One of the most misunderstood concepts about digital assets is comparing them to US Dollar. We hear different points of view establishing base case for Bitcoin as a hedge against US Dollar inflation, so it’s only natural to assume Cryptocurrency must be compared to traditional Currency.
Cryptocurrency ≠ Currency
Cryptocurrencies like Bitcoin, Ethereum and over 5,000 other digital assets can’t be compared to US Dollar, Euro, Yuan, or any other government issued traditional currency.
Currency
- Traditional currencies are issued by the governments. Does not have max supply.
- Economy of each county is tied to its currency, government policies, GDP, etc.
- Under normal circumstances government currencies don’t fluctuate in value.
Cryptocurrency (Bitcoin)
- Issued by the protocol according to a fixed schedule. Has max supply.
- Borderless, world-wide reach to any consumer. Not tied to any government or GDP.
- Under normal circumstances significantly fluctuates in value.
In 2015, the CFTC found virtual currencies such as Bitcoin to be commodities subject to oversight under its authority under the Commodity Exchange Act (CEA). With that, it makes more sense comparing Bitcoin to other commodities like Gold.
Gold
- Has limited supply.
- Borderless, world-wide reach to any consumer. Not tied to any government or GDP.
- Under normal circumstances moderately fluctuates in value.
Cryptocurrency community speculates that Bitcoin is undervalued since the total value of all the Gold in the world (known as Market Cap) is over $9 trillion at current prices vs total Market Cap of Bitcoin is only $168 billion. If Bitcoin was to reach Gold’s Market Cap, the price of each Bitcoin would have to be $466,666 per Bitcoin.
Going back to basics requires for us to understand the difference between Currencies, Cryptocurrencies, and Fiat Currencies. Here is a visual I found helpful:
The crypto community understood the difference and wanted to offer a true digital currency, so they created Stablecoins.
Stablecoins (USDT, USDC, DAI, other)
- Digital tokens tied 1:1 to currencies that are issued by the governments. Do not have max supply and can be freely exchanged from digital tokens to currencies and back at the issuing company.
- Value of Stablecoin is tied to the value of underlying currency. 1 USDT always equals to 1 US Dollar.
- Under normal circumstances Stablecoins don’t fluctuate in value.
The industry embraced Stablecoins so much that Facebook decided to offer it’s own Stablecoin called Libra to provide for a peer-to-peer fast and cheap transactions of value tied to traditional currencies.
Conclusion
When thinking about investing in digital assets it’s important to understand and have the right frame of reference. I hope you can clearly see that Bitcoin is very much like Gold, while Stablecoins are very much like Traditional Currencies. In my opinion, Bitcoin is actually better than Gold since it’s more divisible, highly transferable, easily transactable, and decentralized.
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