The Value in Bitcoin: Digital Gold

Flashback to 2017 and most crypto-traders can probably relate to the incessant pump and dumps by whale groups. 2017 was a great year not only for day traders but also the crypto-market for it brought Bitcoin into the limelight. Fast forward to 2018, Bitcoin is almost 70% down from its all-time high of 20,000 USD. Price volatility is an inherent consequence of uncertainty and the hype around blockchain has most certainly amplified the uncertainty.

Can blockchain really remove intermediaries? Can blockchain reduce cross-border transaction time to seconds? Can it reduce transaction fees to a matter of cents? Blockchain painted a near-utopian scenario which none of us have ever thought of, that is, until the advent of Bitcoin in 2008. Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto presented the possibility of transacting between individuals in a decentralized network. However, the price of Bitcoin, or cryptocurrencies in general, have remained depressed amidst a thriving blockchain industry. This begs a question: What is so good about Bitcoin?

Bitcoin: Money or Currency?

First off, we have to define and contrast money and currency. Currency serve as a medium of exchange, unit of account, be portable, durable, divisible and fungible (mutually interchangeable). Money encompasses all of the above, in addition to being a store of value. Store of value refers to the fact that an asset can maintain its value over time and this is usually attributed by its scarcity in the market. Gold is a great example of money as it has maintained its purchasing power over the decades. Gold has remained so popular over thousand of years is due to its limited supply as well as our fascination with its appearance; its practical applications are rather limited.

Source: iGold, Bullion Management Group Inc
“With an ounce of gold a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, in the Depression of the 1930s.”

Fiat (Latin for “let it be done”) currencies are currencies which are backed by nothing more than trust in the government. In fact, the U.S. currency used to be backed by gold, that is, until August 1971 when U.S. President Richard Nixon announced that the U.S. dollar will no longer be redeemable in gold. Known as the Nixon Shock, the decoupling of U.S. dollar from the gold standard effectively ended the Bretton Woods Agreement and led to the creation of fiat currencies.

Due to the loose definition of ‘store of value’, there have been debate as to whether fiat currencies count as money. While it is true that most currencies have maintained their value over the years, statistics have told us that all fiat currency will eventually return to their intrinsic value of zero; USD will be no exception. The U.S. dollar has already lost 95% of its purchasing power since the creation of the Federal Reserve in 1913. The Venezuelan Bolivar Fuerte is an extreme case which I will elaborate more later on.

So, what is Bitcoin? By economics definition, it is a currency. In fact, it is the best form of currency till date. The ability to conduct cross-border transactions in a fast, cheap, anonymous and immutable way have trumped any form of currency that mankind has invented. However, Bitcoin is a very poor form of money given that its price volatility has made it a poor store of value. For now, we shall not dwell on the semantics.

Bitcoin’s Proof of Concept: Venezuela

Venezuelans turning their ‘worthless’ currency into bags which are worth more.

The collapse of Venezuela’s monetary system has provided a golden opportunity for cryptocurrency to showcase its advantages over fiat currency. Every day, Venezuelans live in fear as they wonder how much their money is worth at the end of each day. With the International Monetary Fund (IMF) predicting Venezuela to hit 1,000,000% inflation by December 2018, Bitcoin has become a popular payment method and investment asset due to its decentralized nature, portability and anonymity. Just a year ago, 1 BTC could be bought for 34,000 Venezuela’s Bolivar Fuerte (VEF). Bitcoin peaked at 1.3 billion VEF in August 2018. Meanwhile, Dash has gained rapid adoption in the country with over 500 merchants adopting the cryptocurrency. Dash is seen as a better version of Bitcoin with the added features of masternodes, instant transactions and decentralized governance

However, the government hasn’t been supportive of the crypto-market, deeming it a direct threat to the government regime and control over the hyperinflated economy. Ironically, to reel in on the crypto-craze, the government of Venezuela has launched its own cryptocurrency, Petro. Intended to supplement its Venezuela’s Bolivar Fuerte currency and help overcome US sanctions, Petro is claimed to be backed by the country’s oil and mineral reserves. However, Petro has received worldwide criticism for its poor implementation and shady figures.

“ It’s become a trusted alternative when fiat money’s value is corrupted by politics” -John McGinnis and Kyle Roche of Wall Street Journal

Venezuela gave us a sneak peek into a country that has to a certain degree, embraced cryptocurrency as a form of payment. While it remains to be seen how cryptocurrency will play out in Venezuela over the long term, it is without a doubt that Bitcoin has served its intended purpose as “a peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution” as outlined in the Bitcoin whitepaper.

Million Dollar Bitcoin: A Game of Demand and Supply

Given a fixed supply, any increase in demand will lead to a increase in price.

Given a fixed supply, when demand increases, price will increase. Demand will only increase with price stability and a shift in perspective in two areas: Bitcoin as a form of currency and as an investment asset With more merchants accepting cryptocurrencies, we will undoubtedly see an increase in demand among consumers for Bitcoin and other cryptocurrencies. On the other hand, Bitcoin has been dubbed by many as digital gold and is seen as a great hedge against the government and financial systems. At the Upfront Summit 2018, Fundstrat Global’s co-founder Thomas Lee describes Bitcoin as the Holy Grail of portfolio allocation, citing its falling correlation with the stock and bond market and its inverse relationship with gold. However, it is shunned by many retail and institutional investors due to its price volatility.

Source: Fundstrat

You may wonder, isn’t the supply of cryptocurrency fixed? Well, the answer is both a yes and a no. Yes, as the supply of individual coin is fixed. For instance, the total supply of Bitcoin is capped at 21million, though it is estimated that 25% of it has been lost or destroyed. However, the total number of coins in the crypto-market is virtually unlimited. Hence the influx of capital into the crypto-market is constantly being diluted by the increasing number of coins, eroding any potential rise in the price of Bitcoin. Anyone with a fair amount of programming knowledge can easily create their own coin. All you got to do next is brainwash mindless crypto-fanatics about how game-changing your coin will be and you got yourself an ICO.

Create your own coin and get rich, sounds easy right? Not really, because it would just be another $hitcoin in the crypto-market. Akin to the stock market, the value of cryptocurrency and gold lies in what someone is willing to pay for it. People buy gold for its excellent store of value and as a hedge against the potential collapse of the global economy. However, Bitcoin has much more potential; it possesses the ability to transact over a decentralized network in a cheap, fast, secure and immutable way. Alternative coins such as Ether (a.k.a Ethereum) serve different needs and are deemed to have some intrinsic value. While Bitcoin is primarily used for payment purposes, ether is designed to be a utility token, allowing users to execute programs built on the Ethereum blockchain. With the maturing and adoption of blockchain technology as well as price stability, we could potentially see Bitcoin as the new, default store of value; and the rise of a new workforce supports this possibility.

Crypto-adopters: Millennials

As we head towards the new digital age, demand for cryptocurrency will be driven not by Generation X but a new class of individuals: Millennials. YES, MILLENNIALS! Millennials are now the largest generation in the US labor force and are expected to overtake baby boomers in population by 2019.

Source: Fundstrat

A 2018 survey of 2,000 people across the UK found out that millennials are more trusting of tech giants (e.g Amazon and Paypal) than they are of banks. In 2016, Facebook published a whitepaper detailing their discovery about Millennials. The paper discovered that 44% of millennials do not feel that their bank understands them and that a staggering 92% of them do not trust financial institution. A recent independent study by CREALOGIX Group also revealed that Millennials are shunning away from traditional banking towards cryptocurrencies. Indeed, trust in traditional banking has fallen significantly across all demographics after the 2008 Financial Crisis and blockchain and cryptocurrency has emerged as an alternative to traditional banking for these young, tech-savvy millennials.

The worldwide attention on Bitcoin over the past year has increased its popularity among millennials, with many preferring it over stocks and gold.

Deal Breaker: Wall Street

Undoubtedly, Wall Street will play a crucial role in the demand for cryptocurrency. However, Wall Street have been polarized over the future of cryptocurrency. JPMorgan CEO Jamie Dimon has repeatedly criticized Bitcoin, citing the inability for the government to control them. On the other hand, the announcement of Bakkt, a global platform and ecosystem for digital asset by Intercontinental Exchange (Parent of the New York Stock Exchange) is evident of the increasing interest of institutional investor towards cryptocurrency. Bakkt will play a huge role in the mainstreaming of cryptocurrencies in Wall Street. While the U.S. Securities and Exchange Commission (SEC) has ruled Bitcoin and cryptocurrencies to be commodities, its delayed ruling on a proposed Bitcoin Exchange Traded Fund (ETF) has send ripples across the community, causing a sharp fall in prices. Within a 7-day period, almost 50 billion USD was wiped out of the cryptocurrency market.

Timeline of events.

Nonetheless, with the increasing attention on blockchain and cryptocurrency, it is without a doubt that we will see more institutional investor jump onto the crypto bandwagon, leading to a surge in demand for popular coins such as Bitcoin, Ethereum and Ripple. A positive SEC ruling on the Bitcoin ETF is all that is needed to open up the Wall Street’s floodgate.

The Road Ahead

For decades, USD has been the default currency. Centralized banking systems have also worked well and fulfilled our needs, but it is far from perfect. Financial fraud and economic collapse are the results of our existing less than perfect financial system. Could blockchain redefine our financial system? Could Bitcoin replace USD? The answer is a straight no, for it will require a fundamental shift in our current financial and governmental structure. However, cryptocurrency will do a fantastic job in situations when financial systems fails to perform.

There remain many challenges to be resolve for cryptocurrency to be integrated into current financial systems and governmental policies. Issues such as controlling of capital outflow/inflow as well as traceability of transactions needs to be discussed. Appropriate international regulations and standards would also need to be established to regulate the use of cryptocurrencies.

Another issue in the crypto-market which have received little attention is Bitcoin whales, a group of approximately 1,600 addresses that collectively hold around 5 million Bitcoin, or a third of the market. The concentration of Bitcoin meant that the market is at risk of large price volatility and manipulation, another deterrence for institutional investors. Till then, it is unlikely for cryptocurrency to be utilized on a daily basis and we will not see a million-dollar Bitcoin anytime soon.

To conclude, blockchain has set the gold standards in the areas of transparency, immutability and privacy, but only time will tell if Bitcoin will be the new gold in the millennial era.

Last but not least, HODL!!

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Hi all! I’m a aspiring tech writer based in Singapore. I write about the latest tech happenings in the various industries as well as commentary on technologies such as Blockchain and Artificial Intelligence.

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