With more or less three months before Bitcoin’s next halving event, major crypto exchange Coinbase published a blog post that pretty much sums up why the asset presents itself as the digital gold. This narrative has been circulating in the crypto community for some time now, and Coinbase seems determined to prove this chronicle.
As per the blog post published last February 7, the next halving would result in a reduced supply of BTC, giving room to increased scarcity. It is not a secret that the creator of Bitcoin, Satoshi Nakamoto, designed the cryptocurrency in such a way that its supply wouldn’t exceed 21 million.
Every time a miner completes a block of transactions, new Bitcoins are being minted as a form of reward. When Bitcoin was introduced in 2009, miners were rewarded with 50 tokens per block. Nakamoto also set parameters wherein the block rewards would be cut in half once the network reached 210, 000 blocks. The event is known in the crypto industry as halving, and it occurs roughly every four years.
Since Bitcoin’s inception, the industry had already witnessed two halving events, which puts the current block rewards at 12.5 BTC. After the event in May, it would be down to 6.25 BTC. According to experts, this would put the rate of BTC’s annual supply issuance at 1.7%.
Aside from gold, there are many other metals that can be used in a variety of industry such as copper. However, copper’s price is miles away from gold’s. Coinbase specifically mentioned about stock-to-flow (S2F), the relationship between the total supply and new supply rate of an asset.
Notably, an inverse relationship exists between commodity value and elemental scarcity. Gold comprises only 0.00000031% of the Earth’s crust, which means it is incredibly scarce. According to estimates, all of the gold mined worldwide (roughly 190,000 tons), can successfully fit a box that measures only 65 ft. wide.
Because of its scarcity, gold had cemented itself as a historic store of value. For a long time, the value of the US dollar had been tied to this asset. Back then, an ounce of gold can be redeemed at $35 in the United States. However, the government felt the need to increase the supply of money to pursue political goals. Being too much of a restrictive standard, the practice of pegging the value of the US dollar to this precious commodity had been abandoned by the government in 1971.
The decision brought obvious results. The value of the US dollar has declined while gold’s moved nowhere but up. From $35 an ounce, gold is priced at over $1500 per ounce today.
Currently, gold’s S2F is the highest among all metal commodities. However, as emphasized in the blog post, the S2F scarcity of the crypto asset would level with that of gold after the May 2020 halving.
The similarity and differences between gold and Bitcoin
Bitcoin, just like gold, cannot be easily mined or accessed by any individual. Miners have to go through the complicated Proof-of-Work algorithm before they could get the tokens.
Gold had established itself as a stable store of value because of its elemental scarcity and predictable supply. But with a maximum cap to its quantity, Bitcoin is necessarily going the same way. However the crypto has an edge against gold, in terms that it can be transferred via a communication channel. The exchange also outlined the other characteristics of Bitcoin that makes it a great alternative to gold. The list includes the token’s auditability, portability, privacy, divisibility and cost-efficiency.
Furthermore, a plethora of technological advantages support BTC, and with plenty of individuals and companies that pursue and accelerate developments, the global market is increasingly becoming mature than ever. Coinbase is confident that Bitcoin, as a digital store of value, can rival the status of gold.
The value must be complemented with demand
Central banks typically release supply of money in circulation to support the economic needs. However, the eventual excess supply of fiat currencies typically leads to hyperinflations. Such occurrences cause economic uncertainties, and it encourage people to seek assets that effectively present themselves as safe havens such as gold and Bitcoin.