In the near term, Bitcoin will remain as a speculative digital asset. However, certain indicators point towards a probability of it becoming a “digital gold” in the future.
A digital currency system known as E-gold was created in 1996 by attorney Barry Downey and Douglas Jackson, an oncologist. It was the first digital gold currency backed by physical gold stored in the company’s vault. The system allowed users to own actual gold in the form of a digital currency, and enabled them to make instant private payments to other e-gold accounts. Unfortunately, it was shut down by federal law enforcement agencies in 2009 due to regulatory concerns. Coincidentally, the revolutionary blockchain and its reward token called Bitcoin, was invented during the same period as e-gold’s demise. Since then, Bitcoin has been labelled by investors worldwide as a potential “digital gold” which might replace physical gold as the preferred store-of-value asset in the decades following the first minted Bitcoins in January 2009.
Describing Bitcoin as “digital gold” can be a convenient way of explaining its concept that attracted buyers into Bitcoin, giving the first cryptocurrency a real-world value. The globally recognised digital asset has strikingly similar characteristics to physical gold, as both assets are limited in supply and inimitable , not controlled by a single authority and fungible. Unlike e-gold, Bitcoin is decentralised, while e-gold is a centrally controlled system which has a single point of failure in the event of a fallout of the company. However, it remains to be seen whether or not Bitcoin can stand the test of time and prevail upon the global financial market as the replacement of gold, and as the store of value for the digital era.
In March 2020, Bitcoin experienced an extreme volatility which capitulated traders who entered the market in January and February of the same year.. However, there is evidence that suggests that traders with substantial amounts of capital, or whales, have seen the massive price dip as a buying opportunity for Bitcoin, reigniting the narrative of Bitcoin as the digital gold.
Anticipation for the digital gold
The underlying blockchain technology and cryptocurrencies have given rise to a growing interest from governments, corporations and financial institutions. Countries like China have acknowledged the useful technology and are using it to create national digital currencies. Likewise, droves of famed corporations including Microsoft, IBM and Google have embraced blockchain and integrated the technology into their business operations and products. As a result, cryptocurrency is becoming an attractive digital asset for retail and institutional investors in recent years and Bitcoin has managed to maintain its dominance in the cryptocurrency market. Additionally, many experts believed that cryptocurrency banking may emerge as an indispensable part of the financial market as a result of the maturing cryptocurrency market. Crypto banking is a strong contender to traditional banking systems due to its decentralised system, offering a more efficient, transparent and secure system for the people.
The imminent rise of Bitcoin
A recent study by US-based cryptocurrency exchange Coinbase mentioned that the market capitalisation and demand for gold is linked to its supply scarcity. Armed with a multitude of technological advantages, accelerating development, and maturing the global market, Bitcoin is a strong contender for Gold as the preferred store of value. The market value of Bitcoin has grown exponentially since 2013 and has experienced a handful of major rallies brought about by the first two Bitcoin halving events, in 2012 and 2016 respectively. The Halvening, or Bitcoin halving event, occurred when the reward for the mined blocks on the Bitcoin blockchain is halved, further slowing the production rate of the 21 million Bitcoin supply in existence. After the third halving event in May 2020, and the coin’s production rate will halve every 210,000 blocks until the total 21 million Bitcoins are fully mined, 120 years from the time of this writing.
On the contrary, the supply of gold may increase over the next century, possibly owing to the technology advancement in asteroid mining. In 2017, NASA announced that they are planning to visit Asteroid 16 Psyche made of gold and other precious metals including gold. If mining on an asteroid is possible in the future, Asteroids like 16 Psyche will be worth a whopping US$10,000 quadrillion dollars. While this may seem like a far-fetched idea in 2020, Bitcoin on the other hand, has an unalterable total supply deeply programmed into Bitcoin's immutable blockchain.
Bitcoin and Gold’s History as a Hedge
In 560 BC, the Greek state of Lydia in Asia Minor introduced the first gold coins as a medium of exchange. For about two millennia, the gold standard was recognised globally as a reliable form of money and national currencies of many countries were pegged to gold, until 1971 when US-pegged national currencies became the norm. However, various financial crises have casted doubts over their currencies over-reliance over the US Dollars. Bitcoin was created on the basis of this concern, when the Bitcoin creator Satoshi Nakamoto felt that the people’s money should not be controlled by central authorities. In the 2008 financial crisis, companies and individuals were gravely affected by big banks due to their risk mismanagement amid the economic downturn.
However, Bitcoin is designed to be a hedge against authoritarianism and not monetary manipulation. It offers a well-built resistance to governments, unlike physical assets like gold, which is susceptible to civil forfeiture. Bitcoin, as an asset class, was created to counter government’s pervasive control over the people’s assets, and have proven itself useful in geopolitical turmoils.
Added Privacy Layers in Bitcoin
Bitcoin is an intangible asset which can be traded easily within minutes in a cryptocurrency market which operates around the clock, anywhere in the world. Scarcity and ease of transfer make bitcoin a great store of value. With the help of available privacy tools available in the cryptocurrency market, the pseudonymous digital store of assets could also conceal the identity and personal information of the holder, unlike gold which most often require a declaration of information to authorities.
Although there are privacy-focused cryptocurrencies such as Monero which offer obfuscation of the user’s data and identity, Bitcoin dominance has garnered a comprehensive support ecosystem enhancing this asset class. Known as Bitcoin mixer, the third-party privacy tool enables the holder an added level of anonymity and privacy which is often more secure than privacy coins like Monero. With an increasing number of people purchasing Bitcoin, the traction of Bitcoin mixing services have grown in tandem with the cryptocurrency. Bitcoin mixer ensures complete anonymity of the investor, further cementing the potential role of Bitcoin as the preferred store of value in the years that follow.
A Bitcoin mixer is a user-friendly automated platform which provides a seamless and secure environment, removing traces of the investor’s transaction with Bitcoin through the randomisation of the Bitcoins sent to the Bitcoin mixer and received into the user’s receiving Bitcoin address. Most reputable Bitcoin mixers do not keep any logs or personal information of the user, since no account is required for the Bitcoin mixing service. On the other hand, An account is required for storing the physical gold asset, and is subjected to unwarranted intrusion of the investor’s privacy.
Bitcoin as a Safe Haven Asset
Michael Sonnenshein, the Managing Director at Grayscale Investments, has announced in November 2019 that the US Securities and Exchange Commission (SEC) has recognised the Grayscale Bitcoin Trust as a reporting company, which holds an estimated 1.7% of the total Bitcoin supply. According to Sonnenshein, the decision signals a progress of the crypto market, where regulators are no longer conservative and are willing to engage with the digital currency asset class. Bitcoin’s growing status as a safe haven asset may also be seen in countries like Venezuela and Iran, where economic turmoil impacted their national currency, forcing their citizens to look for Bitcoin as a safe haven. Evidently, reputable peer-to-peer Bitcoin marketplace such as LocalBitcoins and LocalCryptos saw the high trading volume of Bitcoin in affected countries like the above.
Beyond Digital Gold
The world is now facing challenges such as the coronavirus pandemic, oil price wars and a large-scale global recession not seen since the last world war. Should Bitcoin become significant enough in the market to prove its viable alternative to gold and the traditional financial system, it will evolve beyond a hedge against the longstanding safe haven asset, gold. Every application built around Bitcoin provides an alternative for consumers, and enhances one’s anonymity through third-party privacy tools like a Bitcoin mixer. The current year may be a monumental year for people to realise the flaw in the unscrupulous centralised financial system. Gold and Bitcoin will likely coexist in the foreseeable future. Beyond that, the function of Bitcoin may far exceed that of gold, introducing a new concept of money as we have never seen before.