Through a bitter winter and tough criticism, Bitcoin has managed fresh highs against all odds. The downfall began in late 2017, when officials and banks were faced with calls to regulate the Cryptocurrency market, resulting in a 70% plunge from the all-time high of $20K to just shy of $7K.
The crypto-critics were quick to associate these price patterns with that of the .com bubble, but on what grounds? The rise, the fall or the volatility? Don’t get me wrong, the .com bubble was definitely a bubble and it definitely burst but Bitcoin seems to be headed in another direction, one that reads “Digital Gold.” Many analysts will agree, saying that Cryptos could also be thought of as commodities and suddenly the term ‘Digital Gold’ doesn’t sound so off.
Saifedean Ammous, author of ‘The Bitcoin Standard: The Decentralized Alternative to Central Banking’ and Economics Professor, shares his thoughts regarding the correlation between Gold and Bitcoin.
HARD VS EASY MONEY AND STORE-VALUE
“Easy money refers to money whose quantity is easy to increase, in case there is an increase in demand for it. So, if people move toward using copper as money, it is very easy for copper miners to increase the supply and bring the price back down, which will hurt the people who used copper as the store of value for their savings. So, copper is bad as a store of value, because it’s easy to produce in response to an increase in demand.
Gold, on the other hand, is hard money because even if the price of Gold goes up a lot, it is very hard for Gold miners to increase the supply of gold in the world. It is hard to bring the value down. Therefore, gold serves as a good store of value in the long run. It’s a much better store of value than other forms of money over time.”
For those new to commodities, store value by definition is “any form of commodity, asset, or money that has value and can be stored and retrieved over time. Possessing a store of value is an underlying basis for any economic system, as some medium is necessary for a store of value in order for individuals to engage in the exchange of goods and services.” To put it simply, limited supply is highly likely to result in steady prices, more or less. Come to think of it, isn’t that why in times of financial turbulence most investors flock to their safe-haven?
THE CORRELATION WITH BITCOIN
Just like Gold, Bitcoin is more-or-less safe in the fortress of its supply (or lack of). Saifedean Ammous further validates this saying, “Bitcoin’s supply is also strictly limited. There will only ever be 21 million Bitcoins. And the code that controls the issuing of the Bitcoins is decentralized among thousands, tens of thousands of nodes that operate the Bitcoin software.
And if it were to change, it would need the majority agreement of everybody involved. Since everybody involved has an interest in maintaining the monetary policy in a way that maintains the value of the money, it is highly unlikely that we’re going to witness any change in the monetary policy.
Even technical changes, like changing the block size or various parameters, have been almost impossible to make in Bitcoin.” New to the techy side of Cryptos? My article ‘Bitcoin – Double Spending And Mining Explained’ covers the basics.
Saifedean Ammous went on to add that he believes “is an enormously important innovation because it has many good properties that Gold doesn’t have. It’s very easy to send across the world very quickly, and it’s much harder to confiscate than Gold. Therefore, the possibilities are exciting for people who believe in the importance of sound money for society.”
He concluded that he thinks “this is no coincidence. What the Gold standard allowed people to do is to have a store of value that would maintain its value in the future. And that gave people a low time preference, that gave people the incentive to think of the long term, and that made people want to invest in things that would pay off over the long term.”
Now, this not to say that Bitcoin is there yet, but as we previously said, it seems to be headed towards that direction, with a few detours here and there. These detours have been heavily criticized while backstage bankers, payment networks and central banks alike are trying to figure out how to apply blockchain to their own payment systems and currencies.
There’s no denying that the short price squeezes suggest fluctuating sentiment towards Bitcoin, but the fact of the matter is that as Bitcoin began its recent reversal-rally, the Bears had to close their short positions, which perhaps accounts for a significant portion of the 40% surge. BTC is now lingering around the $9K handle, up from today’s market open.
To round it up, April has been the best month for Cryptos since the great fall, the question that remains is, will this persist until we reach and surpass old records? Or were the Bulls too quick to cheer? Stay tuned as we follow Bitcoin’s journey through the financial markets.
This article is for educational and informative purposes only and should not be considered as investment or trading advice.