Bitcoin - Gold of the Future
Updated: Apr 8
This article was first published on September 27, 2018. Frank Schwab is a multiple board member, strategic fintech advisor & speaker. He works at the intersection of banking, innovation and technology and helps banks and financial service providers to manage the digital transformation.
Since peaking at just under USD 20,000 on December 17, 2017, Bitcoin has lost a good two-thirds of its value. And according to Google Trends even more than 80% interest. In terms of Gartner terminology: the Bitcoin is currently in the Valley of Disappointment. More precisely, currently the fourth time, after June 2011, April 2013 and December 2013. A good time to look into it.
It's irritating: Bitcoin down - number of wallets is increasing. Over the past nearly 3 years, the number of wallets more than tripled to 28 million. And the number of transactions is also steadily rising. Although the total number of Bitcoin transactions tripled from 100 million in January 2016 to more than 300 million in August 2018. But on closer inspection, the transactions stagnate.
Between August 2016 and August 2017, there were approximately 100 million Bitcoin transactions worldwide, compared to only about 88 million transactions between August 2017 and August 2018. Over the same period, the number of wallets rose from 8.5 million in August 2016 to 16.4 million in August 2017 to more than 28 million in August 2018.
Bitcoin is not a payment system, but digital value
When I look at the stagnating Bitcoin transaction numbers, it becomes clear that Bitcoin will not be established as a payment system in the next few years. Satoshi Nakamoto (pseudonym) in his white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" from the year 2009 had imagined differently. But the rising number of Wallet owners indicates a growing interest in Bitcoin and the emergence of a new digital asset class.
“So Bitcoin is in my imagination a first representative of digital values and the gold of the future.”
Gold is a relic from the past
Gold is rare, beautiful to look at and you can make jewelry out of it. That's why people have thought it valuable for millennia. But when the going gets tough, people are not fed up with gold. And because of its physical denomination and weight, gold is neither easy nor quick to transport or trade. Try to pay for a bicycle as the owner of a 1 kilogram gold bar. You would have to melt the gold bar, take the appropriate amount, etc. In the age of digitalization, gold appears as a relic of the past.
Although you cannot eat bitcoins, bitcoins are just as rare as gold. Currently more than 17.2 million bitcoins have been generated, but in the long run the bitcoin volume is limited to 21 million. This is similar to gold. Around 192.2 million kilograms of gold have been mined worldwide. According to experts, a maximum of additional 54 million kilograms of gold can be produced.
Bitcoin is easy to use and you can pay with it
Unlike gold, bitcoins are much easier to piece and transfer. The smallest Bitcoin denomination is 1 Satoshi. This corresponds to 0.00000001 Bitcoin. Bitcoin and Satoshi can be transferred in seconds between anywhere in the world. Even bicycles can now be paid online and offline with Bitcoin at some retailers. And even if a merchant does not accept Bitcoin, there are now Bitcoin-based credit cards that allow you to pay in virtually every major FIAT currency (USD, EUR, Pounds, ...). The Bitcoin-FIAT exchange is done by the providers of these credit cards completely automatically in the background.
The price of gold also fluctuates strongly
Often the Bitcoin is heavily criticized because of its price volatility. And the facts confirm this criticism. In the last three years, the price has increased at first hundredfold, and has fallen again by two-thirds since its peak of nearly USD 20,000 in December 2017. However, if you look at the last 12 months, then you can clearly see a decline in the range between USD 3,500 and USD 20,000. For the longest time, the price of a bitcoin fluctuated between USD 6,000 and USD 8,500.
Between October 2015 and September 2018, the price of gold has fluctuated between USD 34,000 and USD 44,000 per kilogram of gold.
Thus, the gold price in the last three years has fluctuated comparably strong as Bitcoin in the last six months.
Despite high volatility, Bitcoin appears to be a useful and practical alternative to store value in countries with very high inflation rates, such as Venezuela, Ukraine or South Sudan, alongside FIAT currencies.
It is currently 20 times more expensive to produce gold than to produce bitcoin
According to the World Gold Council, up to 3,000 tons of gold are mined annually worldwide. At an average cost of USD 31,571 per kilo of gold produced, the total cost of the year is USD 94.7 billion.
For 2017, the average cost of producing a new bitcoin is USD 6,000. With 690,000 newly generated bitcoins, this adds up to USD 4.14 billion in total costs.
This means that the cost of producing gold in 2017 was 20 times more expensive than that for bitcoin.
In my opinion, this result puts the current discussion about Bitcoin's energy consumption into another light. Although high, significantly lower compared to gold. Even with gold, energy consumption is the main cost driver of the total costs.
Also annual storage costs are to be regarded with Gold or Bitcoin as investment forms. For gold, this can amount to up to 1% of gold wealth annually. For example, if you store your gold at a specialized and professional custodian in Switzerland or Singapore, and not in the in-house vault. The safekeeping of Bitcoins is usually still free of charge, whether in your own wallet or at a crypto exchange.
Gold and Bitcoin in numbers and facts
Fair value of Bitcoin over USD 400,000
In the event that humanity accepts bitcoin as a digital asset in the future, as does gold today, then it is interesting to find a fair value for bitcoin.
From my point of view, the market capitalization of gold is a starting point for the future fair value of Bitcoin, since I consider gold and bitcoin to be very comparable.
The current market value of the 192.2 million kilograms of gold is USD 7,412 billion. If this market value is spread over the current more than 17 million bitcoins, then this results in a price of USD 428,000 per Bitcoin.
It's hard to predict how long it takes for a similar number of people to own Bitcoin, as does Gold today. Currently, about 20 million people own Bitcoin, while one can assume that more than 1 billion people own gold in the form of jewelry, coins or securities. But you can make estimates. The conditions for a comparatively fast spread are good, because actually it only needs a smartphone and a Bitcoin wallet.
Full coverage of Bitcoin over the next 5 to 15 years is conceivable
On the one hand, there are already more than 2 billion smartphones worldwide, with a strong growth.
On the other hand, more than 1.2 billion bank accounts were opened between 2011 and 2017, according to the World Bank's Global Findex database.Worldwide, it is estimated that two-thirds of all adults have a bank account. Thus the second condition for the basic understanding of the humans for the banking and a Bitcoin Wallet is created.
"Together, these two developments will make it possible for Bitcoin to be widely distributed worldwide over the next 5 to 15 years."
Should the Bitcoin actually develop into digital gold, then further, enormous increases in value are to be expected.It's not about Bitcoin replacing gold. But Bitcoin creates a new, additional asset class.And I therefore expect Bitcoin to establish itself as a digital asset in the wallets and portfolios of hundreds of millions of people in the not-too-distant future.
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This article is also available in German: https://www.it-finanzmagazin.de/bitcoin-gold-analyse-frank-schwab-78265
Respective Slideshare presentation here: https://www.slideshare.net/ashridge/bitcoin-gold-of-the-future?ref=https://www.linkedin.com/pulse/bitcoin-gold-future-frank-schwab/