Thanks to its 10x increase in 2017 and subsequent fall, BTC has been one of the hottest topics in 2017. It has attracted attention from the likes of European Central Bank President Mario Draghi and JPMorgan President and CEO Jamie Dimon. Some call it a bubble and a fraud that will soon collapse; others say the genie is out of the bottle.
It’s popularity has transcended countries, the rich and poor alike. And yet, few people really understand where the value of bitcoin lies and why it could be a powerful disruptor not only for the financial system, but also for the whole economy. It won’t be a wrong statement to make, that majority of new buyers of BTC 2017, came into the fold only for its increasing value without really getting what’s the actual value of BTC and its utility?
The most common use case for BTC (yet!) is not about making cheap and fast transactions, the most important thing that bitcoin offers is a new form of sound money or rather value outside the control of any authority of government in the world. And that is something very, very important for the world economy. In other words, Bitcoin is hard money rather than easy money.
Easy money refers to money whose supply is easy to increase, in case there is an increase in demand for it. If people move towards using copper as money, it is very easy for copper miners to increase the supply and bring the price back down, which will hurt the people who used copper as the Store of Value for their savings. So copper is bad as a store of value, because it’s easy to produce in response to an increase in demand.
Gold, on the other hand, is hard money because even if the price of gold goes up a lot, it is very hard for gold miners to increase the supply of gold in the world. It is hard to bring the value down. Therefore, gold serves as a good store of value in the long run. It’s a much better store of value than other forms of money over time.
Bitcoin is far closer to gold. It is a digital equivalent of gold.
Bitcoin’s supply is strictly limited. There will only ever be 21 million bitcoins. And the code that controls the issuing of the bitcoins is decentralized among thousands, tens of thousands of nodes that operate the bitcoin software. And if it were to change, it would need the majority agreement of everybody involved.
However, now lets look at Bitcoin’s total market cap vs Gold. Gold has a combined market cap of ~$8tn vs $120bn of BTC.
While BTC believers, always use these numbers to showcase the large upside potential for BTC, if seen as a Digital Gold, we should look also try and understand what would it really take for BTC to achieve this potential?
Scarcity alone is not enough to create value
Scarcity only has the potential to set a floor for the price of a good.
Think of it this way: Mercury is about equally as rare as silver, and yet is costs a mere fraction of a fraction of what silver does. Why? Because while silver might save your life, mercury can literally kill you.
Clearly, scarcity alone is not enough to make mercury as valuable as silver. Usefulness is what makes silver orders of magnitude more expensive than mercury—even though their rarity is roughly the same.
So What Gives Bitcoin its Value?
In this way, Bitcoin is the same as gold and silver and anything else. It has a value because it has a use.
So, what is Bitcoin ultimately used for? It is used for one thing: It allows access to secure, public ledger transactions. That’s where it gets its underlying value from. It is a medium for exchange.
Is that useful? Yes! When people go on and on about how “blockchain is the future”, they’re right. It is the future. It’s a fantastic technological development. And it’s here to stay.
For a commodity to become useful, a broad consensus needs to be achieved which helps people realize its value. In the case of gold, it has been in existence for centuries finding its use case from jewellery, money among others.
Store of Value & Volatility don’t go Hand in Hand for the Common Masses
Bitcoin remains volatile and is indeed a risky investment. We can’t keep on proclaiming BTC as Digital Gold, if there is so much underlying volatility. A common man, who would like to invest a portion in his life’s saving in Gold, won’t have to face this volatility (as of today), so it would be tough to keep on hammering this argument of Digital Gold, unless the market stabilizes.
While BTC believes, can continue to hold, it is tough for a common man to comprehend the price fluctuations at this scale and at this frequency.
Digital Gold for Millennials?
It can be argued that while mass adoption is still far away, over the next 10 years, this new generation of millennials are going to view trust as a replacement of gold. So bitcoin is essentially a digital gold for next generation.