It is now banal to call bitcoin the digital gold; however, the truth is far from it. bitcoin is the token used in Bitcoin, the blockchain, to pay transaction fees, and also it is mined by miners everytime they add a new block to the blockchain. Mining of bitcoin is not a necessity to run the blockchain. It is rather a reward for the miners for acting honest. At the same time, the penalty for acting dishonest is very heavy. The miners have invested huge sums as fixed costs in setting up mining hardwares and softwares, and the variable cost in terms of energy consumption is also high, all of which gets wasted if a miner is barred from mining for a dishonest act. Any dishonest act is bound to get caught because miners compete for adding blocks, and any dishonest addition of block will be immediately flagged by the other miners as there are around 1 million miners competing to add blocks. The total supply of bitcoins is fixed at 21 milion. Once these are mined, there will be no more mining, but the blockchain will continue uniterrupted. Miners, who also receive transaction fees, will continue to recieve it. The transition from high mining rewards to no mining rewards is not abrupt but gradual. Mining rewards are halved every four years or after 210,000 blocks are mined. This whole process is called bitcoin halving. Bitcoin is the oldest blockchain, and it has become so matured over time that it is being considered the most secure repository of data in the world. The original data planned to be stored by Satoshi Nakamoto was money transactions, the money being the token bitcoin. He planned bitcoin as a global currency competing with fiat money like Dollar and Euro. The fiat money is exchanged on the basis of trust bestowed in central banks by the people, to whom the central banks make a promise to give money equivalent in value to the one mentioned on the currency note. However, there is no need of printing currency notes when the ledger is maintained on a blockchain. The bitcoins are mined by the miners, who then either hodl them, exchange them for fiat money and crytpto tokens, or exchange them for products & services. Each and every single bitcoin is tagged to a wallet address on the blockchain. Every time a bitcoin or part of it exchanges hand, the wallet balances are adjusted accordingly. These wallets store private and public keys locally, but the actual bitcoins held by a wallet holder are always on the blockchain. No transfer can take place unless initiated by a private key of the wallet holder. So, this way integrity of initial balances is maintained. Integrity of final balances is maintained through the blockchain. Every transaction is added on the blockchain through addititon of blocks for eternity. The ledger so maintained on the blockchain thus ensures the money is transferred to the intended recipient only, by adjustment of wallet balances. Honesty of transactions is ensured through proof of work consensus, where miners compete for solving a difficult puzzle, and the one who solves it first gets to add the block and is rewarded for it handsomely.

bitcoin has indeed grown over the years and has started getting to be considered as a currency and the store of value. Those who are comfortable with considering gold as a currency inspite of its use in the making of jewellery, are more inclined to compare bitcoin with gold. They call bitcoin as digital gold. Even though I do think of gold as a currency, I am not inclined to call bitcoin as digital gold. bitcoin does have elements of global currency, but the biggest thing going against it is volatility. However, the volatility of bitcoin doesn’t disqualify it as digital gold or a store of value. Store of value in no manner means that the value of the asset can not fall or rise abruptly. It only means that the asset has such inherent qualities that the value of asset per se doesn’t diminishes over time if all other factors affecting the value remain constant. This is so the case with gold but not with iron because gold doesn’t corrode and always retains its value, whereas iron does corrode and becomes less in value over time. Therefore, gold has traditionally been used as a currency. Let’s see whether bitcoin qualifies on this criterion. bitcoin is not a physical object but does have a value. The original source of this value is the efficiency of the underlying blockchain. If the underlying blockchain for any reason becomes inoperative, bitcoin ceases to be a store of value. Similarily, if the underlying trust bestowed in a central bank is breached leading to a dominant perception of mistrust in the central bank, the fiat currency issued by the central bank ceases to be a store of value as well. So, bitcoin though being a currency and, by virtue of it, though being a store of value, is, however, not digital gold. The inherent quality of gold of non-corrosiveness is matched neither by bitcoin nor by fiat currency. In fact, at present, if one were to rank  three assets; i.e., gold, bitcoin, and Dollar; as stores of value, Dollar might rank above bitcoin because the association of people with Dollar and the trust associated therewith, is even now pretty strong. However, I am not making the same claim for all the fiat currencies issued by nations or group of nations. Another problem with bitcoin is that among the above mentioned three assets, bitcoin is the most inefficient medium of exchange for masses. The transacton cost on Bitcoin is so high that it is not practical to use bitcoin as a medium of exchange for ordinary day-to-day business. At the most, it can be used for heavy duty transactions like for purchasing an electric car (unless the entreprenur is not too concerned about environmental cost of mining bitcoins). Even gold is not a very good medium of exchange. I would rank bitcoin above gold as a medium of exchange. So, the question that arises now is whether bitcoin has a future. Well…I think the future is bleak for bitcoin as a currency. However, since it is the most secure blockchain, it does have a very secure future as a crypto if many sidechains start using bitcoin as a repository of data other than bitcoin money transactions. It is pretty much a possibility. I, anytime, prefer proof of work consensus over proof of stake consensus as I find it more sound. Till the time integity of data is maintained on bitcoin, sidechains can use whatever consensus mechanism they prefer, which would ensure speed and scalibility. I don’t dare say bitcoin can not have great utility, but, presently, it has little or no utility, and that is the reason it is vulnerable even to tweet attacks from dog lovers — I don’t understand how love for dogs lead to attacks on bitcoin; no, the reason has to be different given even those who eat dogs are attacking bitcoin.

About the Author

Ankur Mutreja
Ankur Mutreja is an advocate-cum-writer, and his blogs are amongst his modes of expression. He has also authored number of books, which can be downloaded from the links on the top menu.

Be the first to comment on "BITCOIN, NOT DIGITAL GOLD"

Trolls Welcomed :-)

%d bloggers like this: