Is Bitcoin Digital Gold?
Key Points – Is Bitcoin Digital Gold?
- The Basics of Blockchain Technology
- The Main Driving Factor Behind the Price of Bitcoin
- What Does Mining Bitcoin Mean?
- Who All Is Using Bitcoin?
- The Future Impact of Blockchain Technology
- 15 minutes to read | 36 minutes to watch
A New $64,000 (or More) Question?
Some of you might remember—or at least have heard of—the old CBS game show, The $64,000 Question. If a contestant reached the $64,000 question on the 1950s game show, they were allowed to have an advisor’s assistance.
While retirement planning certainly shouldn’t be treated like a game show, everyone has critical financial questions that have a high price tags attached to them. As Dean Barber, Wayne Robinson, and the rest of the Modern Wealth Management team help to answer some of those questions for clients and prospective clients, one of the common topics they’ve been asked about lately is the trend of cryptocurrency.
For people that asked them how much one Bitcoin was worth two months ago, do you know what their answer was? It just happened to be right around $64,000.
Is Bitcoin the New Digital Gold?
Wayne and Dean believe that Bitcoin is here to stay, so they wanted to give their thoughts on it and answer the question: Is Bitcoin digital gold?
“There is a lot of deep thought that builds the case for Bitcoin being the digital gold,” Wayne said. “Bitcoin as a developing asset cost absolutely can be viewed as digital gold for a bunch of reasons. It’s understanding what it is, what the risks are, and then formulating an educated opinion.”
Covering the Basics of Blockchain Technology
Before we dive deep into answering, “Is Bitcoin digital gold?” it’s important to define blockchain technology. IBM defines blockchain as a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. Those assets can tangible, such as houses, cars, cash, or land). They can also be intangible, such as intellectual property, patents, copyrights, and branding.
To help better understand how blockchain works, Wayne suggests that blockchain is a marriage cryptology and math.
“Everything is encrypted, which makes it secure,” Wayne said. “And then it’s solving complex riddles using math. At its birth, it had no value. It was a white paper, concept, and software. It only becomes valuable if it gets used. People who were in the industry and understood it saw the value in it and started to use it. As it grew in its adoption, it grew in its value. It’s the network effect.”
The Birth of Bitcoin
Wayne points out that there are thousands of blockchain technology companies that are trying to solve real world problems. Of all those companies, the first and most well-known is Bitcoin. Bitcoin was first introduced in 2009 by Satoshi Nakamoto. While Nakamoto’s name flew under the radar during Bitcoin’s early stages, it didn’t take long for Bitcoin’s popularity to skyrocket.
“When Bitcoin was created, people saw value and wanted to invest in it,” Wayne said. “More and more people saw the promise of it and kept investing in it.”
With Bitcoin token’s worth having gone from pennies to tens of thousands of dollars, many people believe Bitcoin has fallen in the realm of Moore’s Law. Moore’s Law outlines that we can anticipate a computer’s speed and production to expand every few years and that consumers will pay less for them.
“We’ve seen similar adoption with the internet and cell phones. There are S-curves where the adoption picks up,” Wayne said. “When we look at the adoption of blockchain technology, it’s being adopted fast than anything. It’s even faster than the internet was adopted.”
Where Are We on Blockchain’s S-Curve?
When looking at any S-curve, Dean shares that you need to analyze three segments that will take the same amount of time. The first segment will be from zero to a 10% adoption rate. Once it reaches 10%, it will then take just as long to get to a 90% adoption rate. Then, it will take the same amount to time to reach 100%. So, where are we on blockchain’s S-curve?
Wayne doesn’t have a concrete answer for that question, but looking at blockchain’s popularity worldwide, he believes we’re early in the adoption phase. He offers a few things to keep in mind for what could eventually end up on the blockchain.
“The overall value of the crypto space now is about $2 trillion. Bitcoin is the largest of that at about $1 trillion,” Wayne said. “With blockchain technology, you can transfer things like marriage certificates, ownership, property, and arts. Everything will be recorded on the blockchain because it’s efficient, fast, and secure. Will stocks, bonds, and real estate end up on the blockchain? Will our voting systems and identities end up on the blockchain?”
Blockchain’s Impact on Other Parts of the World
One of blockchain’s most interesting developments in recent months has taken place in Ethiopia with Cardano. In April 2021, Cardono’s founder, IOHK, partnered with the Ethiopian government.
“Every student in the Ethiopian education system is on the blockchain. It includes their identity, grades, and certification,” Wayne said. “When a student comes out of a university in Ethiopia years from now, there’ll be no question about a person’s grades and who owns a diploma. You can’t cheat the system.”
The future possibilities with this has Dean excited. These are just a few things that immediately came to his mind.
“It would be very difficult to have identity fraud in that scenario,” Dean said. “Voter fraud would be virtually impossible. That would be cool.”
With Blockchain Answers Come Even More Questions
While Dean and Wayne are both excited to see the developments of blockchain technology, there’s no doubt that more and more questions will arise as well. That’s exactly why they’re looking into: Is Bitcoin digital gold?
With each type of cryptocurrency, there will be a project with something to solve and a description of its tokenomics. If the project makes sense to you, ask yourself, is it worth investing in?
Let’s look at Bitcoin specifically again. When the white paper came out, it had a finite supply of tokens. The total tokenomics for Bitcoin were a maximum supply ever of 21 million. No more can be made beyond that point. It can’t be cheated. However, Wayne does want people to realize that there are still some risks with investing in cryptocurrency.
“Even if we think about Bitcoin, regulation is one of the biggest risks. Regulation and competition could squish it quick,” Wayne said. “Every transaction that’s ever occurred in the Bitcoin blockchain is on a public ledger. Even to think about going back and manipulating that ledger would be virtually impossible. You can imagine the complexity of that.”
What Does Mining Bitcoin Mean?
One asset that has always been renowned as a solid asset is gold. While gold is scarce, it’s not as scarce as Bitcoin since Bitcoin can’t be reproduced. Wayne points out that if the price of gold rallies, a lot of miners will go back to work because they want to mine more gold. As we ask ourselves, “Is Bitcoin digital gold?” it’s logical to ask, what does it mean to mine Bitcoin?
“Bitcoin is what they call proof of work. The protocol is designed for people to validate these transactions,” Wayne said. “It’s a global network of computers validating the transactions, so it’s decentralized. It’s not one office, one corporation that’s validating this. If you knew how to mine Bitcoin, you could if you wanted to. The riddle is solved through the validations.”
In a mining mini summary, let’s say Wayne is sending Dean Bitcoin. Wayne is who he says he is and Dean says who he says he is. When Dean receives the Bitcoin, the miners validate the transaction. For doing that work, they get compensated in Bitcoin. That’s mining Bitcoin in a nutshell.
A Valid Crypto Concern
While more and more people have started mining Bitcoin, there have been some power problems in the process due to the electricity consumed. It takes a great deal of computing power to solve the riddles. Big mining farms will have an advantage because of this. However…
“There is some protocol built in that avoids a monopoly being developed in where one massive mining farm can mine all of the Bitcoin. That requires multiple validations,” Wayne said. “There is some essence of protection built in so that it doesn’t become centralized because the whole concept is that decentralization. Level the playing field.”
How Many Bitcoin Are Left to Be Mined?
Of the 21 million Bitcoins that can be mined about 18.5 million of them have been mined so far. In every four years or after so many blocks are generated, the mining rewards are halved. The rewards will get smaller and smaller and eventually, all the Bitcoin will be mined. With that process, a 100% mining rate for Bitcoin won’t simply be reached over night. Due to the halving of the rewards, all 21 million Bitcoin aren’t projected to be mined until 2140.
“When it’s all mined out, the miners would be so entrenched in and own and hold Bitcoin on balance sheets that they would still want to execute on these transactions to keep the network working,” Wayne said.
Who All Is Using Bitcoin?
While Bitcoin might seem like a difficult concept to understand at first, it revolves around simple supply and demand. In terms of Bitcoin being used with digital wallets, we’re seeing more and more companies accept it as a form of payment. It’s proof that “Is Bitcoin digital gold?” has been a commonly-asked question.
“Places like movie theaters and Starbucks now take digital assets. Corporations are also using Bitcoin as an asset on the balance sheet,” Wayne said. “It’s so interesting to listen to Michael Saylor from MicroStrategy talk about how he concluded that Bitcoin was a viable asset to hold on his balance sheet. His argument is for borrowing against his own asset for tax-free income stream.”
Along with companies and corporations using Bitcoin, institutions are using it as well. Wayne shares that Grayscale is a great example of a fund-like institution that started with Bitcoin trust.
“Grayscale would custody it so that the person who is investing in this trust wouldn’t have to hold encryption keys or a wallet. They would just be a shareholder in this trust,” Wayne said. “When Bitcoin went up or down as a shareholder, you would benefit from the rise and fall of the price of Bitcoin. That’s an institutional example. Now we see all these institutions trying to get ETFs approved, so institutional adoption is occurring on a big scale.”
A Diversified Digital Portfolio
Once again, institutional adoption of cryptocurrency doesn’t just apply to Bitcoin. It’s happening with other forms of cryptocurrency as well. Wayne and Dean share that it’s possible to have diversification in a digital portfolio with owing parts of several different cryptocurrencies.
“Specifically talking about Grayscale again, they came out recently with what they call their Large Cap Fund,” Wayne said. “There’s eight of the top-tier, blue chip projects that are very well established, so you get a little bit of them all. It’s mostly Bitcoin. The second highest allocation is Ethereum and then there are pieces of Solana and Cardano. So, you can now buy into a diversified portfolio of digital assets.”
Will Bitcoin Continue to Grow?
As we begin 2022, we aren’t too far removed from Bitcoin’s high watermark value of $69,000 per token on November 9. While its value dipped for the remainder of 2021, there is a lot of optimism surrounding Bitcoin’s projected growth that make it fair to ask: Is Bitcoin digital gold? Fidelity Investment forecasts that one Bitcoin token will be worth $100 million by 2035.
“If that’s true, who can afford a Bitcoin?” Wayne said. “They will break it down into a smaller measure called the satoshi (named after Satoshi Nakamoto). There are 100,000 satoshis in a Bitcoin.”
Theft Is Still Something to Keep Tabs on in the Crypto World
Along with monitoring Bitcoin’s value, another trend to keep an eye on is how much theft is in the digital currency space. Wayne believes that blockchain technology does offer a strong level of security within its systems and doesn’t know of any instances where a certain blockchain has been hacked.
“The theft is more in cyber hygiene than it is a fault of the protocol,” Wayne said. “It’s not keeping your keys safe or not having two-factor authentication, things like that. Or being duped. There is an example where a guy got an email that looked like it was from Coinbase saying his account has been hacked. The email said that it would help him solve a hack in his account, but the email was the hack. He gave them all his private information to solve this hack while he was being hacked. You need to keep your guard up.”
When it comes to like buying digital assets directly and creating your own wallet, you get a very detailed encryption key. It’s typically 15 very specific words that need to be put in exactly right, so it’s a very strong password.
On the flip side, while it’s hard to hack such a detailed password, it isn’t necessarily easy to remember. So, there could be trouble if you forget your password and lose access to your wallet. That’s why it’s important to be careful with your own cyber hygiene and how you can access your digital assets.
Is There an Optimal Percentage of Crypto to Have in Your Portfolio?
If you’re intrigued about investing in cryptocurrency, there’s another common question to think about besides “Is Bitcoin digital gold?” Is there an optimal percentage of crypto to have in your portfolio? Dean incorporates a small percentage of Bitcoin into his portfolio just for the sake of diversification. Around 3% to 5% is a good target range to have.
“Bitcoin wasn’t something I bought where I thought that whatever I put in it was going to instantly be worth millions. I did the ETF strategies opposed to creating the digital wallet and thinking that I’m going to use it to buy and sell things,” Dean said. “I wanted to have it as part of my portfolio where I could take advantage of what’s going on in Bitcoin without having to worry about. I’m not going to buy my movie tickets or start making those types of transactions with Bitcoin.”
A similar amount of portfolio diversification is what Dean and Wayne have seen from Modern Wealth Management clients who have invested in cryptocurrency. Dean and Wayne are privy to that thinking to that if something does go wrong, that person won’t experience any financial hardships since the amount of crypto they have isn’t a significant portion of their portfolio.
“With clients’ portfolios, the allocation of crypto should be big enough that if it does do what everyone thinks it’ll do, it’ll make a difference,” Wayne said. “But it shouldn’t be so big that if it goes wrong, it derails a client’s plan. We do it through those ETF strategies to keep it simple.”
Wayne suggests letting somebody who has incredibly good cyber hygiene to have custody your digital assets. That way, they’ll be casted into a cold wallet and off the internet, which makes it more difficult for theft to occur.
Patience is Key
Cryptocurrency is obviously something that’s not going away. Whether it’s Bitcoin, Ethereum, or another cryptocurrency, having the diversification and security of your digital assets are critical. Remaining level-headed is the key to success in the crypto world.
“It’s going to be a more conservative approach to participate in the crypto market,” Dean said. “I don’t think you’re going to go say, ‘Hey, I hit a home run day after day after day,’ but it’s going to work.
Dean initially had some reservations about cryptocurrency, and it’s easy to understand why. Remember, it wasn’t that long ago when the Reddit and GameStop saga had a slew of people caught up in their financial feelings.
“I thought early on with Bitcoin that it was mostly speculation. I’m beginning to believe now that this is going to be a way that people are going to do business in the future,” Dean said. “It’s a way that countries and companies themselves are going to do business. That companies themselves are going to do business. It’s all big stuff that can take us a long way.”
Speaking of speculation, just think about how people first reacted to the internet. There wasn’t immediate trust with it from a lot of people, but it’s now a huge part of people’s lives every day.
“When the internet originally started, people were like, ‘What is this? I don’t know anything about it. I don’t trust it. What can people see? I’m not doing that online bill pay thing. Don’t send me an email,’” Dean said. “Now, virtually everyone has adopted it. The internet is in the palm of our hands.”
Are Blockchain Applications Next?
Believe it or not, Wayne says it’s only a matter of time before blockchain applications are also in the palm of our hands. What can we expect?
“They’re already building them in the hard wallet into cell phones. Samsung is already developing it and Apple is talking about it. It’ll come to a point where you won’t even know that you’re using blockchain technology,” Wayne said. “It’ll just be a part of our everyday life. It’s going to happen.”
There has also been a lot of recent discussion about The Metaverse and how blockchain is going to play a critical role in it. For those who aren’t familiar with the Metaverse, it’s essentially a virtual world that you access through a VR headset.
“Right now, there are different things in The Metaverse. For example, Decentraland is a virtual world that is selling real estate, selling spots in the world,” Wayne said. “A plot of land recently sold for $2.3 million in this virtual world. Somebody bought this plot of land because eventually they will be advertising.”
Here’s another example. Nike recently registered its Swish logo and Just Do It slogan for The Metaverse. So if you go into a mall a virtual world, there’s a good chance you’ll see the presence of some mainstream brands like Nike.
“It’s like fantasy land. There are games in this virtual world where you are an avatar in a virtual game,” Wayne said. “Maybe at some point your NFT, your non-fungible token piece of art, that you buy can be displayed in The Metaverse. This requires blockchain technology because it’s encrypted, efficient, and can be very fast. There’s no question that blockchain technology will be part of this virtual world.”
The Network Effect
This helps to explain that the idea of cryptocurrency isn’t just used to buy and sell things. It’s important to also understand that the value of cryptocurrency will likely increase due to the increased adoption of the blockchain technology.
It’s the network effect. For example, what makes Facebook valuable? The easy answer is advertising. You can gravitate toward the people you want to meet with the help of Facebook’s targeted advertising.
“The amount of people that use Facebook makes Facebook valuable because the advertisers then see the value in a network effect. Without the people and the expansion of that network, it has no value,” Wayne said. “It’ll be the same in virtual world, in blockchain technology. Bitcoin can very quickly start to lose value if people stop using it. If that network shrinks because people stop seeing the value in it, the value could go away.”
The Future Impact of Blockchain Technology
Only time with tell with seeing how the future of blockchain technology changes the world. This appears to be another technological revolution. There has been the industrial evolution, the inventions of the telephone and the internet, and now we have Bitcoin. And with each technological evolution, the adoption rate seems to accelerate faster and faster.
“As this evolves, where does it go?” Wayne said. “It’s super exciting. There are things like the layer two and layer three protocols where you have proof of stake in your cryptocurrency. It’s like showing proof of work. One person having stake in the stake pool brings stability to the network. That’s the mining aspect of a stake pool with the proof of stake protocol. If you stake in a stake pool, you get compensated. In some ways, it’s passive income. There are all these different things that people can really benefit from if they understand it. People will eventually get wised to it.”
Think back about how automobiles and airplanes made immediate impacts on our lives. It’s been the same way with technology, cell phones, the internet, etc. We weren’t sure about what would happen next as each of those things evolved, and the same goes for Bitcoin and blockchain technology.
“Do you remember the Dick Tracy movies back in the day where he had his watch and he could talk into the watch?” Dean said. “Everyone thought that was never going to happen. Now it happens all the time. That’s the only way my wife can keep track of where her cell phone is because she dings it with her watch. I bet she loses that thing five times a day.”
Wayne added, “Remember the Jetsons and flying cars? They’re coming too.”
So, Is Bitcoin Digital Gold?
The whole thing with blockchain and what they’re going to do is there, which is why we’re asking: Is Bitcoin digital gold? And it’s not just Bitcoin. It’s the whole digital currency that makes up the blockchain technology.
“It’s going to be exciting to see where it goes,” Dean said. “However, this is not a place where somebody should say, ‘Let’s go put all our money in this.’ No. Don’t do that.”
Chasing the hottest fad is something that’s easy to do, but be careful not to be completely sucked in by it. If you need an example of what can happen if someone can get in too deep into a hot financial trend, Wayne says to look back at what happened with the Dot-Com Bubble.
“You need to be smart about it,” Wayne said. “They are real solid projects that are trying to do real world-changing things. Those types of projects take time. Even though there have been numerous get-rich results and success stories, it’s not intended to be a get-rich-quick scheme. It’s how we get to adoption and have long-term, real-world-solving problems. The adoption then comes because of the use, making people’s lives better.”
Contact Us with Your Crypto Questions
As the whole crypto world and the blockchain universe expand, we’ll keep you posted on the latest developments to help you understand what is going on. If you have questions about cryptocurrency or blockchain technology and how it could relate to your portfolio, please schedule a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We’re happy to meet with you in-person, virtually, or by phone.
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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.