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Ever wondered why cryptocurrencies are valued by younger generations and forward-thinkers? Or maybe the sheer influx of emerging technologies is baffling, and it just doesn't sit right with you.
It's understandable if you're confused. It almost feels crypto adoption exploded throughout the pandemic. People were stuck inside, so they had to find ways to live through their virtual screens. This includes working from home and, more importantly, embodying the virtual lifestyle.
And if you're living your day-to-day through a screen, you're bound to explore virtual worlds. Metaverse initiatives, the NFT world, crypto trading, digital art... you name it. As a result, we've been placing more value on the intangible rather than the physical world.
Naturally, we must adapt to our climate. Going virtual is how we, as a human species, coped with the rapid change imposed through Covid-19.
If you aren't living under a rock, you've probably heard of Bitcoin (BTC). It's a hot topic, and it gained traction when the pandemic struck. Not only were wealthy individuals buying and holding BTC, but institutions also entered the fray. Instead of holding onto their cash reserves, they began to store their earnings in Bitcoin.
The icing on the cake is when you have the president of El Salvador tweeting about BTC and stamping his badge of approval on the digital currency. Literally feels like we're living in an alternate reality.
So what do these institutions and developing countries see in BTC?
Well, BTC is often compared to Gold as a store of value and medium of exchange. However, suppose you neglect the difference between their tangible and intangible state. In that case, they're both similar commodities that serve the same purpose.
I often find that the news cycle frequently bashes on one of these commodities. I can't even go on YouTube nowadays without seeing a conflicting stream of negativity from crypto bros and the anti-crypto crowd. You either despise Gold, or you find Bitcoin invaluable. There's no in-between.
With this article, I aim to present the facts of each commodity while trying to remain as objective as possible. I also wish to encourage you to dip your feet into the crypto world.
Bitcoin is a digital currency created by the anonymous Satoshi Nakamoto in 2009. That's right—Bitcoin has been around for more than a decade. Hard to believe, hey?
Bitcoin was the first-mover in the crypto world. It introduced the concept of blockchain technology: a public ledger that is decentralized via a network of thousands to millions of computers.
The computers (also called "miners") solve complicated mathematical equations to validate transactions on the network. If they're successful, they are awarded partial amounts of Bitcoin. Such a system encourages validators to continue supporting the blockchain while fulfilling the decentralized mission of the commodity.
The beauty behind Bitcoin lies within its deflationary nature and scarce supply.
As miners get rewards, freshly minted BTC are put into circulation. Now I know what you're thinking: Minting new currency increases the total supply, right?
Wrong. Bitcoin's supply is locked at 21 million. And at this very moment, 19 million BTC has been mined, with 2 million out of circulation. So unlike fiat currency (cash), there isn't an unlimited amount of BTC that can be printed.
Add on Bitcoin's halving events—occurring every four years—where the amount of BTC received per every completed block is essentially cut in half, and you have a scarce commodity with a deflationary mechanic. Here's a simple diagram explaining how it's beneficial for the Bitcoin ecosystem:
The reward is halved → half the inflation → lower available supply → higher demand → higher price → miners' incentive still remains, regardless of smaller rewards, as the value of Bitcoin is increased in the process
In essence, Bitcoin naturally appreciates over time, and it shouldn't drop in value.
Before we dive into the comparison between both commodities, we have to ask ourselves: What makes a currency useful, and more importantly, why does this matter?
Well, quite simply, if a currency doesn't uphold any sort of value for the user, then why even bother using it in the first place? You can just resort to currencies that are already established and regulated by our governments.
With the subject of user value, we must devise specific traits that make a currency useful.
Collectively, we've concluded that a useful currency has six key attributes: Scarcity, divisibility, portability, durability, verifiability, and fungibility.
Scarcity is an economic term used to measure the worth of things like products, currencies, and commodities. It represents how limited the supply of a particular "thing" is. Generally, a rule of thumb is that the more scarce an item, the higher it will be valued.
For example, a 1/1 painting can auction for upwards of millions of dollars, whereas plastic forks and spoons go for a couple of pennies each. Why? It's human nature to want exclusive and limited items more than items you can find anywhere.
Currencies are valued higher if they can be divisible or split into smaller portions. Let's say I own $100 of a non-divisible currency called "XOR." Now, let's say I want to exchange my 1 XOR for an apple since I'm on a cleanse. The apple only costs a dollar, so it's relatively cheap.
In this example, I wouldn't be able to purchase a single apple, as I cannot reduce my XOR. I can't have 1/100th of an XOR. Thus, XOR has self-imposed a barrier as a medium of exchange. How sad :(.
Not only are useful currencies scarce and divisible, but they're also portable. Users should be able to move however much currency they own with ease. This can be applied to conducting transactions or storing your currency in a safe location to hedge against inflation.
Durability is another key aspect of a useful currency. Those who utilize the currency for transactions anticipate it will retain its value, which for the most part, is a social construct. Suppose you bought silver to hold your cold-hard cash during a recession. In that case, you're doing this because you believe silver will keep its value upon the breakthrough of the market downturn.
Of course, commodities can be durable because of their role in manufacturing processes. This doesn't only give them intangible importance, but it also earns them physical utility for consumers.
Noncounterfetiablity/verifiability is last. If I can create the same currency with my own two hands, then why bother purchasing the currency off the market for a much steeper price? As stated here:
Money that is easily duplicated ceases to be THE medium of exchange.
All six aspects must not be met, but they sure help in the mass adoption of said currency.
They lack certain aspects that make them weak as a medium of exchange. This is why fiat currency (cash) represents Gold (not anymore, though it used to back in the day) and Bitcoin is used as the main comparison of the valuation for other currencies.
On the one hand, Gold lacks portability and divisibility. It's challenging to move Gold from one location to the next due to its weight, physical dimensions, and rarity. You need top-of-the-line security to help you switch places. It's also a tedious task to divide it up into smaller pieces.
On the other hand, Bitcoin isn't as durable as Gold. Although the halving mechanics and scarce supply encourage its appreciation in value, the price is still volatile.
Part of the volatility is derived from the unregulated crypto market. People don't trust crypto as much as stocks on the NYSE or TSX. So if they see a dip, all hell breaks loose.
Bitcoin's underlying technology is also severely outdated. Proof of Work (the consensus mechanism powering BTC mining) doesn't work as efficiently as Proof of Stake due to its small block size. High transaction costs and slow transaction speeds are expected in the network.
It's also energy inefficient. Recently, there's been a push to "cancel" Bitcoin as a currency due to its backwards role in climate change.
So if we're looking at both commodities purely from a store of value standpoint, Gold is less volatile as it's more durable. Therefore, if you're hedging against inflation, Gold is the move. At least, this is how it should be on paper.
Bitcoin is riskier, but the rewards are much greater. It's a first-mover in the crypto world, and thus, you'll never see it disappear. There will always be a social value attached to the currency. We've entered a stage in our society where institutions and governments allocate some of their cash into BTC for safe-keeping.
Also, established miners won't ever stop mining BTC. Companies like Bitfarms and Hut 8 Mining Corp have based their entire business model on mining BTC and Ethereum. Even if Proof of Work fades out, the benefit for validating nodes far exceeds the fixed and variable costs of the business.
The chart above compares the price of Bitcoin and Gold. Let's say you bought BTC at the top of the peak in 2021. You would've lost money. But if you bought a couple of years back, say in 2018, you would have scored exponential profits.
What I'm trying to get at here is that Gold and Bitcoin are both stores of value, and often, they're associated with long-term holding. So if we're looking at historical data, BTC's long-term growth surpasses Gold by a mile.