Bitcoin: Gold Reimagined for the 21st Century

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Article first published in City AM on January 28th 2020.


When Satoshi Nakamoto first described Bitcoin in 2008, there was little way of knowing what a behemoth the asset would become over the following decade.

Dominating media headlines with its meteoric price rises and inspiring a slew of copycat coins, Bitcoin has served as both the blueprint for a decentralised economy, and an entirely new class of digital assets.

But while Bitcoin has made substantial progress in establishing itself as a store of value, its usefulness as a means of exchange has been eroded. Heavy speculation and high transaction fees has resulted in most users holding Bitcoin for the long-term, especially given the asset’s all-time highs of almost £15,000 per coin.

Diehard crypto evangelists likely view this as a departure from Nakamoto’s original ‘digital cash’ vision. But the truth is, Bitcoin’s assumed role as a speculative asset has irrevocably shifted the financial world as we know it – and few assets have as much to fear from Bitcoin’s power play as gold. 

Precious metal advocates have long looked to gold for stability from the often-volatile financial markets, especially in times of crisis or recession. However, in recent years, it’s become clear that many of the attributes which have traditionally been associated with gold can also be observed in Bitcoin.

So, what parallels exist between Bitcoin and gold, and crucially, what does Bitcoin do better?

 

Supply and demand

Scarcity is a key determinant of gold’s price, as we know the precious metal is finite. Nevertheless, quantifying the exact amount of gold on Earth is difficult. The World Gold Council estimates that around 190,000 tonnes of gold exists above ground, but how much is left to be extracted is largely unknown.  

Bitcoin, on the other hand, is limited to 21 million coins. Once the last coin is mined – in around 120 years by current estimates – no more will ever enter circulation. This hard cap on circulating supply makes it easier to predict the price of Bitcoin in the future compared to gold.  

In an interview with CNBC last August, Bitcoin bull and Galaxy Digital founder Michael Novogratz claimed that Bitcoin’s role as digital gold was clear to regulators, and still had a long way to go before it reached gold’s global market cap of $8 trillion.

 

Instability: an argument for Bitcoin?

Geopolitical tensions have always been a key driver for gold demand, evidenced most recently following the crisis in Iran.

As City A.M. itself reported, prices of gold surged to a seven-year high of £1,228 per ounce for the first time since 2013, following the brief but tense period of unrest at the beginning of this month.  

Historically, similar price action has followed other major global events, solidifying gold’s status as a safe haven asset – and leading some experts to argue that an alternative to gold simply isn’t required.

The issue with this argument is that in the 21st century – short of a global catastrophe – Bitcoin is simply an easier asset to access and store in times of uncertainty. For those in politically unstable nations, Bitcoin not only fills the role of gold as a hedge against volatile fiat currencies, but it also proves harder – if not impossible – for authoritarian regimes to confiscate.

As an industry, we’ve seen this demand in practice very recently. Blockchain research firm CryptoQuant found strong correlation between the Iran crisis and exchange outflows of Bitcoin.

Outflows tripled from around 12 thousand BTC on January 2, the day before the Iran crisis, to over 37 thousand on January 3. After Iran’s retaliatory show of force on the 8th, outflows rose to a colossal 49 thousand BTC in anticipation of all-out war.

Outflows of Bitcoin generally indicate that investors are moving their Bitcoin away from exchanges with a view to hold long-term – in the exact same way gold is stockpiled in times of crisis.

Once the crisis de-escalated, the price of Bitcoin abruptly fell – exactly as would be expected from a safe haven asset.

Closer to home, the fluctuating price of the pound in the wake of Brexit negotiations and the recent general election, in addition to the political influence on the UK stock market, has led some investors to seek a safe haven for wealth protection. Earlier this month, Forbes columnist Professor Panos Mourdoukoutas shared that researchers from the University of Pretoria had confirmed that Bitcoin was indeed used as a comparable hedge to gold against a turbulent stock market.

These events not only prove Bitcoin’s usefulness as a safe-haven asset in times of instability, but they also help to consolidate Bitcoin’s position as ‘digital gold’ for investors looking to the asset as a store of wealth.

 

Bitcoin’s second decade

As a store of value, gold has a couple of millennia on Bitcoin. But that may not be enough to stop the leading digital asset from making the next decade its own.

Early challenges associated with digital assets have largely been addressed, especially those of access. It’s already easier than ever for professional investors to buy and store Bitcoin, and now, solutions such as those we have built at Mode are also increasing access for retail investors.

Mode’s vision is to deliver a banking ecosystem which recognises Bitcoin’s potential to act as a store of wealth. The 2020’s will be defined by an increased access to decentralised infrastructure, and an increasing number of millennial participants in the financial markets.

The last step of the digital asset revolution is the provision of attractive and seamless ways for new investors to access the market, with comparable user experiences to popular mobile banking solutions. 

While central bank digital currencies look set to fill the role of digital cash, Bitcoin is poised to take the mantle of digital gold. Whether it can do so in a way that is competitive with physical gold will depend on building simple and effective investment products to attract mass adoption.


Jonathan Rowland - Agenda

- Jonathan Rowland, Chairman of Mode Banking, in conversation with James Bowater from City AM.

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