Gold from an ATM and a Growing Courtship With Bitcoin
For some of us love has been in the air this past weekend. And it is on that note that I would like to begin this article. On Friday last week, Quantified Assets announced to the world that they had launched a bitcoin vending machine that would dispense gold and silver. The vending machine is located at the Hackerspace on King George’s Avenue, in Singapore.
This was a first for the world, and the company behind the vending machines plans to include the same to all of its 118 machines in operation around the world. The choice of Singapore was also seen to be an inspired one since the country is one of Asia’s most important trade hubs for gold and silver. The company hopes to partner with other companies in China, Russia, and the UAE.
Gold’s Long History
For millennia, gold has been used in different parts of the world as the currency. Historians cannot agree on the time when gold was first used. However, there is plenty of evidence that it was early in human history. For example, records indicate that gold was already in use in Egypt by the third millennium BCE. The year 700 BCE marks the first time that gold is known to have officially been used as a currency in the Lydian kingdom found in western Turkey. Such lust for gold was so great in Roman times that it moved Virgil, a poet of the time to say auri sacra fames – the cursed thirst for gold!
At the birth of the United States, the US Congress adopted gold as part of a bimetallic standard currency. The use of gold in the nation’s currency did not cease until economic conditions in the mid-70s caused the US government to allow gold to freely “float” on the money markets. As of Monday February 16th, 2015, gold was exchanging at around US$ 1,230 per ounce.
Man’s cursed thirst for gold has not been satiated over the past several millennia, and that has to do with its properties that make it ideal as a medium of exchange and a store of value. Gold is the most ductile and malleable of all metals known to man. Those two properties make it extremely ideal for shaping and stretching it into a variety of shapes. It also does not rust, making it an ideal symbol of durability.
The other property that makes gold ideal is its scarcity. Since man discovered gold, the total amount of gold ever mined throughout history would amount to 120,000 tons. According to gold-eagle.com, all that gold could be transported by a single oil tanker.
Gold and Bitcoin’s Similarities
It is because of this venerated and decorated history that it would be difficult at first glance to see the connection between gold and Bitcoin. One is tangible and quite heavy at that; the other could hardly be more ethereal. And yet, in spite of such obvious differences a number of Bitcoin-Gold exchange pairs are beginning to show up in commodity trading.
It turns out that there are some shared properties that knit the two into ideal soulmates. The first one has to do with the scarcity. As previously mentioned, the total amount of gold ever mined in the world is quite small. By the time the last bitcoin is mined, there will only be 21 million of them in circulation globally.
The cost of mining gold will continue to rise in the coming years. That translates into less supply and hence greater demand. Difficulty of mining is programmatically built into Bitcoin, making it harder to mine bitcoins every 25 blocks or so. That again works well for increasing Bitcoin’s scarcity.
Bitcoin’s Edge
Bitcoin, however, is able to do much more than gold, a factor that makes them complement each other rather well. Gold is heavy. It is also bulky, and this makes unattractive as a medium of exchange. Invariably, some other method has had to be used in conjunction with gold in commerce. In modern times, this has included going off the gold standard and introducing fiat currency. In Roman times, this involved debasing coins so as to account for economic realities of the period. Increasingly, a large number of merchants accept Bitcoin as payment, sometimes without even changing Bitcoin back into fiat money. Unlike gold, it is possible to spend bitcoins directly.
The second factor that gives Bitcoin its edge over gold is the speed with which transactions can be conducted. Transactions for Bitcoin and other virtual currencies can be done almost immediately. Since Bitcoin transactions are done in a peer-to-peer environment, they require only a certain number of verifications for them to be realized. Gold transactions, on the other hand, take time as it has to be analyzed for purity, verified and weighed. Bitcoin edges out gold in this respect, making it deal as an international medium of exchange. In addition, Bitcoin has attracted a large innovation ecosystem and a growing acceptance that will likely stimulate demand for its use.
However, it is in its regulation in the commodity markets in the United States and elsewhere that is going to see it become more recognized as a viable asset. This emerging environment could lead to less fluctuation in the value of Bitcoin.
Ultimately, not everyone is going to look at Bitcoin as a valuable asset. There are those who will still want an asset that they can touch and hold in their hands, something that Bitcoin clearly cannot do for them. It is likely that as Bitcoin matures as an asset class the two commodities gold and Bitcoin may evolve a complementarity based on their common properties, but one that leverages on the unique features in which Bitcoin edges out gold.
Images from Shutterstock.
