Dollar, gold, bitcoin, and their network effect.
Context grounded in some facts- BTC, Gold and USD
Total BTC that can be mined ever (total supply) — 21 million
Total BTC mined to date: 85% of total, ~17.5 million
Total market cap of BTC based on today’s value ($33K per BTC) — $650–700 billion
BTCs estimated to be locked and lost — 20%
Total gold mined to date (entire history) — 190,000 metric tonne
Identified gold resource (available to mine) — approx. 50,000 metric tonne
Total market cap of above ground gold based on $1800 per ounce — approx. $10–11 trillion
Gold held by central banks, IMF and ETFs — approx. $3 trillion
Rest of the gold ~$7–8 trillion could be held as an investment, jewellery, installed in monuments, etc. (some even lost)
Total supply of USD by the end of 2019 — $15 trillion (90% of this is digital, 10% physical)
Total expected supply by the end of 2021 — $20–21 trillion (new $5–6 trillion introduced owing to Covid-19 stimulus package/deficits); this has impacted the value of dollar adversely, but not by much, as most governments around the world have taken similar action (total stimulus ~$10 trillion). The pumping of new USDs is a notable risk for most central banks globally, given $6.8 trillion is held by them as federal reserve constituting 60%+ of their forex reserve; also, any volatility / depreciation in value of USD, impacts it’s credibility as a safe haven.
Network effect…
Both Gold and Dollar enjoy the network effect of global acceptance → gold has enjoyed this network effect for centuries, while dollar has enjoyed this for the last 70–80 years. In 2010, enters BTC a digital, alternate asset built on a de-centralized network — it enjoys many benefits (smart contracts, trust, etc.) and many disadvantages (volatility, hacking, etc.). It’s network effect has been growing rapidly with development of supporting infrastructure for participants, as well as the involvement of reputed institutional investors and companies, such as Square.
So is there a case for BTC to become a viable alternate currency?
Let us for a second assume that there is low volatility in BTC prices or someone starts hedging volatility in BTC transactions / writes future contracts on it’s value, enabling BTC to power currency based use cases, such as commerce, money transfer, etc. In this case, still theoretically speaking, BTC could work as an alternate currency leading to millions of transactions on a daily basis. The biggest impediment to this would be BTC’s enormous energy consumption → every single BTC transaction is equivalent to ~700K visa transactions in-terms of carbon footprint. Given the understanding that every transaction needs to be updated across the entire decentralized network, this makes it energy intensive and slow to run as global payment network. Also, if BTC rises as a mainstream alternate currency, it would challenge the power of central banks and governments globally, and run into regulatory trouble.
“An electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin.
The payee needs proof that at the time of each transaction, the majority of nodes agreed it was the first received.”
Then, what’s the future potential for bitcoin?
It’s best to look at BTC as a viable alternate asset → as the “gold for the digital first generation(s)” or “Digital Gold”. Similar to gold, Bitcoin is limited in supply, is a bearer asset and is anti-inflationary, though it’s cheaper to store and easier to transfer. It’s a viable portfolio diversification strategy and hedge, outside of equity and real estate. Overtime, the potential market cap could be similar to that of gold today, i.e. $7–8 trillion down → i.e. 10–12x, the current market cap of Bitcoin.
Also, I could argue that Bitcoin is a bubble, similarly someone could argue that gold is the longest & biggest bubble in the history of mankind. It’s the ‘sustained network effect’ and ‘trust as a store of value’ that make both of them real. Bitcoin is definitely more volatile, because it’s digital, easily bought and sold, and speculative; though it’s still early days for this amazing new asset class.
The views expressed are solely mine, and are not meant for any investment advise. Please always do your own due diligence.
I’ve referred to various different sources of information, such as www.gold.org, Santoshi Nakamoto’s whitepaper, McKinsey research, wikipedia, NYC times, and Reuters. Though the biggest inspiration has been the “Acquired” podcast’s recent episode on Bitcoin. If you’re interested in the history of tech startups and M&A, then I’d highly recommend subscribing/listening to their podcast.
