Why Bitcoin is The Digital Gold
Bitcoin's total market cap will surpass gold in the coming few years. Understand why.
Many people think Bitcoin is like the stock market. That's because it is digital and gets traded online. But very few people understand that Bitcoin is more like gold than shares. In this post, I will explain why and how.
When you buy company stocks, you are lending money to the company. The company instead of taking your money as debt, gives you a percentage of the company to you. If the company increases in value because its revenue and market share go up, you will also enjoy the appreciation and your asset value goes up.
You can enjoy the appreciation in this asset value only when there is someone else ready to buy the same shares from you with the expectation that someone else or the company itself buys the shares.
If the company doesn't perform well, and if people think that there won't be many people who will be ready to buy the shares at a premium, then you have more sellers than buyers and the price will crash.
Now think about gold. When you are buying gold, you are not lending money to anyone. You are just giving money to the bearer of gold and you take the gold. You become the bearer of the gold that you have bought.
Gold is a bearer instrument. It's not an entry in a ledger that you own this much gold. You take possession of the gold (unless you are buying gold ETFs, aka paper gold).
Most people do not buy gold ETFs because they do not trust any institution. In the long term, institutions could go bankrupt and you cannot audit their gold reserves yourself, you might have to trust another institution who claims that they have audited their reserves.
Indian households are known for buying gold in the form of jewelry and giving it to their children. Gold has value because it has stood the test of time as a precious metal that cannot be inflated in supply. Gold being scarce is what gives value to gold and gold is treated as money.
Gold inflation is only 1-2% and the cost of mining gold is very high. However, if gold price shoots up in value very fast, the cost of mining gold from the earth will be justified and the inflation rate of gold could increase. Gold is hard to inflate, but not impossible to inflate. Technology could improve in the future allowing us to mine gold from asteroids as well.
People buy gold confidently and hold it for decades and generations because:
Gold supply cannot be inflated easily.
Gold is a bearer instrument and doesn't have counterparty risk. (If you hold debt, stocks, or real estate, you need to depend on another party to prove that you own it). Your cash in the bank is also a liability of the bank to pay you in the future.
Gold can be verified for its purity using simple instruments (this can be done by visiting a jewelry store, but still not that easy to do at home).
Gold has intrinsic value and it can be used for industrial purposes. (However, more than 80% of gold is in the form of coins and bars and is only used as a store of value).
Now these are the properties that make gold a form of money. But gold also has other disadvantages that make it a poor form of money.
Gold cannot be verified for purity easily for small transactions. If I pay for something with a gold coin, the receiver will not accept it because he cannot verify its purity instantly.
Gold is not divisible easily. I cannot pay for coffee with gold dust.
Gold is difficult to store safely. If I am carrying gold while traveling, it is very risky. I could get robbed.
Gold cannot be transferred across the world through a digital network.
The total amount of gold in the world is unknown. There are only estimates of it. Some big country's central banks could be holding a lot more gold than what they report. China is rumored to be buying a lot of gold.
New gold could be found in places and can be mined. That will increase the supply of gold and reduce its price.
How Bitcoin is Better than Gold?
A lot of people do not understand the maths behind Bitcoin. They think that someone is controlling Bitcoin and they might manipulate the supply of it. Nothing could be further from the truth.
Bitcoin has a limit of 21,000,000. Out of which 19.57 million has been already issued. New bitcoin is produced or "mined" when new blocks are added to the blockchain. Right now, each block releases 6.25 bitcoins into the supply. A new block is added every 10 minutes approximately. 6.25 x 6 blocks per hour x 24 hours in a day = 900 bitcoins per day.
By April 2024, in the next Bitcoin halving cycle, only 3.125 Bitcoins will be issued per block which cuts the supply of Bitcoins to 450 bitcoins per day. This will keep happening until 2140.
No one can change this because the supply is controlled by the nodes. A node is a copy of the entire blockchain from the very first transaction to the most recent transaction (most recent block to be more accurate).
There are lakhs of nodes across the world and anyone can run their own Bitcoin node. As of now the size of the entire blockchain is around 750 GB. This makes it possible for anyone to run a node.
For all the people who complain that Bitcoin is too slow and doesn't handle more than 10 transactions per second - note that Bitcoin is a final settlement transaction. Increasing the TPS (transactions per second) will increase the block size and hence increase the blockchain size. If the blockchain is 10 TB as of now, not everyone will run a full Bitcoin node and Bitcoin will become more susceptible to attacks if it is not decentralized enough.
To keep Bitcoin decentralized, we have to keep the blocks small and when you keep the blocks small, more people will run a node and it will become more decentralized and less likely to be manipulated by a bad actor. It's like a roof supported by 1,000 pillars. Even if a few pillars are destroyed, new pillars will come to support the roof. This is what makes Bitcoin antifragile.
Here are the advantages of Bitcoin compared to gold:
The "purity" of the Bitcoin that you hold can be verified easily by checking the balance of the wallet against the blockchain.
You can run your own copy of the blockchain.
You can transfer the Bitcoin to anywhere in the world within minutes for a very small price (transaction fees are paid to the miners).
You can divide Bitcoin into 100,000,000 satoshis. So if you want to send $100 worth of Bitcoins, it is very easy to divide it (unlike gold).
When you store your Bitcoin in your wallet, you own the private keys and it becomes as good as you keep a coin of gold in your pocket.
Bitcoin doesn't discriminate based on your country, religion, gender, or KYC status. It serves all humans equally.
That's why Bitcoin is more like digital gold and less like shares. You are not buying any company's percentage. You are buying a share of a limited asset that can become the global money of the world.
The market cap of Bitcoin right now is $1.4 Trillion. The market cap of gold is $13T. Considering Bitcoin has all the properties of gold and more, even if Bitcoin's market cap reaches $13T equal to that of gold, we can expect a $600,000 Bitcoin within the next 10 years.
As of now the market cap of Bitcoin is very small compared to gold but Bitcoin has given a better price appreciation than gold for the people who decided the save in Bitcoin.
With inflation and more fiat currencies being issued in the world, the price could go up to $1m per coin or even beyond that as countries, institutions, and people FOMO into the asset purely because of the price appreciation.