Thursday, October 5, 2017

How does Bitcoin stack up versus gold when compared using the world's real reserve currency... energy?

Since Bitcoin and most other cryptocurrencies are valued primarily in relation to sovereign currencies like the dollar, euro, yen, and yuan, it is on occasion difficult to determine their true value since they often fluctuate in opposition to how each of these currencies are moving in their own right.  But since cryptocurrencies are engineered almost in the same way sovereign currencies are today... by computer processing power, what would its value and relation be to energy rather than currencies, and in addition, how would cryptocurrencies relate to gold under these same observations?

While the gold price has increased significantly since 2000, Bitcoin’s price has gone up exponential in a short period.  The amount of gold that can be now purchased with one Bitcoin has increased dramatically from less than a half ounce at the beginning of 2017, to 3.4 oz currently: 
Now, how does gold, fiat currency, and Bitcoin compare as “traits of money.?”  I came across this table in an article, but could not find the source to give credit.  However, I find this chart on the monetary traits of gold, fiat currency and Bitcoin interesting.  The individual who put this chart together is showing that Bitcoin has the larger number of “High” ratings compared to gold and fiat currency: 
While the table shows fiat currency and Bitcoin enjoy higher traits of money than gold, some factors in the graph above are misrepresented.  Let me explain.  First, the table shows that Bitcoin is highly durable.  This is true only if the electric grid and internet remain in a highly functional state.  Just look what happened to Puerto Rico after Hurricane Maria hit the island.  An astonishing 95% of the island is still without power…. and it will take months to restore power to the island.  How does Bitcoin or electronic money function in Puerto Rico today? 
Even though Cash is king in Puerto Rico today, what would have happened if the U.S. Dollar went into hyperinflation at the very same time that Puerto Rico lost its power?  Instead of using cash, people would be bartering and using gold and silver for trade.
Second, the “predictable supply” category gives Bitcoin a “high” ranking while gold receives a “moderate” rating.  Bitcoin can only accomplish a predictable supply if the electric grid, internet, and energy supply continue to provide the power for bitcoin mining and transactions.  For Bitcoin to continue mining and providing transactions in the future, the world needs a cheap and growing energy supply.  Unfortunately, a cheap and increasing power supply is not in the cards. – SRS Rocco via Silver Doctors

Here perhaps lies the bottom line.  All money at its core is based on energy in some form or fashion.  Mining operations require large amounts of oil and electricity to pull gold, silver, etc... out of the ground, and Bitcoin requires vast amounts of processing power to 'mine' each new 'virtual coin'... and the cost of processing power and energy for that cryptocurrency alone is growing exponentially now that two-thirds of all Bitcoin have already been extracted.  This means that at a certain point the cost of mining for both gold and Bitcoin will reach a point of diminishing returns, and the markets will shift into a paradigm where prices will be determined not by exchanges, regulators, or even supply, but from a combination of functionality, availability, and above all, cost of production.


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