Bitcoin is the “model-a” of all crypto and has significantly contributed to the current finance revolution we are experiencing. Investors traditionally call Bitcoin "digital" gold for its long-term store of value. With only 10 years of track record, Bitcoin still has a lot to prove versus gold's 5000-year track record as a store of value.
The History of Bitcoin
Bitcoin (BTC) has been around since 2008 when a pseudonymous developer named Satoshi Nakamoto introduced their idea to the world at the height of the global financial crisis.
He made a publication with a Bitcoin-inspired paper, “Bitcoin: A Peer-to-Peer Electronic Cash System” to cryptography via a mailing list and online forum that some say has made one of the biggest contributions to digital finance in the 21st Century.
Bitcoin started as an only enthusiast hobby moving value around the blockchain from wallet to wallet as a social and economic experiment. Until one day, on May 22, 2010, Laszlo Hanyecz made a historic transaction in cryptocurrency, buying 2x Papa Johns pizzas for 10,000 BTC. This historic transaction showed that real-world, peer-to-peer electronic cash was a real thing and had the potential to act as a decentralized global ecosystem.
Soon after this transaction, in February of 2011, Bitcoin gained parity with the U.S. Dollar, reaching a $1 = 1 BTC value. Later that year, Bitcoin gained momentum on the underground Dark Web as the default currency for illicit transactions and gained the full attention of law enforcement and regulators.
January 2013, The Bitcoin economy topped $1 billion for the first time showing the emerging asset class is a force to be reckoned with.
In 2014, one of the largest payment providers, PayPal, set up a Bitcoin wallet platform to enable Bitcoin transactions. This integration was later removed due to market volatility and Anti-Money Laundering regulations still being in their infancy.
2016, Bitcoin and all the cryptocurrency space enter a surging bull market that tops out with Bitcoin valued at $2,000 before crashing back down to $3,250 by the end of the year.
2020, the global covid-19 pandemic sees all markets globally drop nominal value with Bitcoin dropping to just $5,000. Developed economies start printing Fiat money endlessly, diluting issued currency's buying power and creating a rising inflationary market. Bitcoin surges to over $66,000 as investors rush to buy and hold a scarce, digital, and finite asset, Bitcoin.
The History of Gold
Many countries made use of gold and, later, gold coins in the act of barter and exchange. Around 700 BC, the first gold coins with a figure of lion and bull depicted on it were made as issued by King Croesus of Lydia (a region included in Turkey today) and were considered actual works of art. This gave the coins monetary value and allowed a new era of trade to take place. Previously, traders and merchants had no other formal way to exchange other than a Gift and Barter economy previously used for 1000's years before.
It was not until the earliest form of banking that originated in ancient Rome in 300 BC that investors, traders, and merchants could grow their country's economy at scale using central banking practices. The problem persisted: carrying gold coins in crates and chests was expensive, insecure, and bulky when making even modest transactions.
Paper money would soon replace gold as a liquid currency to solve the problems around fungibility, size, weight, and bulkiness. The Europeans were thought to have created the first paper money currency in the 12th Century, but, when the explorer Marco Polo, the Venetian merchant, traveled the Silk Road to China in 1271 – 1295 AD, he discovered that the Chinese had a firm grasp of paper money and monetary policy since as early as 700 BC, nearly 2000 years earlier.
Parts of Europe were using Gold Issued coins as late as the 1600s to facilitate trade, finance, and investing in new ventures. Gold was still the backbone of all economic transactions because of its scarcity, rarity, fungibility, and difficulty to mine and refine. However, the policies used to create the paper-based equivalents of gold or silver held on reserve at banks were limiting factors, as each note in circulation stood for an ounce of gold or silver held at a reserve. This restricted the amount of available currency in the system and hampered economic growth.
The 'Gold Standard' fixed gold's price per ounce into many of the world's major currencies until 1944. After World War II, the Bretton Woods Agreement laid down rules for the commercial and financial relations between the United States of America, Canada, Western European countries, Australia, and Japan.
The U.S. Dollar's direct relationship to gold was severed in 1971, and gold was no longer used as a basis for currency exchanges. Fiat currency (paper currency) has been issued and printed without any cause of value other than a promise of stability from the issuing government ever since.
In 2020, nearly 20% of the total U.S. money supply was printed, which made an increase in circulation in just one year without any "backing."
Properties of Gold
Many factors make gold a reliable safe-haven investment. It is valuable for consumer products such as jewelry and electronics and even heat shielding for satellites. Despite the demand for gold, its source and supply remain low with as little as 3,000 tons per year being mined and refined.
Investors have traditionally put their money into gold to hedge against stock market fluctuations and volatility during downswings to protect their investments from eroding value. Investors have traditionally moved in and out of gold to ride out market fluctuations, whether buying gold bullion directly or investing via a Gold-backed ETF.
While gold is still mined from the ground worldwide, much of world trade is still carried out and settled via gold bullion stored in Federal Reserves. Often this gold will be used as collateral for Government Bonds, Loans, and other financial instruments.
The U.S. currency and gold were severed in 1971, and gold was no longer used as a basis for currency exchanges. On the other hand, Fiat currency (paper currency) has been issued and printed without any cause of value other than a promise of stability from the issuing government.
In 2020, nearly 20% of the total U.S. money supply was printed and distributed to the public and made available to the finance sector to bolster and lift economic growth. This massive increase in the circulating supply of U.S. Dollars has had several knock-on effects in inflation, debt, and sovereign wealth, with no end in sight in 2021.
What does fiat money have to do with gold? Everything. Gold has been used as a store of value to "issue" fiat money in the past. Now that fiat currency can be printed freely, gold is far scarcer and more valuable due to the diluted buying power of fiat money being endlessly printed and injected into the financial system.
Properties of Currency Vs. Money
While getting confused about currency and money is extremely easy, there is an easy method to figure out between the two.
Currency can be printed, minted but is not a store of value.
Money cannot be printed, cannot be minted, but is a store of value.
A currency is most known to be a piece of paper with numbers showing its value for goods, services, or transfer of wealth. However, the paper the money is printed on is only worth a fraction of a cent.
On the other hand, money carries a value of the minerals it is made of and what value that current mineral trades at. Money can come in coins, bars, or larger bullion bars made of Gold, Silver, Platinum, or even copper.
However, both money and currency serve similar purposes in the global financial system. Both currency and money are both:
Durable and does not deteriorate
But only money is a store of value.
Properties of Bitcoin
Bitcoin uses a secure information-recording system called a “blockchain”. The weak relationship between Bitcoin and other assets, such as stocks and bonds, has led people to refer to Bitcoin as Digital Gold. The ability to invest into a liquid asset that can be transferred to any wallet on earth for a few cents in a matter of minutes is the greatest financial breakthrough of the 21st Century.
There is only a total of 21 million Bitcoin that will ever exist, with roughly 18.8 million Bitcoin in active circulation at the time of writing in October of 2021. It is estimated that the last full bitcoin will be mined in 2100, with the last fraction of minable bitcoin not due to be mined until 2140. On the other hand, gold is still being found and mined from the ground each year at a rate of 3,000 Tons per year. It is also becoming harder to find and mine in abundant quantities. But there is not a real end in sight for gold, just increased scarcity of unknown magnitudes.
Perhaps we will mine gold from meteors in the future?
Bitcoins are generated by performing complex processes and equations called mining proof of work, which also carry out peer-to-peer wallet transactions across the decentralized Bitcoin network. The people who generate Bitcoin are referred to as miners. These people are rewarded with Bitcoins in exchange for their time, computing power, cost, and effort deployed to secure the network.
The bitcoin "ledger" has an immutable record of all transactions conducted across the network back to the genesis block in 2009. Before a bitcoin transaction can take place from one wallet to another, the bitcoin miner will check and gain consensus among other nodes on the network to verify whether the wallet is funded, valid, and allowed to be exchanged. Each wallet address and balance are publicly viewable and verifiable on the blockchain in real-time to anyone with an Internet-connected device. Once verification has taken place, the transaction is “mined” on the blockchain for everyone to see and crypto delivered to the user's wallet.
The idea of a decentralized blockchain differs from traditional banking. No one can see any other bank account balances, nor where the transactional trail of money leads from bank to bank. This level of cloudiness and lack of transparency has led people to believe that many banks are insolvent and not a secure place to store long-term wealth.
The Bitcoin source code also says that rewards to miners will be halved periodically to stop the market from being flooded with newly mined tokens too quickly. This “halving” event is augmented by a constantly evolving “difficulty” algorithm to make the calculations harder to solve if too much computing power is deployed all at once.
Investing in Bitcoin and Gold
When the Federal Reserve and central banks endlessly print fiat currencies to bail out banks, businesses, and sometimes entire economies, gold has always attracted investors as a haven during turbulent times. With the amount of fiat money now in circulation, investors are again looking at alternative hedges to traditional markets. Bitcoin and crypto are becoming an easier and just liquid method to preserving wealth and trade with volatility.
Gold will always have an actual world store of value because it can always be used for something else apart from a store of value (jewelry, heat shielding, etc.).
Bitcoin being inherently digital, cannot do such things. But, in an ever-increasing digital world, Bitcoin could have a place in backing different investment and payments activities as a solid "backstop" of future value deterioration. Suppose there is only 2 million more Bitcoin to mine into circulation between (2021) and 2140, with a small user base of 120 million people. In that case, there could be a supply and demand shock in the future, creating a digital gold rush of investment and innovation.
This gold rush happens for gold in the 1800-the 1900s and is happening again today for Bitcoin.
Where will your portfolio be when the dust settles?