Finite Amount of Bitcoin
One of the most compelling reasons why bitcoin looks like digital gold, is because of the limit on how many bitcoin can exist. There can only ever be 21 million bitcoin. This is in stark contrast to how typical government currencies work. The supply of government currency (FIAT), is allowed to fluctuate on an as-needed basis by creating/borrowing more money from its central bank. We see this demonstrated by world governments during periods of civil or economic unrest. For example, during times of disaster where significant economic aid is required.
The Bitcoin Network works completely differently, as it adheres to a strict bitcoin release schedule. New bitcoin is released into circulation by the network through a process called mining. The term mining comes from having to extract the locked bitcoin from the network through solving computationally difficult problems. Much like mining gold out of the ground, mining bitcoin requires a large amount of energetic input, in order to get the output reward of bitcoin.
Why 21 Million?
There is much dispute as to why Satoshi Nakamoti (the creator of Bitcoin) chose 21 million as the number of bitcoin to exist. Some point out that it is eerily similar to the amount of gold that exists on the planet. All the gold in the world when combined, would form a 20.5 cubic meter block. This may just be a coincidence; the real reason may emerge from a simple analysis of the math behind the mining process.
All About Mining
Mining is simply the process of adding blocks to the blockchain (the underlying technology that supports bitcoin). In order to incentivize people to participate in the mining process, a reward is attached to each block. If you are the one to mine that block, then you are the recipient of that block reward. A block is added to the blockchain, on average, every 10 minutes. In 2009, when the Bitcoin Network was started, the block reward was 50 bitcoin. This in effect, brought 50 bitcoin into circulation every ten minutes. Satoshi Nakamoto built into the system, a mechanism called halvenings. Every 210,000 blocks (roughly every four years) the block reward would decrease by a factor of two. Therefore, in 2012, the block reward became 25 bitcoin. In 2016, the reward halved again, to become 12.5 bitcoin.
The effect is that it becomes more difficult to mine less bitcoin over time.
This has a profound correlation to how gold was brought into existence over the course of human history. Granted, the rate at which bitcoin is being mined is happening at an accelerated rate compared to gold, but the analogy holds true. Earlier in human history, it was much easier to stumble upon a gold mine, and extract your reward from the Earth. Now, the remaining gold lays deep at the bottom of the ocean, or entrenched beneath many layers of rock.
If we extend the mining process into the future, we arrive at a point in time in the future where the block reward is less than the smallest unit of bitcoin (one satoshi = .00000001). This future date is around the year 2140. The number of bitcoin that would exist at this point, is 21 million. Therefore, it looks like the 21 million number is a result of the mining parameters, rather than the number being picked to mimic the amount of gold on the planet.
How People Use Bitcoin
Parts of the world (USA, Canada, EU, etc) are buying bitcoin as an investment. In other parts of the world (Venezuela, Zimbabwe, Japan), people are using bitcoin as actual money, using it to pay for common goods and services. The creator of Bitcoin, Satoshi Nakamoto intended for it to be used as a peer-to-peer electronic cash system. Many have rightfully pointed out that Satoshi intended for bitcoin to be used as money.
Any good money has these three properties that has ever been used has these three properties.
- Medium of Exchange
- Store of Value
- Unit of Account
At one point and time, gold held all three of these properties. This was a time when gold was used as money, and traded for goods and services. The value of gold was stable across time, and frequently used as a unit of account for kingdoms and governments. It can be argued that bitcoin is lacking some of the above properties. It is entirely possible that as bitcoin matures, the value will stabilize, and will inherit more of the properties of gold.
Bitcoin is not a spectacular store of value, due to the amount of volatility an owner will experience. Furthermore, mass adoption has stopped bitcoin as being a medium of exchange in all corners of the world.
Opinion: Bitcoin Will One Day Be Digital Gold
It is my opinion and prediction that bitcoin will look more and more like gold as we march forward into time. My favorite aspect of bitcoin, is that it has no formal leader. For me, this is the nail in the coffin when making the comparison to gold. Satoshi Nakamoto gifted the bitcoin network to the people, and left the world stage once the project was off the ground. Like a benevolent entity from the heavens, Satoshi left the world with a shiny technological artifact we know as the bitcoin network. Like gold, anyone can participate, own, and use bitcoin on an opt-in basis. It belongs to no one, and everyone. For now, bitcoin will remain as the largest monetary experiment in history.