequately funding your retirement plan, etc.