By Sukhi Jutla, Co-founder of MarketOrders,
Since Bitcoin was launched over a decade ago, many comparisons of it have been made to gold. In fact, Bitcoin and other cryptocurrencies are often considered as being ‘digital gold’ and there are over 20 cryptocurrencies that are actually backed by real gold. This article looks into how and why this comparison is valid and what it means for crypto holders.
Assets like gold and other commodities are limited because there is a limited supply in circulation. Bitcoin is limited to 21 million coins. Once these coins have been mined, no more can be produced. That means the value of the asset increases when more people want it.
Most cryptocurrencies are programmed pieces of code and these usually have a finite number of coins programmed into them. This means the cryptocurrency has a limited supply, just like the amount of gold in circulation.
You cannot create gold out of thin air the way governments influence monetary policy by ‘creating’ more money. There is a fixed amount. This means the higher the demand for the cryptocurrency, the higher in value it will rise. These are the economics that also influence the price of gold. The higher the demand, the higher the price as more investors want it.
Market volatility increases price of gold and cryptocurrencies
In times of economic uncertainty, the price of gold tends to increase with investors rushing to purchase more gold as it is seen as a stable holding compared to government-issued currency. Market volatility tends to drive investors to invest in ‘safer’ assets such as gold. Gold is seen as a safe asset because it is tangible, it can be liquidated into cash easily, and it is easy to transport.
Cryptocurrency prices do tend to be volatile but prices tend to increase when there is economic uncertainty in markets and countries. This is primarily because governments control the money supply so when there is political or economic uncertainty, investors get worried and tend to pull out investment in the country’s currency and invest it in cryptocurrencies. Cryptocurrencies are also relatively easy to exchange into other currencies and are highly portable as you carry them in your digital wallet which is accessible from any computer or phone.
Mining gold and crypto
Cryptocurrencies are essentially programmable pieces of code which are produced when they are ‘mined’. What this essentially means is that a series of very complex mathematical puzzles need to be solved by a computer processor. Once a solution to the complex puzzle is found, the programmer (the computer) releases a number of coins.
This computing power effort is known as ‘mining’ and is supposed to imitate the effort required to ‘mine’ gold out of the ground. Mining gold involves a considerable amount of effort and resources and the reward of successful mining is striking gold. In similar terms, the computing power and effort involved in mining crypto are supposed to be akin to mining gold. In terms of crypto mining, you get crypto coins as a reward for your efforts.
A store of value
Although you can use Bitcoin as a form of payment – the key reason for its creation – there are still not many businesses or retailers that accept Bitcoin as a form of payment. However this looks set to change in the coming years. At the moment, Bitcoin is primarily being used as a store of value. This is why many investors tend to buy and sell bitcoin as an investment product. Gold is also seen as a store of value hence the comparisons to crypto being called ‘digital gold’.
Closing remarks – The era of digital gold
It is becoming increasingly obvious how cryptocurrencies and gold prices influence each other. Given that some are backed by gold, which is a physical asset that is well trusted, this could lead to cryptocurrencies becoming more easily adopted and seen as a more stable form of investment and value for years to come.