The number of bitcoin units is limited to 21 million, and on the other hand, every four years, during an event called halving, the bitcoin rewards, or more precisely, the number of bitcoins generated in half, is halved. How do Scarf and halving transform Bitcoin into digital gold? A Coinbas account on Medium has answered this question in an article that you will read below.
What is worth the money? Today, the value of a dollar is not directly tied to the value of any other asset. Several years ago, money was directly backed by gold. By the year 1971, an ounce of gold at a constant $35 was redeemable in the United States, and for governments that wanted to increase the money supply, adherence to the gold standard was a limiting factor. Gold is scarce, and governments simply cannot produce much more to fulfill their diplomatic goals. As a result, the US gold standard was lifted by the US in the year 1971 and the dollar became a Fiat currency. Since then, the value of the dollar has fallen, and the value of gold per ounce has gone from $35 to more than $1500 today.
Gold, because of its scarce nature, is a tool of historical value. It is estimated that all of the 190000 tonnes of gold extracted so far can be stored in a box about 20 meters wide. If tomorrow, a hypothetical meteorite containing gold and its dimensions hit the ground, the value of gold would fall sharply as its supply doubled. Gold is glossy and can be used in the electronics industry. But many other metals, such as copper, are also widely used in industries. However, copper is much less valuable than gold. There is an inverse relationship between scarcity and the value of a commodity, the more a commodity is scarce, the higher its value. Gold is very scarce, accounting for only 0.00000031% of the Earth’s crust, while it is worth more than $1500 an ounce.
Is there a replacement for gold?
With the demand of global financial institutions, individuals and central banks, gold shortages have become a cornerstone of the market value of the precious metal, surpassing $7 trillion. Now, imagine for a moment that there was a scarce gold base metal with a special feature:
Portability through a communication channel
“Portable through a communication channel” is exactly the words Satoshi Nakamoto, an unknown creator of Bitcoin in 2010, said in an online forum. Can anything with this feature make you a competitor for gold? If you were to ask this question 10 years ago by curious users of that community called Bitcointalk, you probably wouldn’t get the answer. 10 years later, the answer to this question proves that only the most outspoken bitcoin fan could have imagined it.
In the year 2013, a bitcoin would only buy 0.1 ounces of gold. But at the time of this writing, each bitcoin is trading at $8500 an equivalent of more than 5.5 ounces of gold. Even compared to gold, bitcoin’s value has increased significantly over the past decade. Bitcoin is also scarce like gold. The production of new bitcoin requires a significant amount of work and activity during the mining process. So to fully understand the bitcoin shortage and how new bitcoin is produced, you need to understand bitcoin monetary policy.
Since the creation of Bitcoin, it has been mandated that the maximum supply of this digital currency be 21 million units. To date, more than 18 million units have been extracted and available, and new bitcoins are being released at a rate of 3.6% annually. At the time of writing this article, almost every 10 minutes, when the miners process the new block, 12.5 new Bitcoin units are extracted. On May 1 an event called “halving” will launch a new Bitcoin release at 6.25 units every 10 minutes. halving happens once every 4 years and May is the third halving this year. We will see bitcoin history.
Bitcoin security is ensured through extraction, during which transactions are validated and timed. The higher the hash rate of extraction, the more computational power is needed to reach a consensus on the bitcoin network. Some may believe that fewer miners will guarantee network security, as the mining reward will be halved after each hovering. However, the bitcoin economy tends to be reactionary and self-balancing. Despite the two halving that so far have significantly limited the miner’s reward, the hash rate has recently reached its highest level. In other words, the closer Bitcoin’s supply reaches its $ 21 million limits, the security of the network will increase in parallel.
The mining process shows us that bitcoin is different from gold. No one knows exactly how much gold is on the ground and there is no way to verify the accuracy of the total supply of gold. With Bitcoin, anyone with a computer will also be able to check all available bitcoins.
In addition, if you buy a gold ring, you have no easy way to prove its purity. Reuters quotes:
Counterfeit gold ingots, cheaper than gold-coated metal ingots, are relatively common in the gold industry.
However, there are devices that are capable of detecting and approving small amounts of gold but are very expensive and difficult to operate.
Bitcoin’s independent verification capability is made possible by running a Full node. Can a gold purifier be able to simultaneously present and confirm the history of all transactions that have so far been made in gold history? Bitcoin fullback can. Currently, there are more than 55000 nodes in 96 countries that are validating the bitcoin network.
In addition, each Full Node can confirm that in the year 2020, new bitcoins will be delivered at an annualized rate of 1.7% per year. A model called Stock to Flow measures the supply of new units relative to the total supply. In the case of gold, if we take the total amount of gold on earth to be about 190000 tonnes, it will take about 85 years to extract the same amount of gold again. When bitcoin’s post-halving annual release rate reaches 1.7%, the cumulative current flow will be around 58. Accumulation on the gold stream is higher than any other metal commodity, and bitcoin will soon grab that gold.
While flow accumulation is an interesting criterion for measuring scarcity, it accounts for only half of the value-determining equation. Demand is as important as supply, and if bitcoin fails to deliver features beyond scarcity, bitcoin value predictions based on the current-accumulation model will fail. Obviously, obstacles such as bitcoin fluctuations can lead to the failure of any kind of forecast.
Compared to gold, bitcoin is significantly lively. However, bitcoin volatility has been decreasing over the years. According to CoinMetrics data, the average 180-day bitcoin volatility has declined compared to the first five years of its life, from 6.4% in the year 2011 to 2015, to 3.7% in the years 2015 to 2020.
The predictable supply of gold, scarcity and the world market has made it possible to become a viable hedge against Fiat. At the same time, bitcoin development is accelerating and has proven many of its benefits over this precious metal so far, including:
Bitcoin nodes have the ability to independently verify each bitcoin received as well as the entire history of the general ledger.
Low commission for shipping internationally
At an average transaction fee of $.24, Bitcoin can be sent to any user in any country in the world who has an Internet connection. In September last year, a bitcoin transaction worth more than $ 1 billion was executed at a mere $700 fee. The cost of shipping the equivalent amount of gold is very high and requires protected insurance and shipping.
Transferring gold without the presence of a third party requires the physical presence of both parties to the transaction. While bitcoin transactions are peer to peer, both digitally and anonymously.
Since bitcoin’s private key can be remembered with a 12-word phrase and sent digitally, bitcoin is easily portable in large quantities, unlike gold.
Unlike gold, which needs to be melted, bitcoin is easily divisible. You can own and send a fraction of bitcoin or thousands of bitcoins Halving.
Bitcoin Halving will soon become scarce and at the same time more predictable and predictable.
So what makes assets such as Bitcoin and Gold backed by value? For valuation, one asset must be compared with another. The same is true of Fiat currencies. The value of the dollar and the euro is constantly changing in the world of variable-rate trading. In fact, one can say how much a dollar is worth when comparing it to another asset like the euro, otherwise, a dollar is always a dollar and a bitcoin is always a bitcoin. In global markets, supply continues to increase or decrease relative to the demand for an asset. The modern monetary system is dynamic and dynamic, especially as the world’s central banks increase or (rarely) reduce the money supply.
As the central bank increases its money supply, the economy can thrive. On the other hand, history is rife with staggering inflation, such as Germany in the years 1921 to 1923, Zimbabwe between the years 2007 and 2009, and present-day Venezuela. The Nov. 2019 Federal Reserve report on US government debt increase and ultimately staggering inflation:
We live in a world of scarcity, which means that our needs exceed the resources needed to fulfill them.
Launching new money is not a solution to magically generate more resources. Printing money is a hidden cost to all citizens, as new supply diminishes the value of money in circulation.
This economic phenomenon – printing more money – has led to a constant demand for gold, especially in times of high economic uncertainty. In times of trouble, the temptation to print money is always high. Gold, due to its scarcity, is a value-saving tool against the devaluation of fiat currencies. Recently, the global economic fear, measured by the ” index of global economic policy uncertainty “, has reached its highest level with the gold value against the Fiat currencies.
Over the past decade, the value of gold against Halving bitcoin has increased dramatically due to increasing global economic uncertainty. Gold and bitcoin are safe havens against the devaluation of fiat currencies. Armed with thousands of technological advantages, in the digital age, bitcoin will be a serious competitor for gold in the field of storage.