Is Bitcoin Digital Gold? The meteoric rise from $0.0008 to $63,729 in just over a decade has caught everybody’s imagination. No other asset class known to humankind has ever delivered a return of such magnitude in a short period.
And, if experts are to be believed, there is still a lot of room left for Bitcoin to grow in value and many are predicting it to reach the $1 million price tag by the end of this decade.
Launched in 2009, in the backdrop of the global financial crisis, Bitcoin was created to effectively replace fiat currencies. But, why fiat currencies?
Fiat currencies depreciate due to inflation over time and are subject to various monetary interventions by the government, resulting in the value destruction of stakeholders. For instance, post the global financial crisis, there was a huge devaluation in USD, which led to value destruction, resulting in chaos in global trade and commerce.
Bitcoin shares many properties of fiat currencies and gold, making it a safe haven asset and immune to impacts of inflation and global macro development, which has helped it earn the title of “Digital Gold”.
Let’s have a detailed look at the factors that make Bitcoin a Digital Gold.
Bitcoin as Money
For an asset/security to be called money, it needs to have the following characteristics:
- Durability: It should be durable and can hold its value.
- Portability: It should be easy to carry
- Divisibility: It should be measurable and divisible. For example- a ₹100 bill can be easily exchanged for other denominations like ₹50, ₹20, ₹10, etc.
- Uniformity: It should come in the same size, shape and value
- Limited Supply: To maintain its value, it should have a limited supply
- Acceptability: It should be acceptable and people should be willing to exchange goods and services with the bill/asset
Both fiat currencies and gold lack some characteristics to be called pure money. For instance, fiat currencies don’t have any supply restrictions as governments and central banks can regulate the flow of currency in the market according to economic situations. In extraordinary situations, they can even print money to increase the liquidity in the market.
Speaking about gold, it scores ahead in terms of limited supply but lags on portability and divisibility, which severely limit its possibility of being used as money.
And, this is where Bitcoin gets an advantage. It not only ticks all the boxes but is also superior in terms of technology used economics.
Why Bitcoin is Termed as Digital Gold?
What makes Bitcoin superior and unique is its technology and coin economics.
Bitcoin is a global digital monetary system that functions independent of any centralised monetary system and is completely decentralized. It is based on blockchain technology, which stores and records information electronically in several databases, known as chains, making it a truly decentralized system.
This makes Bitcoin immutable, counterfeit resistant and a fully trustless system, which means you don’t need to trust anyone in the system to complete the transaction.
Another factor that makes it superior is its coin economics. Bitcoin has a limited supply of 21 million coins. To date, 18.75 million coins are mined and the 21 millionth coin is expected to be mined sometime around the year 2140. This makes Bitcoin an extremely scarce digital asset.
And, here you should not miss the Bitcoin halving process, a mechanism through which the flow of newly mined Bitcoins is regulated in the market.
In the Bitcoin halving process, every four years, the supply rate of new Bitcoin decreases by half. For instance, in 2009, the reward for mining each block was 50 BTC, which reduced to 25 BTC in 2012, then 12.5 BTC in 2016, and currently it is 6.25 BTC.
This feature makes Bitcoin a deflationary asset and makes the already scarce asset scarier.
In other words, compared to fiat currencies, whose value depreciates over time resulting in reduced purchasing power, holding Bitcoin translates to increased purchasing power.
How much Bitcoin will Rise?
Different estimates are floating in the market, but we will focus on the much accepted and popular Bitcoin Stock-to-flow model to determine the price growth.
The Stock-to-Flow (S2F) model is the way to measure the abundance of a natural resource, or a scarce asset like Gold, Bitcoin, etc. It is calculated by the following formula:
S2F= Stock/ Flow
The S2F ratio of an asset indicates the number of years it would take at the present flow or mining rate to accumulate the current stock level of the asset.
For example, gold is historically known to have the highest stock-to-flow ratio of 62, which means it would take 62 years to mine the existing gold stock in the world at the current mining rate.
Similarly, applying the similar S2F model on Bitcoin, the current ratio is 56, and after the next halving in 2024, the S2F ratio will increase to 113, making it a scarcer asset than gold after 2024 halving.
The stock-to-flow price prediction chart by Plan B has predicted the price of BTC to reach $100,000 by the end of this year. And, by far, this model predicts the most realistic value of Bitcoin based on its fundamentals.