The big question for Bitcoin: Is Bitcoin like a commodity or like an equity?
I say it’s a big question because commodities bubble and when they do, they follow a series of mini booms and busts that shrink in scale over an extended period.
After the commodities bubble of the early 1970s, commodities bubbled every few years until in the end the commodity market was as dead as a dodo.
It would be unfortunate if Bitcoin was like commodities in that way.
Equities bubble and technology stocks bubble every few years. While it isn’t necessarily the same technology that froths up, it is still the same sector. These booms grow with the economy and only get bigger. In the recent two tech bubbles the same big names have appeared: Amazon, Apple and Microsoft, and that is the kind of model that Bitcoin believers want from their crypto assets.
Right now, Bitcoin certainly looks like a commodity after an initial bubble was followed by a recent and tremendous rally. This progress looks rather like a commodity aftershock. Yet commodities collapse after a bubble because the mining companies over invest in mining more of the thing and then dump a glut onto the market causing a price collapse. These price slumps force mines out of business, creating a drop of supply that in turn creates a price spike and the cycles repeats. Underneath it all is the march of technology making the basic process ever cheaper, undercutting prices and swelling production.
This isn’t how crypto mining works.
Bitcoin might be the new gold, but gold is not like Bitcoin.
Last year, 14 million ounces of gold was mined worth about 2.5 million bitcoin. Next year and for every year to come as far as we are concerned, that much gold is likely to come out of the ground. Now in value terms the amount of future bitcoin that is ever going to be produced is currently worth less than 18 months of future gold production.
The controlled supply mechanism of bitcoin is one of many excellent features designed into the asset from the start and this is what separates BTC’s investment dynamics from those of a commodity. What is more, new bitcoin supply is set to get more and more scarce, until it stops for all intents and purposes.
Yet a proof-of-work crypto, like bitcoin, is not equity-like either. It is a share of nothing, just like a dollar is not a share in America.
While quite a few people would like it otherwise, gold is not a currency and conversely Bitcoin is not a commodity or equity-like; it really is a unique asset type that remains poorly understood.
Bitcoin is an extremely rare asset, with strong branding, tremendous volatility and several use cases. It is gaining growing acceptance and does many of the jobs gold does, only better.
Gold, on the other hand, is a commodity with practical uses and is hoarded by governments for a very simple and important reason.
Gold is the only currency acceptable in war and while paper may work for an obviously winning side, gold is the only money acceptable when the outcome of a conflict is in question. This is why governments stash gold, even today.
While gold remains the ultimate currency for warfare, bitcoin is fast becoming the asset of choice for flight from such things as war. In a world where a huge chunk of the global population is ruled by totalitarian or proscriptive regimes while increasingly impenetrable barriers to capital rise, it seems unlikely that the need for bitcoin will do anything but grow.
While gold will retain this as a use case, bitcoin will incrementally take a significant share of this market.
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Clem Chambers is the CEO of private investors website ADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide.
In 2018, Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards.