Let’s go back to the discussion started in a previous article: Can we assimilate BItcoins to physical gold? The differences are important and should not be underestimated.
One of the more interesting similarities between gold and cryptocurrencies is their scarcity. For example, gold mining grew at a rate of 1.7% across mine production in 2020 – and that rate hasn’t changed much in the last 20 years. Instead, the amount of Bitcoin is currently increasing at an annual rate of close to 3% and is projected to slowly decrease to zero growth around the year 2140.
While both gold and Bitcoin once they run out of stock cannot be created out of thin air, the predetermined number of existing units of Bitcoin can seemingly create an edge. However, gold’s importance has been reinforced by a combination of basic physical and chemical properties, as well as a good balance between availability and scarcity. Thus, while there are other metals and precious metals, such as silver, palladium, or platinum, gold is by far the preferred and used asset in currency standards and has remained a key component in foreign reserves even after the end of the Bretton-Woods system.
Conversely, nothing prevents new – and perhaps more efficient – cryptocurrencies from replacing existing ones or potentially adding to the overall total supply. The crypto space has exploded in recent years and it is estimated that there are more than 10,000 cryptocurrencies available through various online platforms.
If, for example, Bitcoin has benefited from the recognition of its name and the large effect obtained also on social networks, the space is highly competitive and it is still too early to know how this problem of the finite number of Bitcoins could be solved. For example, Bitcoin Cash, which follows the same structure but allows for an increase in block size to reduce costs and increase speed, was launched a few years ago.
Gold production and ownership are different
Gold mining is well-distributed throughout the world. The top five gold-producing countries are China, Russia, Australia, the United States, and Canada, with several countries in Latin America and Africa. The average annual production is evenly distributed among the regions, with Europe the only continent accounting for less than 10% and no continent getting more than 25%.
Similarly, the mined gold property is widely distributed. The US Treasury is the largest known gold holder, yet owns only 4% of all gold. Nearly 50% exists in the form of jewelry (distributed globally), while 21% is owned by a large number of investors – individual and institutional – in the form of gold bars, coins, and ETF issuers.
Instead, concentration risk has been flagged as a key issue for cryptocurrencies. The number of Bitcoin “miners” has been reduced from thousands to a handful of key participants. As reported by Bloomberg, “five mining entities — all headquartered in China — control 49.9% of all computing power on the network, the highest concentration of mining power ever, a new TokenAnalyst analysis has found,” which, if increased, could pose serious risks to your network.
Furthermore, while the number of Bitcoin owners has increased over the past year, ownership is highly concentrated: only 2% of Bitcoin owners own 95% of all available Bitcoins.
Therefore, while bitcoins are the exclusive possession of a few market participants, who could change their price, gold, on the other hand, is well distributed both in ownership (Jewels, Governments, Banks, Investors, individuals) and in production (China, Russia, Australia, United States, and Canada, Latin America and Africa). So the diversification of gold is almost complete both in terms of production and possession.
And this, a prudent investor should never forget.