By Nagaya Technologies on The Capital
There has been a buzz around the market regarding the value of Cryptocurrencies and their possible trajectory in the future. One of the most recent and ambitious in that sense is the claim that the first and currently the most popular Bitcoin is the “New Gold.”
Another one of such bold claims came from a Forbes article here, where the Economics Department of the University of Pretoria published a lengthy paper titled “Is Bitcoin the New Digital Gold? Evidence from Extreme Price Movements In Financial Markets.”
Another came from the Apple Co-Founder Steve Wozniak who says that “Bitcoin is BETTER than Gold.”
How true is this? Let us dive deeper and have an objective discussion about this.
Let us first talk about how Gold is formed. I will quote thoughtco.com on this one.
While nuclear fusion within the Sun makes many elements, the Sun cannot synthesize gold. The considerable energy required to make gold only occurs when stars explode in a supernova or when neutron stars collide.
All the gold found on Earth came from the debris of dead stars. As the Earth formed, heavy elements such as iron and gold sank toward the planet’s core. If no other event had occurred, there would be no gold in the Earth’s crust. But around 4 billion years ago, Earth was bombarded by asteroid impacts. These impacts stirred the deeper layers of the planet and forced some gold into the mantle and crust.
Making gold is not as simple as directly adding or subtracting protons from other elements. Attempts by alchemists to turn lead (or other elements) into gold were unsuccessful because no chemical reaction can change one element into another.
In short, Gold is created by NATURE and not by humans.
What about Cryptocurrency? For convenience purposes, let us use Bitcoin as an example.
Bitcoin is a Payment Network that follows a Distributed Ledger model distributed through blockchain technology. Bitcoin was created by its pseudo-anonymous founder Satoshi Nakamoto, and its White Paper was first released in the year 2008.
Since the creation of Bitcoin in 2008, there has been a total of 5000+ Cryptocurrencies revolving in the market per this day.
So, it is safe to say that from the aspect of creation, Bitcoin is NOT similar to Gold.
The process of Mining Gold from the Earth’s crust is a long, complicated, risky, and costly one.
The process that goes from Exploration of the mine, Development, Operation, Decommissioning, and Post Closure could take up to 10–20 years depending on various factors. That does not yet involve the refining process.
Cost of starting a relatively small-sized Gold Mine could take up to $500.000. This does not yet include the cost of land acquisition.
On the contrary, the process of mining Bitcoin isn’t the same as mining natural minerals like Gold.
Bitcoin is generated when a group of people who maintain their network, in this case, called the Miner, solves complex mathematical equations. The first to complete the equations will put a new block on the chain, verify a transaction, and in return, be rewarded with a bitcoin.
Although early on in Bitcoin’s history, individuals may have been able to compete for blocks with a regular at-home computer, this is no longer the case. The reason for this is that the difficulty of mining bitcoin changes over time. Less computing power means the difficulty level decreases.
All of this is to say that, to mine competitively, miners must now invest in powerful computer equipment like a GPU (graphics processing unit) or, more realistically, an application-specific integrated circuit (ASIC). These can run from $500 to tens of thousands.
As it is true that the cost of both Bitcoin and Gold mining increases with time, let us keep one thing in mind. In the case with Bitcoin Mining, this is NOT necessity cost (like the case for Gold Mining) but rather COMPETITION cost. And it will keep getting more costly with time as more miners flock into the industry making it more complex to mine.
What determines the value of Gold?
There are various reasons, including External Market Conditions and the Element themselves.
External Market Conditions include:
1. Value of the US Dollar
2. Central Bank Gold Reserves
3. Worldwide Demand and Supply
External Market Conditions may have a slight impact on the price of gold, but it will not drive the price haywire. That is how it has been for thousands of years since Gold first originated.
Why is that? Because of the Element itself. Data Driven Investors says:
Gold has several financial advantages when compared to other assets. Gold has no time limit and no shelf-life; most of the gold found is still in existence. Gold is also portable, and divisible; splitting up gold does not change its value, as opposed to other metals, like diamonds. Gold supersedes other metals because of its non-oxidation property, unlike copper and iron.
Gold cannot be counterfeited or inflated; central banks cannot reproduce Gold. Unlike paper currencies that can just be printed anytime by central authorities, Gold material is abundant enough to be made into a coin but limited enough to create value.
On the contrary, what determines the value of a Cryptocurrency?
There are several factors to this, including
3. Market Sentiment
As per 2019, the market adoption of Cryptocurrency is 237.1 billion U.S. dollars, up from the 2018 value of 128.78 billion.
But we got to ask, what is the percentage of these are individual investors investing into a long-term project vs actual companies accepting them as a valid method of payment? Usability may seem like a flowery idea where they step up and completely replace fiat currency, but that is a thing of the future.
We shall discuss further about Usability below.
What about Hedge?
Hedging is an investment used to back up an asset to manage the probability of loss from fluctuations in the prices of commodities, currencies, or securities.
It would be wise for us to measure the worth of a Cryptocurrency through the hedge that backs it up, but the majority have none. That means, if there comes a day when a Cryptocurrency loses its value completely, our investment is flushed down the drain.
So, it currently leaves us with just one factor — Market Sentiments. Or to put it out bluntly, the majority of a Cryptocurrency today is not backed with anything more than mere play of demand and supply.
Now there are certain cases where companies create Cryptocurrency to crowdfund and invest the earnings into Crypto Mining. The “Hedge” in this sense is the Crypto generated from the Mine.
If the Crypto themselves has no subsequent value, what makes us think using this as a hedge is a good idea? What difference would that make as compared to the current Fiat money system?
If we talk about usability and mass adoption, there is an interesting angle we can exploit to have a better understanding, scalability.
Gold is deemed as one of the most useful metals on earth. Geology.com mentions that:
Its usefulness is derived from a diversity of special properties. Gold conducts electricity, does not tarnish, is very easy to work, can be drawn into wire, can be hammered into thin sheets, alloys with many other metals, can be melted and cast into highly detailed shapes, has a wonderful colour and a brilliant luster. Gold is a memorable metal that occupies a special place in the human mind.
From Jewellery, Technology, Culinary and even aerospace can utilize Gold. The chart below shows Bullion Gold’s usability in the United States.
What about Bitcoin?
At its base layer, Bitcoin is not very scalable. If we are looking at having a mass adoption of Bitcoin, we have to think about how Bitcoin’s decentralized ecosystem is able to accommodate millions of users’ transactions at a particular time.
Fernando Ulrich from Medium says:
Bitcoin’s base layer, at the protocol level, cannot scale exponentially. Linear and incremental scaling is possible, and it will continue to be upgraded to accommodate more throughput along with other optimizations. For onboarding billions of users, however, exponential scaling is necessary, and blockchains are unfit for this need. Any cryptocurrency claiming otherwise is giving up some essential features to accomplish this, although its creators may not disclose or even realize it. On-chain exponential scalability with paramount security and decentralization is infeasible, there are always engineering trade-offs.
So, Bitcoin, at its core, is not as scalable as Gold. Does that mean we cannot see it being used on a wider scale?
It is possible, but it would take Bitcoin to bootstrap their system to accommodate this, or another Cryptocurrency comes to the picture with a core system that is suitable for mass-scalability.
As attractive it is to invest in Cryptocurrency, we can only see its sustainability during trying times like the one we are currently having.
The Cryptocurrency community is desperate to proclaim Bitcoin or Cryptocurrencies as the new Gold. But the market has shown otherwise.
Volatility is a measure we can use to determine the stability of a market. This chart given by Reuters has, in fact, shown that in times where gold prices are soaring up, the Bitcoin chart shows inverse co-relation.
Craig Erlam, senior market analyst at Oanda Forex in London, said
One day, who knows. In certain situations — Argentina, Venezuela etc. — perhaps there’s a case,” Erlam said. “But bitcoin is not gold and certainly not gold 2.0. At the moment, it’s a toy that has the potential to be more, but that’s all.
The evidence isn’t there, and fundamentally, it’s too volatile and unpredictable to even be considered.
Cryptocurrency has the potential to become an important part of the financial system, and thus a good investment option. But it has been proven time and time again that the haven of investment even when the market crashes has always been Gold.
Gold has maintained its value for thousands of years because of its intrinsic quality. As good as Cryptocurrencies are, they are NOT similar to Gold.
For this reason, there are more and more Cryptocurrencies emerging in the market that are backed by real assets, like Gold. This is relieving news for investors, as real assets protect the investment from the worst possible scenario of Cryptocurrencies losing their value altogether.
This is the option you can take if you are looking to invest and reap the benefits long term, more on that here.