By Sumit Gupta
India’s love affair with gold is timeless, spanning over centuries. In India, gold is not just a metal but an integral part of the cultural fabric and an inseparable part of our traditions and belief system. According to a report by Reuters, experts have been quoted that — the gold possessed by Indian families are more than what is there in the reserves of the entire United States and Europe.
Dhanteras earmarks the first day of Diwali, and an auspicious muhurat to buy gold. Besides being liquid and portable, gold is also considered as a popular asset class. Owing to factors such as subdued global economic growth, trade war tensions, volatility in equity markets etc., gold is often looked up to as an effective hedge, a safe haven against any form of major upheaval and systemic risk.
However putting aside the traditions and the sentiments attached, an unbiased investor’s purview will offer caution against investment in the metal as reports state that gold purchased every year on Dhanteras since 2005 has yielded an average annualized return of just 7%. In other words, someone who bought 10 grams gold on Dhanteras every year would have spent Rs 3.07 lakh on the metal. That gold is now worth Rs 4.93 lakh.
Now interestingly, the behaviour of gold as an asset contrasts with that of bitcoin, another asset that appears to exhibit an inverse relationship between its circulating supply (or stock) and its price.Accordingly to bitcointreasuries.org, with 18.5 million coins–out of the total fixed supply of 21 million–already mined and circulating and institutional investors hold nearly 4% of it. Considering more institutional investors including the conventional ones too are joining the bandwagon of corporations, the resulting supply shrinkage is expected to build further surgein the price of the digital asset.
Capturing the significant growth story of Bitcoin spanning across 11 years of its existence, one will realize, the asset which started off with an exchange value of lower than $1 in Feb 2011 is worth USD 13000 today – in lieu of a staggering growth of approximately 12,99,900%. This kind of growth has never happened in the history of finance, which is why this is something to pay close attention to.While gold on the other side worth approximately USD 282 in Feb 2011 is today worth USD 670 fetching a growth of approximately 139%.
More so in the current wake of the pandemic, when investors are growing increasingly cautious and eyeing alternative investment avenues that not just offer long-term investment options but can also be easily liquidated, Bitcoin builds a strong case. Interestingly while there are some very stark similarities between the traditional commodity and its new digital counterpart, several attributes also evidently showcase the disparities between the two assets, recapitulating the argument of Bitcoin being the new digital gold.
Rarity
With the obvious exception of tangibility the comparison checks off the first major attribute being rarity as both are rare resources and have a limited supply.The halving of Bitcoin’s mining reward ensures that all 21 million Bitcoin will be out in circulation by the year 2140. But the catch here is that while we know that there are only 21 million bitcoin that exist, it is unknown when all the world’s gold will be mined from the earth.
Divisibility
All bitcoins are displayed to the eighth decimal place, creating 100 million units within each bitcoin, which means the smallest possible unit, a ‘satoshi,’ represents 0.00000001 of a single bitcoin. Imagine a world in which you can send a small fraction of a bitcoin instead of a “like” on Twitter to crowdfund charities or even fund independent projects for that matter with the click of a button. Now try doing that with a gold bar.
Fungibility
In case of gold, purity varies depending on the percentage of gold and is denoted by the unit – Karat. Higher the Karat unit, higher will be the value (ex: 24 karat – pure the gold is). Thus different purity of gold has different market value (22 karat gold will have different value than 24 karat gold).
While on the other hand, one bitcoin represents the exact same value as another bitcoin on the network. Bitcoin thus offers an efficient means of transferring money, thereby presenting a potential alternative to the central bank-controlled fiat money, further reiterating its widespread adoption.
Censorship Resistant
Censorship resistance covers how difficult it is for a single authority, or institutions, or nations to prevent the owner from keeping and using the good and Bitcoin is supremely censorship resistant. It is ideal for those living under countries with huge inflation issues to hedge and protect their wealth. Gold however is easier to confiscate and seize and is thus less censorship resistant.
Counterfeitability
Owing to the complicated, decentralized blockchain ledger system, Bitcoin is incredibly difficult to counterfeit. Creating a counterfeit bitcoin would mean executing what is known as a double spend — a situation in which a user “spends” or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record, the possibility of which is extremely unlikely. Now imitating, stealing or even destroying gold is just not as complicated right?
Currently, just 0.4% of total India population trades in crypto. Therefore even if the adoption grows to 5 or 10 percent,the asset still has huge upside in price vis-à-vis gold on account of its trivial adoption and fixed supply.The gold market is capped at about $9 trillion while Bitcoin is at $200 billion.Now if Bitcoin reaches the gold market cap in the current scenario, it will mean 1 Bitcoin is worth $485850 –representing a 4000% increase in current price. Thus it presents a strong case for Bitcoin to not just reach gold’s market cap but even surpass it as the two assets compete on the aforesaid traits of divisibility, scarcity and fungibility among others.
Therefore undeniably, Bitcoin is indeed the landmark digital money and one of the most exciting financial technologies on the block.While it hasraised a global social movement,breeding umpteen possibilities and exhilarating ambitions it has also grown into a technology worth billions of dollars.A terrific idea that has actually come to pass since the creation of the internet, Bitcoin is indeed the new digital gold, one must consider and what better occasion than the auspicious day of Dhanteras to mark a new beginning!
(The author is Co-Founder & CEO, CoinDCX and the views expressed in this article are his own)
