We have often heard of Bitcoin being referred to as digital gold. Many say that is an oversimplification of what bitcoin is. To me, those people are completely wrong. Bitcoin is not digital gold, in fact, it is a much better asset than gold. Let us discuss why.
Why was Bitcoin created?
Those who have a little knowledge of cryptocurrency might know what I am talking about.
The cryptocurrency was created in the wake of the 2008 financial crisis as a way for people to control their money themselves and not depend on the government. It was made as an alternative to the currency issued by the governments.
The first-ever cryptocurrency created was Bitcoin. It was created by a man who goes by the pseudo name Satoshi Nakamoto. It is a totally decentralized (no one controls it) currency system that works on blockchain technology.
Is Bitcoin a currency or asset?
If Bitcoin’s sole purpose of creation was to become the world’s currency, why is it being treated as an asset?
Bitcoin has a limited supply of 21 million coins in its lifetime. It means that a maximum of 21 million bitcoins can be mined ever, it’s not like government currency which can be printed any time and how much ever they want.
Due to its very limited supply, its value has shot up as more and more investors are pouring their money into Bitcoin. As it is decentralized, the price totally depends on market forces making it very volatile. And anything that is highly volatile can never be a currency.w
Due to its volatility and limited supply, it has become an asset rather than a currency.
How Bitcoin is better than Gold?
There are many aspects we need to explore in order to compare 2 assets fairly. But mostly we compare assets on the basis of how much return it has given. Let us discuss each aspect:
ROI (Return on Investment)
Let us compare performance of both assets in last 10 years.
Price of Gold in 2011 – 26000 rupees
Price of Gold in 2021 – 50000 rupees
Total Return – 92 %
Average return per annum – 9.2%
Price of Bitcoin in 2011 – 150 rupees
Price of Bitcoin in 2021 – 4600000 rupees
Total return – 3066566 %
Average return per annum – 306656 %
Bitcoin has given enormous returns in the last 10 years, making it the best performing asset in the world. There is no comparison between Gold and Bitcoin in return in the last 10 years.
What is the main problem with Bitcoin?
Bitcoin like any other asset comes with its own sets of pros and cons. But let us discuss what is the major drawback of Bitcoin.
Bitcoin, just like gold has to be mined. The difference is that, Bitcoin has to be digitally mined.
Any asset has a certain value because it is in limited quantity. If gold could be found as easily as sand, it won’t be that valuable.
When Bitcoin was created, it was programmed that only 21 million bitcoins will exist of which, all can be mined only by 2140. It means that only 21 million bitcoins can be mined and this number cannot be changed.
What is digital mining?
In order to distribute Bitcoin eventually around the world, the concept of digital mining was formed. Basically, it is a series of mathematical calculations which your computer has to solve in order to be rewarded with Bitcoin.
For example: If your computer solves 10 mathematical calculations, it will be rewarded with 0.5 Bitcoin. (Although this number keeps changing if interested read this)
So, in order to make some Bitcoins, you need to make your computer do the work. The more it works, the more bitcoin you get.
The problem with mining is that it consumes a lot of electricity, especially after the commercialization of Bitcoin mining. Big firms have put powerful computers on work to mine 24/7.
According to an estimate, Bitcoin consumes 110 Terawatt Hours per year. To put it in perspective, it is equal to the energy consumed by the whole nation of Sweden or Malaysia.
Although Bitcoin mining consumes so much energy, but so does mining gold. Gold consumes more than double of what Bitcoin consumes.
It is estimated that Gold mining consumes 240.61 Terawatt hours per year of energy. The Banking system consumes 260 Terawatt hours per year of enerygy.
So, on comparison, Bitcoin doesn’t seem that energy consuming at all.
It is pretty evident from above points that Bitcoin is way better than gold as an asset. It can be stored digitally, exchanged remotely and sold remotely. Unlike Gold which has given very nominal return last decade, Bitcoin has become the best performing asset of the decade.