středa 3. ledna 2018

Bitcoin propaganda: Bitcoin is like gold

The original Bitcoin propaganda was that it's the new money - the currency of the digital age. This used to be possible on a very small scale - buying pizzas from your friend and drugs and guns on dark web. But once the speculative bubble started and everyone is moving funds to and from exchanges, the network got clogged and the fees rised to the level which no more allows using it as money.  Currently, you have to pay an equivalent of around $10 to get your transaction processed within hours. If you pay less, the transaction will likely stay in the network for 14 days and then it will be canceled. If you want your transaction to happen at all, you need to check the current transaction queue and the common fee level, and then hope that you have set a fee high enough to be picked by some "miner" (which, of course, sort the transactions by fee, not by time).

The Bitcoin propaganda narrative had to change to "Bitcoin is the new gold". That is an idea that can be dismissed even more easily than "Bitcoin is the new money". For the main reason, scroll down. But before that, let's get some facts:

Gold is an element. It has unique chemical features that make it an ideal material for many applications. It does not corrode. It is highly conductive. It does not give rise to allergic reactions.

All these qualities ensure natural demand for gold. About 50 % of gold mined yearly is consumed by jewelery industry. About 12 % is used by other industry.

Demand for golden jewelery is worldwide. It has very strong tradition in Arabic countries as well as India, where wealth is traditionally stored in gold, which is preferred over banks. It is also one of ways to launder money - golden jewels worn on your body are free from import tax when crossing borders.

A common misconception is that people use gold as jewels because it is precious, not the other way around. It's a kind of chicken and egg problem, but can be cat simply: Uranium is even more expensive, but still people don't use it for jewelery. Gold got expensive because of it's features, not the other way around.

Productivity of gold mines decrease rapidly over time. The ore to gold ratio is around hundred times lower than 120 years ago. Despite of that, world production is increasing (due to more effective mining and mining as a side product of mining of other metals).

Bitcoin is not like gold. Bitcoin is a chain of data. It has no other usage than transactions. It is not unique - anyone can start different chain of numbers, and people do - that gives rise to forks or other cryptocurrencies. With every fork, the number of tokens which "are like digital gold" duplicates, dividing the capital put to the original chain. This is covered in another post.


There is almost no natural demand for Bitcoin - most of the demand nowadays is just speculative. People only buy it because they expect to sell it later. There is very little transactions that serve business - most of them are transfers of speculative capital to and from the exchanges, substantial part are spam transactions whose purposes is to either rise the transaction fees or harm competitive chain (e.g. BTC vs BCH).

Once the speculative demand stops, there will not be much demand left. Just the opposite - most people who bought for speculation will decide to sell. There will suddenly be a huge drop in price, making many, especially the rational speculators, sell, which will drop the price even more.

With gold, since over 60 % of yearly mined amount is bought even without speculative demand (including bank reserves), there will most likely be someone who will buy at some price level - and that price level is the around the costs of mining. Because the natural demand can later be covered from these reserves bought cheaply.

But since there is no natural demand for Bitcoin, and the costs of mining can fall back to very low level (because the complexity of mining computations adapts to the current requirements), there is nothing to stop it from falling to the price levels supported by the low natural demand, which is a) money laundering, b) way of exporting capital from restricted financial systems like China or Venezuela, c) currency for illegal transactions on dark web.

And lastly, the process nicknamed "mining" has one substantial economic difference from gold: Trading gold doesn't require mining of gold. If all mines in the world were shut down today, gold would be traded on. But that's different with Bitcoin: Mining facilitates the transactions. But currently, mining is very expensive. The costs of Bitcoin mining are, by design, driven by the price of Bitcoin. And this eats a lot of the capital put in Bitcoin. If everyone stopped buying Bitcoin and people would start using it for trading, the mining would still be needed, and it would continue to eat a significant amount of the capital in the network. To cover the mining expenses, miners would have to rise the transaction fees, or to sell Bitcoin if they would have some - which would drive the price down. This, by the way, makes Bitcoin ineligible as a store of value - that is covered in another post.

All these differences make Bitcoin impossible to become a gold-like asset or even replace gold as a reserve asset.

And now the simplest but strongest reason, promised at the beginning: Unlike Bitcoin, gold is a real storage of value: States emit gold coins, bars and plaquettes, which have a denoted nominal value. The value of this gold will never drop under this nominal value - because the states guarantee by law to convert these coins to the state currency. Right, this nominal value is several times (currently around 6 times) lower than the spot price. But Bitcoin has nothing.

DISCLAIMER:

The author of this post keeps some cryptocurrencies, is not involved in any cryptocurrency related bussiness, does not have any short or long positions, does not hate technology or progress. The honest purpose of this post is to provide some commons sense view on the cryptocurrency market and give people a chance to consider before loosing their money.
 
All information in this post can be found on independent sources. For your own good, don't read the bitcoin propagandistic sites only. Their purpose is to feed the bubble and they are funded by speculators who bought large amounts Bitcoin before you did. The sources will be added when time allows, but the tips are: Wikipedia, Investopedia.com, Bloomberg.com. Sites suspected to be secretly and not obviously invested in Bitcoin or funded by Bitcoin speculators are MarketWatch.com, CNBC.com. Blogging sites like Medium.com and this one, of course, provide the whole spectrum of views.

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